<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 33-95962
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Cumberland Farms, Inc.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2843586
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 Dedham Street, Canton, MA 02021
-----------------------------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 828-4900
--------------
Indicate by check mark whether the registrant: (i) 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
--- ---
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes /X/ No / /
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of December 1, 1995, the outstanding shares of each class of the
Registrant's common stock was as follows:
Class A Stock 8 shares
Class B Stock 121,014 shares
(Neither class of stock is registered under the Securities Act of 1933, as
amended.)
<PAGE> 2
INDEX
CUMBERLAND FARMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - March 31, 1996 and September
30, 1995
Condensed Statements of Operations - For the Three Months and
Six Months Ended March 31, 1996 and 1995.
Condensed Statements of Retained Earnings - For the Three
Months and Six Months Ended March 31, 1996 and 1995
Condensed Statements of Cash Flows - For the Three Months
Ended and Six Months Ended March 31, 1996 and 1995
Notes to Condensed Financial Statements - March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SIGNATURES
<PAGE> 3
CUMBERLAND FARMS, INC.
<TABLE>
CONDENSED BALANCE SHEETS
(000'S OMITTED)
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
----------- ---------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash $ 17,731 $ 30,016
Accounts receivable, net 19,956 19,081
Inventories, at FIFO cost 59,152 59,161
Less: adjustment to LIFO cost 27,382 27,382
-------- --------
Net inventories 31,770 31,779
Prepaid insurance 978 2,500
Other current assets 7,558 8,338
-------- --------
Total current assets 77,993 91,714
Net property and equipment 219,601 219,300
Investment in Gulf Oil L.P. (Note 2) 31,361 31,240
Prepaid insurance 1,947 6,365
Other assets, net 13,121 13,808
-------- --------
$344,023 $362,427
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 12,837 $ 17,604
Accounts payable 36,944 39,329
Other accrued expenses 25,561 24,077
-------- --------
Total current liabilities 75,342 81,011
Long-term debt 223,732 236,661
Deferred credits and other liabilities 20,074 18,681
-------- --------
Total liabilities 319,148 336,353
Commitments & contingencies
Stockholders' equity:
Common stock:
Class A Voting, $1 par value; 8 shares
authorized, issued and outstanding
Class B Non-voting, $1 par value;
121,014 shares authorized, issued
and outstanding 121 121
Additional paid in capital 8,617 8,617
Minimum pension liability (1,515) (1,515)
Retained earnings 17,652 18,851
-------- --------
Total stockholders' equity 24,875 26,074
-------- --------
$344,023 $362,427
======== ========
</TABLE>
Note: The balance sheet at September 30, 1995 has been derived from
the audited financial statements at that date but does not include all
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed financial statements.
<PAGE> 4
CUMBERLAND FARMS, INC.
<TABLE>
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(000'S OMITTED)
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995 1996 1995
---------------------- --------------------
<S> <C> <C> <C> <C>
Income:
Revenues (see Note below) $321,254 $303,879 $654,727 $624,744
Equity in earnings of Gulf Oil L.P. 958 607 1,071 8,365
Gains on sales of property and equipment 4,089 3,593 5,982 5,574
---------------------- --------------------
Total income 326,301 308,079 661,780 638,683
Costs and expenses:
Cost of sales 249,088 232,477 502,586 473,352
Operating expenses 67,906 65,525 132,977 130,839
Depreciation 4,758 3,920 9,174 7,701
---------------------- --------------------
Total costs & expenses 321,752 301,922 644,737 611,892
---------------------- --------------------
Operating income 4,549 6,157 17,043 26,791
Interest expense 5,571 6,311 11,384 12,861
---------------------- --------------------
Income (loss) before taxes (1,022) (154) 5,659 13,931
State income taxes (76) 0 359 0
---------------------- --------------------
Net income (loss) $ (946) $ (154) $ 5,300 $ 13,931
====================== ====================
</TABLE>
Note: Excise taxes approximating $57,096 and $55,167 collected
from customers on retail gasoline and cigarette revenues
are included in Sales and Cost of Sales for the three
months ended March 31, 1996 and 1995 respectively, while
$117,246 and $111,513 was collected for the six months
ended March 31, 1996 and 1995 respectively.
See notes to condensed financial statements.
<PAGE> 5
CUMBERLAND FARMS, INC.
<TABLE>
CONDENSED STATEMENT OF RETAINED EARNINGS (DEFICIT)
(UNAUDITED)
<CAPTION>
Six Months Ended
March 31,
1996 1995
-----------------------
(000's omitted)
<S> <C> <C>
Retained earnings (deficit) beginning of period $18,851 $(13,231)
Net income 5,300 13,931
Distributions to shareholders (6,500) (2,719)
------- --------
Retained earnings (deficit) end of period $17,652 $ (2,019)
======= ========
</TABLE>
See notes to condensed financial statements.
<PAGE> 6
CUMBERLAND FARMS, INC.
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1996 1995
---------------------
OPERATING ACTIVITIES (000'S omitted)
- - --------------------
<S> <C> <C>
Net income $ 5,300 $ 13,931
Changes not affecting cash:
Depreciation and amortization 9,174 7,701
Gains on sales of property & equipment (5,982) (5,574)
Equity in earnings of Gulf Oil L.P. (1,071) (8,365)
Distribution of earnings by Gulf Oil L.P. 950 2,800
Changes in assets & liabilities 7,272 2,977
-------- --------
Net cash provided by operating activities 15,643 13,472
-------- --------
INVESTING ACTIVITIES
- - --------------------
Additions to property and equipment (14,478) (10,730)
Proceeds from sales of property and equipment 10,745 10,692
-------- --------
Net cash (used) by investing activities (3,732) (39)
-------- --------
FINANCING ACTIVITIES
- - --------------------
Payments of debt (17,695) (11,277)
Distributions to shareholders (6,500) (2,719)
-------- --------
Net cash (used) by financing activities (24,196) (13,996)
-------- --------
NET (DECREASE) IN CASH (12,285) (563)
CASH AT BEGINNING OF PERIOD 30,016 9,125
-------- --------
CASH AT END OF PERIOD $ 17,731 $ 8,562
======== ========
</TABLE>
See notes to condensed financial statements
<PAGE> 7
CUMBERLAND FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
Note 1 - Basis of Presentation
- - ------------------------------
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, (consisting of normal recurring
accruals), considered necessary for a fair presentation have been included.
Operating results for the six month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the full year
ended September 30, 1996. For further information, refer to the audited
financial statements and footnotes thereto for the year ended September 30,
1995.
Note 2 - Joint Venture Investment
- - ---------------------------------
The Company has a 66 2/3% investment in Gulf Oil L.P. and accounts for its
investment using the equity method. As of March 31, 1996, the Company's
investment in Gulf Oil L.P. amounted to $31,361, which represents the Company's
cost plus its equity in the earnings of Gulf Oil L.P. less distributions
received from Gulf Oil L.P. Shown below is unaudited condensed financial
information relative to the Joint Venture.
<TABLE>
The following summarizes the income statements of the Gulf Oil L.P.:
<CAPTION>
Three months ended Six Months ended
March 31, March 31,
(000's Omitted) (000's Omitted)
1996 1995 1996 1995
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net Sales $482,813 $486,868 $897,217 $924,710
Gross Margin 9,399 8,728 16,950 28,553
Operating Expenses 7,105 6,156 13,417 12,855
Interest Expense 856 1,660 1,926 3,149
Net Income 1,438 912 1,607 12,549
Equity in Net
Income of Gulf
Oil L.P. $ 958 $ 607 $ 1,071 $ 8,365
</TABLE>
<PAGE> 8
Note 3 - Income Taxes
- - ---------------------
The Company's Federal income tax returns have been examined by the Internal
Revenue Service through the year ended September 30, 1991. The Internal Revenue
Service is currently examining the fiscal years ended September 30, 1992 and
1993 and has selected the 1994 return for examination.
Note 4 - Contingencies
- - ----------------------
There were no material changes during the quarter ended March 31, 1996, except
as described in Part II, Item 1, Legal Proceedings included elsewhere herein.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following table summarizes the results of operations for the three
and six months ended March 31, 1996 and 1995, which is followed by Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Operating results for the six months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the entire year ending
September 30, 1996. The financial information set forth below should be read in
conjunction with the Company's financial statements, related notes and other
financial information included elsewhere herein.
<PAGE> 10
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, % INCREASE MARCH 31, % INCREASE
1996 1995 (DECREASE) 1996 1995 (DECREASE)
---- ---- ---------- ---- ---- ----------
(in thousands except ratios and gross profit per gallon information)
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Retail revenues $251,975 $244,168 3.2 % $514,915 $500,852 2.8 %
Other income 5,186 5,388 (3.7)% 10,424 10,781 (3.3)%
-------- -------- ----- -------- -------- -----
Total 257,161 249,556 3.0 % 525,339 511,633 2.7 %
Equity in earnings of
Gulf Oil L.P. 958 607 57.8 % 1,071 8,365 (87.2)%
Gains on sales of
property and equipment 4,089 3,593 13.8 % 5,982 5,574 7.3 %
-------- -------- ----- -------- -------- -----
Total 262,208 253,756 3.3 % 532,392 525,572 1.3 %
Wholesale revenues 64,093 54,323 18.0 % 129,388 113,111 14.4 %
-------- -------- ----- -------- -------- -----
Total revenues 326,301 308,079 5.9 % 661,780 638,683 3.6 %
-------- -------- ----- -------- -------- -----
Costs and expenses
Cost of sales 249,088 232,477 7.1 % 502,586 473,352 6.2 %
Operating expenses 67,906 65,525 3.6 % 132,977 130,839 1.6 %
Depreciation and amortization 4,758 3,920 21.4 % 9,174 7,701 19.1 %
-------- -------- ----- -------- -------- -----
Total 321,752 301,922 6.6 % 644,737 611,892 5.4 %
-------- -------- ----- -------- -------- -----
Operating Income $ 4,549 $ 6,157 (26.1)% $ 17,043 $ 26,791 (36.4)%
======== ======== ===== ======== ======== =====
OTHER OPERATING DATA
Merchandise gross profit $ 35,026 $ 33,212 5.5 % $ 71,243 $ 69,185 3.0 %
Merchandise gross profit
as a percentage of sales 30.5% 29.4% 30.4% 29.6%
Gasoline gallons sold 116,949 112,942 3.5 % 240,539 228,393 5.3 %
Gasoline gross profit $ 12,686 $ 13,638 (7.0)% $ 29,484 $ 31,903 (7.6)%
Gasoline gross profit
cents per gallon 10.8 12.1 (10.7)% 12.3 14.0 (12.1)%
Operating income before
depreciation and amortization
as a percentage of total
revenues 1.6% 2.2% 3.1% 4.6%
Operating income as a
percentage of total revenues 0.1% 0.8% 1.7% 3.4%
Comparable average store and
station data:
Merchandise sales growth 1.4% 4.2% 0.4% 4.2%
Gasoline gallons sold 3.5% 10.0% 5.4% 8.9%
</TABLE>
<PAGE> 11
THREE MONTHS ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $114.3 million for the three months ended March 31,
1996 an increase of $1.6 million or 1.4%, from the prior year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
increased from 29.4% to 30.5%
Retail gasoline sales were $137.6 million, an increase of $6.2 million, or 4.7%
over the prior year. Gasoline gallon sales were 116.9 million, an increase of
4.0 million gallons, or 3.5% over the prior year. The increase in gallons sold
results primarily from continued attention to the convenience retailing aspects
of selling gasoline through improved dispenser amenities and from competitive
marketing strategies. The average cents per gallon gross margin of 10.8(cents)
decreased 1.3(cents) or 10.7% from the prior year principally due to an increase
in the cost of gasoline.
Other income is comprised of rental income from tenants located at retail and
gasoline sites and has decreased due to fewer tenants.
The Company owns a 66-2/3% limited partnership interest in Gulf Oil, L.P.
Control of the partnership rests with the general partner. The Company accounts
for its investment under the equity method. The increase in earnings from $.6
million in the quarter ended March 31, 1995 to $1.0 million for the 1996
quarter, resulted primarily from slightly higher margins achieved by Gulf Oil
L.P. in the 1996 quarter.
Gains on sales of property increased over the prior year. Twenty-five properties
were sold during the three months ended March 31, 1996, compared to twenty-eight
sold in the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $35.5 million, an increase of $10.0 million or 39.2 % over the
prior year, due to price increases and the addition of wholesale milk customers.
Wholesale petroleum revenues were $28.6 million, a decrease of $.2 million, or
.7% from the prior year. The decrease results primarily from fewer lessee dealer
locations.
Cost of sales for the quarter ended March 31, 1996 increased over the prior year
as a result of increases in product costs and volume sold in the gasoline
operations. Operating expenses increased from the prior year as a result of
increases in payroll and expenses incurred due to the severity of the weather in
the second quarter. Depreciation and amortization increased as a result of
capital expenditures during the prior year.
Interest expense decreased from the prior year principally due to lower debt.
<PAGE> 12
SIX MONTHS ENDED MARCH 31, 1996 VERSUS MARCH 31, 1995
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $233.5 million for the six months ended March 31,
1996 an increase of $.9 million or .4%, from the prior year. Sales gross margin
dollars increased slightly. Gross margin, as a percentage of sales, increased
from 29.6% to 30.4%
Retail gasoline sales were $281.4 million, an increase of $13.2 million, or 4.9%
over the prior year. Gasoline gallon sales were 240.5 million, an increase of
12.1 million gallons, or 5.3% over the prior year. The increase in gallons sold
results primarily from continued attention to the convenience retailing aspects
of selling gasoline through improved dispenser amenities and from competitive
marketing strategies. The average cents per gallon gross margin of 12.3(cents)
decreased 1.7(cents) or 12.1% from the prior year principally due to an increase
in the cost of gasoline.
Other income is comprised of rental income from tenants located at retail and
gasoline sites and has decreased due to fewer tenants.
The Company owns a 66-2/3% limited partnership interest in Gulf Oil, L.P.
Control of the partnership rests with the general partner. The Company accounts
for its investment under the equity method. The decrease in earnings from $8.4
million for the six months ended March 31, 1995 to $1.1 million this year
resulted primarily from unusually high margins achieved by Gulf Oil L.P. in the
first quarter of fiscal year 1995.
Gains on sales of property increased slightly over the prior year. Thirty-seven
properties were sold during the six months ended March 31, 1996, compared to
forty-four sold in the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $70.1 million, an increase of $18.9 million or 36.9 % over the
prior year, due to price increases and the addition of wholesale milk customers.
Wholesale petroleum revenues were $59.3 million, a decrease of $2.7 million, or
4.4% from the prior year. The decrease results primarily from fewer lessee
dealer locations.
Cost of sales for the six months ended March 31, 1996 increased over the prior
year as a result of increases in product costs and volume sold in the gasoline
operations. Operating expenses increased from the prior year as a result of
increases in payroll and expenses incurred due to the severity of the weather in
the second quarter. Depreciation and amortization increased as a result of
capital expenditures during the prior year.
Interest expense decreased from the prior year principally due to lower debt as
compared to the prior year.
<PAGE> 13
The Company's operating income for the six months ended March 31, 1996 was
approximately $17.0 million as compared to approximately $26.8 million for the
six months ended March 31, 1995. The principal reasons for the decline were the
decrease in the earnings of Gulf Oil L.P. and increases in operating expenses
and depreciation.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow because most of its
revenues are received in cash. Based on current projections, the Company
believes that the amount of cash generated from operations, together with
proceeds from anticipated property sales will be sufficient to meet its current
and long-term obligations and future capital expenditure requirements.
Notwithstanding satisfactory operating results since emergence from Bankruptcy,
the Company remains highly leveraged and its cash available to meet debt
obligations and capital expenditures, although adequate, continues to be
limited. In addition, because the Company does not have a working capital line,
the Company remains dependent on its asset disposition program to fund cash
shortfalls. Substantially all net proceeds from asset sales are utilized to pay
secured debt. There can be no assurance that the Company's business will
continue to generate income at or above current projections. Moreover, the
Company's ability to generate sufficient funds to meet its obligations is
dependent upon future economic conditions, general business and industry
performance and other matters, many of which are beyond the control of the
Company and which cannot be predicted at this time. If the Company is unable to
generate sufficient income from operations and proceeds from property sales to
service its debt requirements, including various required target payments, and
make necessary capital expenditures, the Company may be required to refinance
all or a portion of its existing debt or obtain additional financing. There can
be no assurance that any such refinancing would be possible or that additional
financing could be achieved. Moreover, refinancing may not be a viable option or
may be viable only with credit enhancement or overcollateralization. The
commitment for a working capital line of credit referred to in Note 7 to the
Company's audited financial statements for the year ended September 30, 1995
and in Management's Discussion and Analysis for the quarter ended December 31,
1995 was terminated by the lender in March 1996. Although discussions with the
lender have been resumed, there can be no assurance that any financing will be
consummated.
Among those obligations and capital expenditures that now, or in the future may,
require significant commitments of the Company's available cash are (i) debt
service, including principal repayment and Target Payments under the Company's
restructured indebtedness, (ii) insurance coverage for worker's compensation and
general and automobile liability claims, (iii) costs associated with
environmental compliance, (iv) payments to meet certain tax obligations of the
Company's shareholders and (v) the Company's potential response to the Put or
exercise of the Call with respect to its partners' partnership interests in Gulf
Oil L.P. Those items are discussed below.
<PAGE> 14
DEBT SERVICE
The Company's Plan of Reorganization (the "Plan") became effective on December
30, 1993. The Plan restructured the Company's indebtedness and contemplated
improving the Company's operating performance. Nevertheless, the Company has
significant interest expense and principal repayment obligations under the Plan.
As of December 30, 1993, the Effective Date of the Plan, the Company had total
indebtedness of approximately $371 million which has been reduced to
approximately $319 million as of March 31, 1996. Substantially all of the
indebtedness arising under the Plan is secured. Moreover, substantially all of
the major debt instruments, including the Indentures, contain cross-default
provisions.
Certain of the Company's credit agreements require the Company to make Target
Payments of the outstanding principal amount due each year from the sales
proceeds of certain designated mortgaged properties. The Company's remaining
Target Payments with its Target Payment Lenders aggregated approximately $9.0
million as of March 31, 1996. Remaining Target Payments for the next four fiscal
years are estimated to be $2.5, $2.3, $2.3 and $1.0 million, respectively, and
$1.6 million thereafter. Aggregate cash requirements for fiscal 1996 are
estimated to be $71 million, including an estimated approximately $7.9 million
in Target Payments, of which $5.4 million was paid from September 30, 1995 to
March 31, 1996. The funding for such anticipated cash requirements is expected
to be provided from earnings of the Company, cash dividends from Gulf Oil L.P.
and proceeds from asset dispositions.
ASSET DISPOSITION PROGRAM
During the six month periods ended March 31, 1996 and 1995, the Company raised
$10.7 million in each period, from its asset disposition program. Proceeds from
asset dispositions for the fiscal year ended September 30, 1996 are estimated to
be $18.5 million. Substantially all proceeds from asset dispositions have been
or will be used to pay down secured debt.
To date, the Company has generated adequate cash flow from its asset disposition
program and operations to meet its cash flow needs. The Company expects to
generate approximately $18.5 million from its asset disposition program during
fiscal 1996 by selling between 55 and 65 properties. The properties anticipated
to be sold consist of vacant lots, closed locations, underperforming locations
based on a profit-per-store analysis, and properties located in market areas
where the Company has decided to reduce or eliminate its presence. The objective
of the asset disposition program has been to increase capital resources and
liquidity and improve operations by retaining the better-performing properties
of the Company. The Company's asset disposition program has
<PAGE> 15
contemplated disposal, in most instances, of non-performing or under-performing
properties and accordingly has not had, nor is the program expected to have an
adverse effect on the Company's historical or future results of operations.
Although the Company believes that, to date, the asset disposition program has
been beneficial and has both accelerated debt repayment and contributed to the
improvement in average store sales per week, the asset disposition program could
in the future adversely affect the Company's results of operations if, in order
to meet its cash flow needs or make required Target Payments, the Company found
it necessary to sell properties it did not wish to and would not otherwise sell.
INSURANCE PROGRAM
The Company's insurance program requires a high degree of risk assumption as a
result of the high deductibles under its workers' compensation, general
liability and automobile liability insurance policies. The insurance company
providing these coverages requires the Company to provide letters of credit or
other collateral in amounts estimated to be sufficient to pay claims. Because
the Company has no working capital facility, the Company must provide cash equal
to the approximate face value of the letters of credit as collateral. The
Company uses working capital to pay claims as they are settled which, in turn,
reduces the letters of credit and the collateral requirements. Of these letters
of credit, $8.0 million secure up to $16.0 million of bonds for purchase of raw
milk and taxes on motor fuel, cigarettes and alcoholic beverages, and $15.4
million secure the actuarial value of unpaid claims and the estimated actuarial
value of claims which may occur through April 1, 1996. The Company has
collateralized 25% of its obligations for the estimated actuarial value of
claims by pledging real properties for which the Company was able to reduce its
letters of credit and bring approximately $5.6 million in cash back to the
Company. If the Company's actual liability exceeds the actuarially determined
amounts, the Company would be obligated to pay such excess and would likely be
required to post higher letters of credit thereafter. Such payments and
increased letters of credit requirements could have a material adverse affect on
the cash flow and profitability of the Company.
ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, particularly the comprehensive regulatory
programs governing underground storage tank systems ("USTs") used in its
operations. In addition, the Company had operating expenses for assessment and
remediation activities in connection with releases into the environment of
gasoline or other regulated substances from USTs at the Company's current or
former gasoline facilities, including various of the properties securing the
Notes, a portion of which expenses were reimbursed from state trust fund
programs. Due to the nature of releases, the actual costs incurred may vary from
the Company's
<PAGE> 16
estimates, and the ongoing costs of assessment and remediation activities may
vary from year to year.
In addition to annual "expense" type environmental costs, federal and state
regulatory programs mandate that all existing USTs be upgraded or replaced by
December 22, 1998 to meet certain environmental protection requirements.
Approximately 73% of the Company's USTs meet the December 22, 1998 environmental
protection requirements, and approximately 280 more USTs require upgrading or
replacement by December 22, 1998. The Company estimates that it will make
aggregate capital expenditures of approximately $48.7 million through fiscal
year 1999 to comply with upgrading and other UST regulatory requirements and to
enhance its gasoline business. The actual costs incurred may vary substantially
from these estimates.
The Company also incurs certain ongoing environmental costs associated with the
operations of its plants. Among other things, the large quantities of ammonia
used by the fluid milk plants and the wastewater treatment facilities and waste
oil burners located at the plants are subject to federal, state and local
regulations. In addition, the Company may also, from time to time, incur
liability as a result of contamination associated with the operation of the
plants.
TAX DISTRIBUTIONS TO SHAREHOLDERS
The Company has negotiated a full settlement with the Internal Revenue Service
for the audit of fiscal years ended September 30, 1988 to 1991. In the quarter
ended March 31, 1996 the shareholders received a distribution of approximately
$2.7 million for payment of their estimated income taxes for the fiscal year
ended September 30, 1995, bringing the total tax distributions for the year to
$6.5 million.
GULF OIL L.P.
In connection with the Plan, a substantial portion of the Company's wholesale
petroleum and gasoline operations was transferred to Gulf Oil L.P. in exchange
for a 66-2/3% Class A limited partnership interest in Gulf Oil L.P.
The Company's equity in the earnings of Gulf Oil L.P. was approximately $1.1
million and $8.4 million for the six months ended March 31, 1996 and 1995
respectively. The management of Gulf Oil L.P. has advised the Company that it
believes its operations will improve for the remainder of the fiscal year.
However, its earnings are dependent upon volumes and margins from wholesale
sales of petroleum products, which may fluctuate depending upon economic
conditions and other factors that may exist in the future. Accordingly, there
can be no assurance that the Company's equity in Gulf Oil L.P. will generate
earnings consistent with prior year's levels.
<PAGE> 17
Although the Partnership Agreement of Gulf Oil L.P. provides for certain
distributions to partners, such distributions are subject to restrictive
covenants in Gulf Oil L.P.'s agreements with its lenders, which permit
distributions only for tax payments and only if no defaults exist. As a result,
the Company currently receives distributions of only approximately 40% of the
cash attributable to its pro rata share of partnership earnings. During the
quarter ended March 31, 1996, the Company received a subordinated promissory
note from Gulf Oil L.P. in the amount of $950,000 bearing interest at a rate of
prime plus 2% payable upon demand. Interest is paid to the Company monthly.
The Partnership Agreement of Gulf Oil L.P. provides that at any time on or after
January 1, 1999, the General Partner and related interests have the right, but
not the obligation, to Put their partnership interests to the Company and the
Company has the right, but not the obligation, to Call such interests at a
formula price based upon a multiple of an average of the prior three years'
earnings of Gulf Oil L.P. at the time of the exercise of the Put or Call.
Because the price is based on a fixed multiple, the Company cannot determine at
this time whether it will exercise the Call or elect to purchase upon exercise
of the Put. Among other things, any such exercise would require the Company to
secure funds not only to purchase the interests of the other partners but also
to obtain a working capital facility sufficient to fund operations. If the
Company is unable or determines it is not in its best interests to consummate
the Put or to exercise the Call, the Partnership Agreement provides that Gulf
Oil L.P. will be sold by an investment banker as a going concern.
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company has brought actions against Demetrios B. Haseotes, a
shareholder and Director of the Company to seek, inter alia, (a) an injunction
(which was entered) barring Mr. Haseotes' involvement in the Company's
management (b) an accounting of funds distributed to Mr. Haseotes to pay certain
tax liabilities and (c) an accounting and possible disgorgement of funds
received by Mr. Haseotes in connection with the sale of a crude oil refinery in
Canada. Mr. Haseotes has filed an action seeking reinstatement of his
compensation which the board suspended when Mr. Haseotes refused to comply with
its request for a complete accounting of the funds described above. The Company
has since learned that there was cause to treat Mr. Haseotes' employment as
terminated on or about November, 1994, when Mr. Haseotes violated the terms of
an agreement with the Company, and has counterclaimed for damages in his action,
relating to his affiliated companies. The Company has also commenced a
proceeding in Bankruptcy Court to expand the scope of the existing injunction,
preventing Mr. Haseotes from interfering in the day to day operations of the
Company, in order to prevent Mr. Haseotes' intervention between the Company and
third parties. Finally, Mr. Haseotes, in his capacity as Director of the
Company, has brought an action in the Delaware Chancery Court for
indemnification and advancement of fees incurred in defending the various
proceedings in which he is involved.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the ____ day of May, 1996.
CUMBERLAND FARMS, INC.
Date: By:
---------------------------- -----------------------------------------
Name: Arthur G. Koumantzelis
Title: Sr. Vice President and
Chief Financial Officer
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the ____ day of May, 1996.
CUMBERLAND FARMS, INC.
Date: By: /s/ Arthur G. Koumantzelis
---------------------------- -----------------------------------------
Name: Arthur G. Koumantzelis
Title: Sr. Vice President and
Chief Financial Officer
<PAGE> 21
[LOGO] CUMBERLAND FARMS, INC.
77 DEDHAM ST.
CANTON, MA 02021
(617) 828-4800
VIA AIRBORNE EXPRESS
- - --------------------
May 15, 1996
The Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Cumberland Farms, Inc.
File No. 33-95962
------------------------
Ladies and Gentlemen:
Pursuant to Rule 15d-1 of the Securities Exchange Act or 1934, as amended,
Cumberland Farms, Inc. is hereby sending by EDGAR submission, its quarterly
report on form 10-Q.
If you have any questions, please feel free to contact the undersigned.
Very truly yours,
/s/ Kevin P. Johnson
----------------------------------------
Kevin P. Johnson
Vice President and Corporate Controller
KPJ:djw
Enclosures
cc
Arthur G. Koumantzelis
Sheryl F. Altman, Esq.
<PAGE> 22
Exhibit 27
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] SEP-30-1996
[PERIOD-START] OCT-01-1995
[PERIOD-END] MAR-31-1996
[EXCHANGE-RATE] 1
[CASH] 17,731
[SECURITIES] 0
[RECEIVABLES] 21,572
[ALLOWANCES] 1,616
[INVENTORY] 31,770
[CURRENT-ASSETS] 77,993
[PP&E] 337,053
[DEPRECIATION] 117,452
[TOTAL-ASSETS] 344,023
[CURRENT-LIABILITIES] 75,342
[BONDS] 0
[COMMON] 121
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 24,754
[TOTAL-LIABILITY-AND-EQUITY] 344,023
[SALES] 654,727
[TOTAL-REVENUES] 661,780
[CGS] 502,587
[TOTAL-COSTS] 644,739
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 11,384
[INCOME-PRETAX] 5,659
[INCOME-TAX] 359
[INCOME-CONTINUING] 5,300
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 5,300
[EPS-PRIMARY] 0
[EPS-DILUTED] 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1996 FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,731
<SECURITIES> 0
<RECEIVABLES> 21,572
<ALLOWANCES> 1,616
<INVENTORY> 31,770
<CURRENT-ASSETS> 77,993
<PP&E> 337,053
<DEPRECIATION> 117,452
<TOTAL-ASSETS> 344,023
<CURRENT-LIABILITIES> 75,342
<BONDS> 0
<COMMON> 121
0
0
<OTHER-SE> 24,754
<TOTAL-LIABILITY-AND-EQUITY> 344,023
<SALES> 654,727
<TOTAL-REVENUES> 661,780
<CGS> 502,587
<TOTAL-COSTS> 644,739
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,384
<INCOME-PRETAX> 5,659
<INCOME-TAX> 359
<INCOME-CONTINUING> 5,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,300
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
