<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
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 _______
Commission file number 33-95962
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 August 14, 1997, 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 - June 30, 1997 and September 30, 1996
Condensed Statements of Operations - For the Three Months and Nine
Months Ended June 30, 1997 and 1996.
Condensed Statements of Retained Earnings - For the Nine Months Ended
June 30, 1997 and 1996
Condensed Statements of Cash Flows - For the Nine Months Ended June
30, 1997 and 1996
Notes to Condensed Financial Statements - June 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 5. OTHER INFORMATION
SIGNATURES
<PAGE> 3
CUMBERLAND FARMS, INC.
CONDENSED BALANCE SHEETS
(000s OMITTED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
---------- -------------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash $ 19,532 $ 24,116
Cash escrow 537 793
Short term investments, at cost 3,243 12,200
Accounts receivable, net 22,816 21,476
Inventories, at FIFO cost 60,199 59,042
Less: adjustment to LIFO cost (29,300) (29,100)
-------- --------
Net inventories 30,899 29,942
Other current assets 6,412 9,156
-------- --------
Total current assets 83,439 97,683
Net property and equipment 222,773 218,755
Investment in Gulf Oil, L.P. (Note 2) 34,503 36,445
Other assets, net 13,532 13,321
-------- --------
$354,247 $366,204
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 11,371 $ 13,108
Accounts payable 39,773 39,819
Other accrued expenses 26,101 28,329
-------- --------
Total current liabilities 77,245 81,256
Long-term debt 204,169 218,398
Accrued insurance liability 13,241 9,075
Deferred credits and other liabilities 18,051 18,264
-------- --------
Total liabilities 312,706 326,993
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
Retained earnings 32,803 30,473
-------- --------
Total stockholders' equity 41,541 39,211
-------- --------
$354,247 $366,204
======================
</TABLE>
Note: The balance sheet at September 30, 1996 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.
CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
(000s OMITTED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---------------------- -------------------------
<S> <C> <C> <C> <C>
Income:
Revenues (see Note below) $368,039 $363,054 $1,087,987 $1,017,781
Equity in earnings of Gulf Oil, L.P. 174 1,962 1,578 3,033
Gains on sales of property and equipment 3,085 3,859 7,774 9,841
--------------------- -------------------------
Total income 371,298 368,875 1,097,339 1,030,655
Costs and expenses:
Cost of sales 288,086 280,934 857,571 783,520
LIFO charge 200 750 200 750
Operating expenses 67,807 67,873 201,817 200,850
Depreciation 5,649 5,235 15,535 14,408
--------------------- -------------------------
Total costs & expenses 361,742 354,792 1,075,123 999,528
--------------------- -------------------------
Operating income 9,556 14,083 22,216 31,127
Interest expense 5,656 5,588 17,137 16,972
--------------------- -------------------------
Income before taxes 3,900 8,495 5,079 14,155
State income taxes 40 433 109 792
--------------------- -------------------------
Net income $ 3,860 $ 8,062 $ 4,970 $ 13,363
===================== =========================
</TABLE>
Note: Excise taxes approximating $64,963 and $60,344 collected from
customers on retail gasoline and cigarette revenues are included in
Sales and Cost of Sales for the three months ended June 30, 1997 and
1996 respectively, while $189,252 and $177,590 was collected for the
nine months ended June 30, 1997 and 1996 respectively.
See notes to condensed financial statements.
<PAGE> 5
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
June 30,
1997 1996
--------------------------
(000's omitted)
<S> <C> <C>
Retained earnings beginning of period $30,473 $18,851
Net income 4,970 13,363
Distributions to shareholders (2,640) (8,582)
------- -------
Retained earnings end of period $32,803 $23,632
======= =======
</TABLE>
See notes to condensed financial statements.
<PAGE> 6
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1997 1996
-----------------------
OPERATING ACTIVITIES (000's omitted)
- ---------------------------------
<S> <C> <C>
Net income $ 4,970 $ 13,363
Changes not affecting cash:
Depreciation and amortization 15,536 14,408
Gains on sales of property and equipment (7,774) (9,841)
Equity in earnings of Gulf Oil, L.P. (Note 2) (1,578) (3,033)
Distribution of earnings by Gulf Oil, L.P. 5,170 1,650
Changes in assets and liabilities (529) 8,336
-------- --------
Net cash provided by operating activities 15,795 24,883
-------- --------
INVESTING ACTIVITIES
- ---------------------------------
Additions to property and equipment (22,182) (21,709)
Proceeds from sales of property and equipment 11,708 17,422
Purchases, sales and maturities of short-term
investments, net 8,957 0
-------- --------
Net cash (used) by investing activities (1,517) (4,287)
-------- --------
FINANCING ACTIVITIES
- ---------------------------------
Payments of debt (15,966) (24,429)
Change in cash escrow (256) 0
Proceeds from new debt 0 5,000
Distributions to shareholders (2,640) (8,583)
-------- --------
Net cash (used) by financing activities (18,862) (28,012)
-------- --------
NET (DECREASE) IN CASH (4,584) (7,416)
CASH AT BEGINNING OF PERIOD 24,116 30,016
-------- --------
CASH AT END OF PERIOD $ 19,532 $ 22,600
======== ========
Non-cash investing activity:
Increase in equity of Gulf Oil, L.P., offset
by accrued liability (Note 2) $ 1,650
========
</TABLE>
See notes to condensed financial statements
<PAGE> 7
CUMBERLAND FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
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 nine months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the full year ended September
30, 1997. For further information, refer to the audited financial statements and
footnotes thereto for the year ended September 30, 1996.
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 June 30, 1997, the Company's
investment in Gulf Oil, L.P. amounted to $34.5 million which represents the
Company's cost plus its equity in the earnings of Gulf Oil, L.P. less cash
distributions received from Gulf Oil, L.P. Shown below is unaudited condensed
financial information relative to the Joint Venture.
The following summarizes the income statements of the Gulf Oil, L.P.:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
June 30, June 30,
(000's omitted)
1997 1996 1997 1996
--------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $472,436 $436,510 $1,664,994 $1,333,727
Gross margin 6,664 9,845 23,425 26,795
Operating expenses 5,738 6,190 16,244 19,607
Interest expense 664 715 2,343 2,638
Net income 262 2,940 4,838(a) 4,550
Equity in net income
of Gulf Oil, L.P. $ 175 $ 1,962 $ 1,579(a) $ 3,033
</TABLE>
(a) - The Company's equity in the net income of the Gulf Oil, L.P. for the nine
months ended June 30, 1997 has been reduced by $1.6 million to reflect the
Company's share of brand maintenance income earned by the L.P. from the Company,
which was included as a reduction of the related costs of $2.5 million in the
Company's financial statements for the prior fiscal year.
<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. The Company believes that
the Internal Revenue Service will propose changes to the Company's returns, as
filed, for the years under examination. Additional federal income taxes, if any,
as a result of assessments for years under audit are not the responsibility of
the Company because of its S Corporation status. However, the Company, may be
required to make significant distributions to shareholders in the future for any
assessments for tax years commencing with the year ended September 30, 1992.
<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 nine
months ended June 30, 1997 and 1996, which is followed by Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Operating results for the nine months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the entire year ending
September 30, 1997. 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>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, % INCREASE JUNE 30, % INCREASE
1997 1996 (DECREASE) 1997 1996 (DECREASE)
--------------------------------------- ----------------------------------------
(in thousands except ratios and gross profit per gallon information)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
REVENUES
Retail revenues $287,954 $286,373 0.6% $ 850,446 $ 801,287 6.1%
Other income 4,706 5,010 (6.1)% 14,587 15,434 (5.5)%
-------- -------- ----- ---------- ---------- -----
Total 292,660 291,383 0.4% 865,033 816,721 5.9%
Equity in earnings of
Gulf Oil L.P. 174 1,962 (91.1)% 1,578 3,033 (48.0)%
Gains on sales of
property and equipment 3,085 3,858 (20.0)% 7,774 9,841 (21.0)%
-------- -------- ----- ---------- ---------- -----
Total 295,919 297,203 (0.4)% 874,385 829,595 5.4%
Wholesale revenues 75,379 71,672 5.2% 222,954 201,060 10.9%
-------- -------- ----- ---------- ---------- -----
Total income 371,298 368,875 0.7% 1,097,339 1,030,655 6.5%
-------- -------- ----- ---------- ---------- -----
Costs and expenses
Cost of sales 288,086 280,934 2.5% 857,571 783,520 9.5%
LIFO 200 750 (73.3)% 200 750 (73.3)%
Operating expenses 67,807 67,873 (0.1)% 201,817 200,850 0.5%
Depreciation and amortization 5,649 5,235 7.9% 15,535 14,408 7.8%
-------- -------- ----- ---------- ---------- -----
Total 361,742 354,792 2.0% 1,075,123 999,528 7.6%
-------- -------- ----- ---------- ---------- -----
Operating income $ 9,556 $ 14,083 (32.1)% $ 22,216 $ 31,127 (28.6)%
======== ======== ===== ========== ========== =====
OTHER OPERATING DATA
Merchandise gross profit $ 38,801 $ 37,646 3.1% $ 110,935 $ 108,893 1.9%
Merchandise gross profit
as a percentage of sales 29.8% 29.5% 29.7% 30.1%
Gasoline gallons sold 126,896 121,992 4.0% 373,647 362,531 3.1 %
Gasoline gross profit $ 15,323 $ 17,164 (10.7)% $ 43,376 $ 46,653 (7.0)%
Gasoline gross profit
cents per gallon 12.1 14.1 (14.2)% 11.6 12.9 (10.1)%
Operating income before
depreciation and amortization
as a percentage of total
revenues 4.1% 5.2% 3.4% 4.4%
Operating income as a
percentage of total revenues 2.6% 3.8% 2.0% 3.0%
Comparable average store and station data:
Merchandise sales growth 2.1% 0.3% 3.1% 0.3%
Gasoline gallons sold 4.0% 5.0% 3.1% 5.2%
</TABLE>
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 1997 VERSUS JUNE 30, 1996
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $129.8 million for the three months ended June 30,
1997 an increase of $2.6 million or 2.1%, from the prior year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
increased slightly from 29.5% to 29.8%
Retail gasoline sales were $158.1 million, a decrease of $1.1 million, or .7%
over the prior year. Gasoline gallon sales were 126.9 million, an increase of
4.9 million gallons, or 4.0% over the prior year. The level of gallons sold
results primarily from expanded facilities, improved dispenser amenities and
competitive marketing strategies. The average cents per gallon gross margin of
12.1 cents decreased 2.0 cents or 14.2% 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 as a result of sales of properties.
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 equity in earnings
from $2.0 million in the quarter ended June 30, 1996 to $.2 million for the 1997
quarter, resulted primarily from lower margins in the current year versus the
prior year.
Gains on sales of property decreased from the prior year. Ten properties were
sold during the three months ended June 30, 1997, compared to thirty-one sold in
the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $40.2 million, an increase of $4.3 million or 12.0 % over the
prior year. The increase is attributable to price increases for wholesale milk
and sales to additional wholesale milk customers. Wholesale petroleum revenues
were $35.2 million, a decrease of $.6 million, or 1.7% from the prior year.
Cost of sales for the quarter ended June 30, 1997 increased over the prior year
as a result of increases in product costs and volume sold in the gasoline
operations. A LIFO charge was provided to recognize increasing costs of raw
materials purchased. Operating expenses were slightly below the prior year.
Depreciation and amortization increased as a result of capital expenditures
during the prior year.
Interest expense increased from the prior year principally due to changes in the
effective rate of interest and the addition of a working capital facility in
June 1996.
<PAGE> 12
NINE MONTHS ENDED JUNE 30, 1997 VERSUS JUNE 30, 1996
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $371.9 million for the nine months ended June 30,
1997 an increase of $11.3 million or 3.1%, from the prior year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
decreased from 30.1% to 29.7%
Retail gasoline sales were $478.5 million, an increase of $37.8 million, or 8.6%
over the prior year. Gasoline gallon sales were 373.6 million, an increase of
11.1 million gallons, or 3.1% over the prior year. The increase in gallons sold
results primarily from expanded facilities, improved dispenser amenities and
competitive marketing strategies. The average cents per gallon gross margin of
11.6 cents decreased 1.3 cents or 10.1% 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 as a result of sales of properties.
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 equity in earnings
from $3.0 million for the nine months ended June 30, 1996 to $1.6 million this
year resulted primarily from lower margins.
Gains on sales of property decreased from the prior year. Thirty properties were
sold during the nine months ended June 30, 1997, compared to sixty-eight sold in
the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $120.6 million, an increase of $14.6 million or 13.8 % over the
prior year. The increase is attributable to price increases and sales to
additional wholesale milk customers. Wholesale petroleum revenues were $102.3
million, an increase of $7.2 million, or 7.6% from the prior year. The increase
results primarily from increased wholesale selling prices in the previous
quarters.
Cost of sales for the nine months ended June 30, 1997 increased over the prior
year as a result of increases in product costs and volume sold in the gasoline
operations. A LIFO charge was provided to recognize increasing costs of raw
materials purchased.
Operating expenses increased from the prior year as a result of increases in
payroll, benefits and repair expenses. Depreciation and amortization increased
as a result of capital expenditures during the prior year.
Interest expense increased from the prior year principally due to changes in the
effective rate of interest and the addition of a
<PAGE> 13
working capital facility in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company annually 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 its $30 million loan facility and satisfactory operating results
since emergence from Reorganization in December 1993, the Company remains highly
leveraged. In addition, because $17 million of the availability under the loan
facility was utilized for the issuance of letters of credit, 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 seek additional sources of
financing. There can be no assurance that any additional financing could be
achieved. Moreover, additional financing may not be a viable option or may be
viable only with credit enhancement or overcollateralization.
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, Target Payments under the Company's
restructured indebtedness and debt service under the working capital facility,
(ii) insurance coverage for worker's compensation and general and automobile
liability claims, (iii) costs associated with environmental compliance, (iv)
capital expenditures, (v) payments to meet certain tax obligations of the
Company's shareholders and (vi) 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.
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
<PAGE> 14
December 30, 1993, the Effective Date of the Plan, the Company had total secured
debt of approximately $308 million which has been reduced to approximately $216
million as of June 30, 1997. Substantially all of the indebtedness arising under
the Plan is secured. Moreover, substantially all of the major debt instruments,
contain cross-default provisions.
The Company has a $30 million working capital and letter of credit facility with
a due date of December 30, 1998. The facility provides a revolving credit line,
term loan and a facility for the issuance of letters of credit. As of June 30,
1997, the Company had drawn down $5 million of the revolving credit line and
used $17 million to provide letters of credit for its insurance and bond
program.
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 $5.6
million as of June 30, 1997. Remaining Target Payments for the next four fiscal
years are estimated to be $1.4, $1.8, $.8 and $.5 million, respectively, and
$1.1 million thereafter. Aggregate cash requirements for fiscal 1997 were
estimated to be $62.7 million, (debt repayment $13.1 million, interest cost
$22.0 million and capital expenditures, $27.6 million), including $2.8 million
in Target Payments. The funding for such anticipated cash requirements is
expected to be provided from existing cash and short term investments, earnings
of the Company and proceeds from asset dispositions.
ASSET DISPOSITION PROGRAM
During the nine month periods ended June 30, 1997 and 1996, the Company raised
$11.7 and $17.4 million, respectively, from its asset disposition program.
Proceeds from asset dispositions for the fiscal year ended September 30, 1997
are estimated to be $16.0 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 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 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
<PAGE> 15
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 assumes a high degree of risk as a result of the high deductibles
under its worker's compensation, general liability and automobile liability
insurance policies issued by an unrelated insurer. These risks, estimated at
$22.9 million, on a present value basis for the years 1992 through 1997, net of
cash and reinsurance deposits of $4.7 million, resulted in accrued insurance
liabilities of $18.2 million at June 30, 1997. The unrelated insurance company
providing these coverages required collateral in the form of a $12 million
letter of credit and certain real properties, cash and reinsurance at June 30,
1997. Conven-Petro Insurance Company, (Conven-Petro), a wholly-owned subsidiary
of Cumberland Farms of Vermont, Inc., which is related to the Company through
common ownership, reinsures the unrelated insurance company for certain Company
worker's compensation claims for the policy years 1992, 1993 and 1994 and for
any increases in such claims subsequent thereto. In addition to collateral for
its insurance program, the Company also provides a $5 million letter of credit
to secure a $20 million bond line. Bonds are posted with various regulatory
agencies for the purchase of raw milk, to secure tax payments for motor fuel and
cigarette taxes and for various municipal planning board requirements.
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, 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 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 90% of the Company's USTs meet the December 22, 1998 environmental
protection requirements, and approximately 80 more USTs require upgrading or
replacement by December 22, 1998. The Company currently estimates
<PAGE> 16
that capital expenditures of approximately $16.7 million will be made, through
December 22, 1998, in order to comply with UST regulatory requirements, which
expenditures could be reduced for locations which may be closed in lieu of
capital costs of compliance or sold.
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.
CAPITAL EXPENDITURES
Capital expenditures, including those for environmental compliance, amounted to
$22.2 and $21.7 million for the nine months ended June 30, 1997 and 1996,
respectively. Additional capital expenditures of approximately $5.4 million are
anticipated through the Company's year ended September 30, 1997.
TAX DISTRIBUTIONS TO SHAREHOLDERS
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. The Company believes that
the Internal Revenue Service will propose changes to the Company's returns, as
filed, for the years under examination. Additional federal taxes, if any,
as a result of assessments for years under audit are not the responsibility of
the Company because of its S Corporation status. However, the Company, may be
required to make significant distributions to Shareholders in the future for any
assessments for tax years commencing with the year ended September 30, 1992.
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 $1.6
million and $3.0 million for the nine months ended June 30, 1997 and 1996,
respectively. Gulf Oil, L.P.'s 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 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.
The Partnership Agreement provides that at any time on or after January 1, 1999,
Catamount Management Corp. and the Class B partners have the right, but not the
obligation, to Put their partnership interest to the Company and the Company has
the right, but not the obligation, to Call such interests at a formula price
equal to a multiple of Gulf Oil, L.P.'s earnings. If the Company is unable or
determines it is not in its best interest to purchase upon the exercise of the
Put or, if the Company, following the exercise of the Call is unable to complete
the purchase, the Partnership Agreement provides that Gulf Oil, L.P. will be
sold by an investment banker as a going concern.
The Company has agreed to purchase its petroleum products, except for its
Florida locations, from Gulf Oil, L.P. with specific minimum purchase and brand
maintenance cost requirements for each year of the Supply Agreement which is
effective through calendar 1998. The Company, for the calendar year 1996
purchased 525.0 million gallons of branded products from Gulf Oil, L.P.; the
minimum requirement was 476.7 million gallons. Future calendar year minimums of
branded product for the years 1997 and 1998 are 483.5 and 488.7 million gallons,
respectively. The Company expects to meet all minimum purchase requirements. For
the six months ended June 30, 1997 and 1996, the Company purchased approximately
$196.6 million and $184.0 million, respectively, from Gulf Oil, L.P. Brand
maintenance costs, which are based upon quantities purchased and target earnings
of Gulf Oil, L.P. were $2.3 million and $1.1 million for the nine months ended
June 30, 1997 and 1996, respectively.
At June 30, 1997 and 1996, accounts payable due to Gulf Oil, L.P. was
approximately $9.5 million and $11.3 million, respectively.
Some of the statements contained in this Management Discussion & Analysis are
forward-looking statements that involve a number of risks and uncertainties. In
addition to the factors listed above, other factors that could cause actual
results to differ materially are business conditions, the lack or
unavailability of a working capital line of credit, environmental conditions at
its properties, the Company's asset disposition program, the results of
operations of Gulf Oil L.P., real estate markets where properties are located,
gasoline margins and other factors listed herein, as amended from time to time.
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS
See description of legal proceedings reported in the Company's 10-Q filed for
the quarterly period ended March 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 27. FINANCIAL DATA SCHEDULE
<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 14th day of August, 1997.
CUMBERLAND FARMS, INC.
Date: August 14, 1997 By: /s/ Arthur G. Koumantzelis
--------------------------------
Name: Arthur G. Koumantzelis
Title: Sr. Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
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0
0
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