<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, 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
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Commission file number 33-95962
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Cumberland Farms, Inc.
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(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
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(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 828-4900
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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
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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
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of May 15, 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 - March 31, 1997 and September 30, 1996
Condensed Statements of Operations - For the Three Months and
Six Months Ended March 31, 1997 and 1996
Condensed Statements of Retained Earnings - For the Six Months Ended
March 31, 1997 and 1996
Condensed Statements of Cash Flows - For the Six Months Ended
March 31, 1997 and 1996
Notes to Condensed Financial Statements - March 31, 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
(000'S OMITTED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
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(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 24,377 $ 24,116
Cash escrow 893 793
Short term investments, at cost 3,243 12,200
Accounts receivable, net 21,872 21,476
Inventories, at FIFO cost 57,530 59,042
Less: adjustment to LIFO cost (29,100) (29,100)
-------- --------
Net inventories 28,430 29,942
Prepaid insurance 0 431
Other current assets 7,186 8,725
-------- --------
Total current assets 86,001 97,683
Net property and equipment 222,012 218,755
Investment in Gulf Oil, L.P. (Note 2) 35,849 36,445
Other assets, net 12,718 13,321
-------- --------
$356,580 $366,204
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 11,432 $ 13,108
Accounts payable 40,364 39,819
Other accrued expenses 25,245 28,329
-------- --------
Total current liabilities 77,041 81,256
Long-term debt 209,415 218,398
Accrued insurance liability 12,287 9,075
Deferred credits and other liabilities 17,747 18,264
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Total liabilities 316,490 326,993
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 31,352 30,473
-------- --------
Total stockholders' equity 40,090 39,211
-------- --------
$356,580 $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
(000'S OMITTED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Income:
Revenues (see Note below) $352,774 $321,254 $719,948 $654,727
Equity in earnings of Gulf Oil, L.P. 1,402 958 1,404 1,071
Gains on sales of property and equipment 1,027 4,089 4,689 5,982
---------------------- ----------------------
Total income 355,203 326,301 726,041 661,780
Costs and expenses:
Cost of sales 275,679 249,088 569,485 502,587
Operating expenses 66,770 67,906 134,009 132,977
Depreciation 4,995 4,758 9,887 9,174
---------------------- ----------------------
Total costs & expenses 347,444 321,751 713,381 644,737
---------------------- ----------------------
Operating income 7,759 4,549 12,660 17,043
Interest expense 5,765 5,571 11,481 11,384
---------------------- ----------------------
Income (loss) before taxes 1,994 (1,022) 1,179 5,659
State income taxes 69 (76) 69 359
---------------------- ----------------------
Net income (loss) $ 1,925 $ (946) $ 1,110 $ 5,300
====================== ======================
</TABLE>
Note: Excise taxes approximating $61,320 and $57,095 collected from customers on
retail gasoline and cigarette revenues are included in Sales and Cost of
Sales for the three months ended March 31, 1997 and 1996 respectively,
while $124,289 and $117,246 was collected for the six months ended March
31, 1997 and 1996 respectively.
See notes to condensed financial statements.
<PAGE> 5
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
March 31,
1997 1996
------------------------
(000's omitted)
<S> <C> <C>
Retained earnings beginning of period $30,474 $18,851
Net income 1,110 5,300
Distributions to shareholders (232) (6,500)
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Retained earnings end of period $31,352 $17,651
======= =======
</TABLE>
See notes to condensed financial statements.
<PAGE> 6
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1997 1996
----------------------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 1,110 $ 5,300
Changes not affecting cash:
Depreciation and amortization 9,887 9,174
Gains on sales of property and equipment (4,689) (5,982)
Equity in earnings of Gulf Oil, L.P. (Note 2) (1,404) (1,071)
Distribution of earnings by Gulf Oil, L.P. 3,650 950
Changes in assets and liabilities 140 7,272
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Net cash provided by operating activities 8,694 15,643
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INVESTING ACTIVITIES
- --------------------
Additions to property and equipment (14,634) (14,478)
Proceeds from sales of property and equipment 8,036 10,745
Purchases, sales and maturities of short-term
investments, net 8,957 0
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Net cash provided (used) by investing activities 2,359 (3,733)
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FINANCING ACTIVITIES
- --------------------
Payments of debt (10,659) (17,695)
Change in cash escrow 100 0
Distributions to shareholders (232) (6,500)
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Net cash (used) by financing activities (10,791) (24,195)
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Net increase (decrease) in cash 261 (12,285)
Cash at beginning of period 24,116 30,016
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Cash at end of period $24,377 $17,731
======= =======
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)
March 31, 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 10-Q 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 months ended March 31, 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 March 31, 1997, the Company's
investment in Gulf Oil, L.P. amounted to $35.8 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 Six Months Ended
March 31, March 31,
(000's omitted)
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales $590,670 $482,813 $1,192,558 $897,217
Gross margin 8,910 9,399 16,761 16,950
Operating expenses 6,079 7,105 10,506 13,417
Interest expense 729 856 1,679 1,926
Net income 2,102 1,438 4,576(a) 1,607
Equity in net income of
Gulf Oil, L.P. $ 1,402 $ 958 $ 1,404(a) $ 1,071
</TABLE>
(a) - The Company's equity in the net income of the Gulf Oil, L.P. for the six
months ended March 31, 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 - Related Party Transactions
- -----------------------------------
See Part II, Item 1, Legal Proceedings included elsewhere herein for information
relating to litigation with a Shareholder and a Director and a settlement with
the EPA.
On April 1, 1997, the Company acquired three properties located in Chelsea and
Westford, Massachusetts from a third-party landlord at an aggregate purchase
price of $750,000, the estimated fair value of the properties. These properties
were originally owned by Mr. George Haseotes, a Shareholder and Director of the
Company, who sold them to the third-party landlord in 1994. The third-party
landlord directed that the aggregate purchase price of these properties be paid
over to Mr. Haseotes. Purchase of the properties was approved by the Company's
Board of Directors.
Note 4 - 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 year 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 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 six
months ended March 31, 1997 and 1996, 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, 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>
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, % INCREASE MARCH 31, % 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 $276,698 $251,975 9.8 % $562,491 $514,915 9.2 %
Other income 4,886 5,186 (5.8)% 9,882 10,424 (5.2)%
-------- -------- ----- -------- -------- -----
Total 281,584 257,161 9.5 % 572,373 525,339 9.0 %
Equity in earnings of
Gulf Oil L.P. 1,402 958 46.3 % 1,404 1,071 31.1 %
Gains on sales of
property and equipment 1,027 4,089 (74.9)% 4,689 5,982 (21.6)%
-------- -------- ----- -------- -------- -----
Total 284,013 262,208 8.3 % 578,466 532,392 8.7 %
Wholesale revenues 71,190 64,093 11.1 % 147,575 129,387 14.1 %
-------- -------- ----- -------- -------- -----
Total income 355,203 326,301 8.9 % 726,041 661,779 9.7 %
-------- -------- ----- -------- -------- -----
Costs and expenses
Cost of sales 275,679 249,088 10.7 % 569,485 502,586 13.3 %
Operating expenses 66,770 67,906 (1.7)% 134,009 132,978 0.8 %
Depreciation and amortization 4,995 4,758 5.0 % 9,887 9,174 7.8 %
-------- -------- ----- -------- -------- -----
Total 347,444 321,752 8.0 % 713,381 644,738 10.6 %
-------- -------- ----- -------- -------- -----
Operating income $ 7,759 $4,549 70.6 % $12,660 $ 17,041 (25.7)%
======== ====== ===== ======= ======== =====
OTHER OPERATING DATA
Merchandise gross profit $ 35,579 $ 35,026 1.6 % $ 72,134 $ 71,243 1.3 %
Merchandise gross profit
as a percentage of sales 30.1% 30.5% 29.7% 30.4%
Gasoline gallons sold 121,728 116,949 4.1 % 246,751 240,539 2.6 %
Gasoline gross profit $ 14,887 $ 12,686 17.3 % $ 28,053 $ 29,484 (4.9)%
Gasoline gross profit
cents per gallon 12.2 10.8 13.0 % 11.4 12.3 (7.3)%
Operating income before
depreciation and amortization
as a percentage of total
revenues 3.6% 2.9% 3.1% 4.0%
Operating income as a
percentage of total revenues 2.2% 1.4% 1.7% 2.6%
Comparable average store and
station data:
Merchandise sales growth 3.2% 1.4% 3.7% 0.4%
Gasoline gallons sold 4.1% 3.5% 2.6% 5.4%
</TABLE>
<PAGE> 11
THREE MONTHS ENDED MARCH 31, 1997 VERSUS MARCH 31, 1996
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $117.9 million for the three months ended March 31,
1997 an increase of $3.6 million or 3.2%, from the prior year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
decreased from 30.5% to 30.1%
Retail gasoline sales were $158.8 million, an increase of $21.2 million, or
15.4% over the prior year. Gasoline gallon sales were 121.7 million, an increase
of 4.8 million gallons, or 4.1% over the prior year. The level of gallons sold
results primarily from expanded facilities, 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 12.2 (cents per gallon) increased 1.4 (cents per gallon)
or 13.0% from the prior year principally due to an increase in the retail
selling price of gasoline, offset to some extent by increases 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 increase in equity of earnings
from $1.0 million in the quarter ended March 31, 1996 to $1.4 million for the
1997 quarter, resulted primarily from lower operating expenses in the current
year versus the prior year.
Gains on sales of property decreased from the prior year. Seven properties were
sold during the three months ended March 31, 1997, compared to twenty-five sold
in the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $38.3 million, an increase of $2.8 million or 7.9 % 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
$32.9 million, an increase of $4.3 million, or 15.0% from the prior year. The
increase results primarily from increased wholesale selling prices.
Cost of sales for the quarter ended March 31, 1997 increased over the prior year
as a result of increases in product costs and volume sold in the gasoline
operations. Operating expenses decreased from the prior year primarily as a
result of lower real estate taxes in 1997 and a milder winter in comparison to
the more severe weather conditions in the prior year. Depreciation and
amortization increased as a result of capital expenditures during the prior
year.
<PAGE> 12
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.
SIX MONTHS ENDED MARCH 31, 1997 VERSUS MARCH 31, 1996
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $242.1 million for the six months ended March 31,
1997 an increase of $8.6 million or 3.7%, from the prior year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
decreased from 30.4% to 29.7%
Retail gasoline sales were $320.4 million, an increase of $39.0 million, or
13.9% over the prior year. Gasoline gallon sales were 246.8 million, an increase
of 6.2 million gallons, or 2.6% over the prior year. The increase in gallons
sold results primarily from expanded facilities, 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 11.4 (cents per gallon) decreased .9 (cents per gallon)
or 7.3% 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 increase in equity of earnings
from $1.1 million for the six months ended March 31, 1996 to $1.4 million this
year resulted primarily from reduced operating expenses.
Gains on sales of property decreased from the prior year. Twenty properties were
sold during the six months ended March 31, 1997, compared to thirty-seven sold
in the prior year.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $80.5 million, an increase of $10.4 million or 14.8 % over the
prior year. The increase is attributable to price increases and sales to
additional wholesale milk customers. Wholesale petroleum revenues were $67.1
million, an increase of $7.8 million, or 13.2% from the prior year. The increase
results primarily from increased wholesale selling prices.
Cost of sales for the six months ended March 31, 1997 increased over the prior
year as a result of increases in product costs and volumes sold in the gasoline
operations. Although milk and gasoline margins improved in the second quarter,
the Company's retail, wholesale and plant margins for the six months ended March
31, 1997 were lower than the prior year's six months.
<PAGE> 13
Operating expenses increased from the prior year as a result of increases in
payroll and 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 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
<PAGE> 14
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 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 $221 million as of March 31, 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 March 31,
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 $5.9
million as of March 31, 1997. Remaining Target Payments for the next four fiscal
years are estimated to be $1.7, $1.8, $.8 and $.5 million, respectively, and
$1.1 million thereafter. Aggregate cash requirements for fiscal 1997 are
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 six month periods ended March 31, 1997 and 1996, the Company raised
$8.0 and $10.7 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
<PAGE> 15
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 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
$22.0 million, on a present value basis for the years 1992 through 1996, net of
cash and reinsurance deposits of $4.7 million, resulted in accrued insurance
liabilities of $17.3 million at March 31, 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 March 31,
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
<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 88% of the Company's USTs meet the December 22, 1998 environmental
protection requirements, and approximately 95 more USTs require upgrading or
replacement by December 22, 1998. The Company currently estimates that capital
expenditures of approximately $19.1 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
$14.6 and $14.5 million for the six months ended March 31, 1997 and 1996,
respectively. Additional capital expenditures of approximately $13.0 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 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 $1.4
million and $1.1 million for the six months
<PAGE> 17
ended March 31, 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.
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 calendar year of the Supply Agreement
(five years). 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 quarters
ended March 31, 1997 and 1996, the Company purchased approximately $98.1 million
and $82.5 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 $1.2 million and $.8 million for the six months ended March 31, 1997 and
1996, respectively.
At March 31, 1997 and 1996, there were approximately $10.9 million and $9.7
million, respectively, in accounts payable due to Gulf Oil, L.P.
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
In civil actions that the Company has brought against Demetrios B. Haseotes, a
shareholder and Director of the Company, the Company has obtained (a) an
injunction barring Mr. Haseotes' involvement in the Company's management, and
(b) judgment in the amount of $663,267, plus interest, which sum reflects funds
distributed by the Company to Mr. Haseotes to pay certain tax liabilities which
he diverted to other uses. The Company also has pending an action against Mr.
Haseotes in seeking an accounting and possible disgorgement of funds received by
him in connection with the sale of a crude oil refinery in Canada. Mr. Haseotes
filed an action seeking reinstatement of his compensation which the Board of
Directors suspended when Mr. Haseotes refused to comply with its request for a
complete accounting of the funds described above. The Company subsequently
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 relating to his affiliates, and counterclaimed for damages in
his action. In November 1996, the Court granted the Company's motion for summary
judgment with respect to Mr. Haseotes' claim for compensation following the
failure to account for funds described above. The Court, however, did not rule
on the issue of suspension of compensation resulting from the violation of his
agreement relating to his affiliates, and that issue will proceed to trial.
The Company and certain of its affiliates, including V.S. Haseotes and Sons
(VSH) have, after extended negotiations among the parties, entered into a
settlement agreement with the EPA relating to alleged violations of the Clean
Water Act in the Towns of Hanson and Halifax, Massachusetts. The agreement
required VSH to donate two properties to the Federal Government. The agreement
also requires the Company to perform certain environmental work which the
Company estimates will not exceed $500,000 in order to convert approximately
19 acres to wet lands status.
ITEM 5. OTHER INFORMATION
-----------------
On April 1, 1997, the Company acquired three properties located in Chelsea and
Westford, Massachusetts from a third-party landlord at an aggregate purchase
price of $750,000, the estimated fair value of the properties. These properties
were originally owned by Mr. George Haseotes, a Shareholder and Director of the
Company, who sold them to the third-party landlord in 1994. The third-party
landlord directed that the aggregate purchase price of these properties be paid
over to Mr. Haseotes. Purchase of the properties was approved by the Company's
Board of Directors.
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 ____ day of May, 1997.
CUMBERLAND FARMS, INC.
Date: 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 MARCH
31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
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