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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 33-95962
CUMBERLAND FARMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER
777 DEDHAM STREET, CANTON, MA 02021 IDENTIFICATION NO.)
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(Address of principal executive offices) 04-2843586
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (781) 828-4900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None
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- -------------------------------- -----------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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(Title of class)
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(Title of class)
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
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that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K of any
amendment to this Form 10-K. [X]
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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As of December 22, 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.
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TABLE OF CONTENTS
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Item Page
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PART I
Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Company's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation 16
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers 24
Item 11. Executive Compensation 28
Item 12. Security Ownership 31
Item 13. Certain Relationships and Related Transactions 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 35
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PART I
ITEM 1. BUSINESS
GENERAL
Cumberland Farms, Inc. (the "Company" or "Cumberland") is a closely
held family-owned business that operates or leases to third parties convenience
stores and/or gas stations throughout New England, the Mid- Atlantic states and
Florida. As of September 30, 1997, Cumberland operated 788 convenience stores,
of which 600 sold gas, operated 33 gas stations and leased 260 gas stations to
independent dealers who also have arrangements to purchase petroleum products
and sublicense the "Gulf" trade name from Cumberland ("Lessee Dealers"). Most of
Cumberland's gas stations, as well as all of the Lessee Dealers, sell "Gulf"
branded petroleum products. As part of its convenience store operations,
Cumberland conducts dairy, bakery and beverage operations and owns and operates
a grocery and warehouse distribution center. While the beverage operations are
exclusively for the benefit of Cumberland's convenience stores, approximately
75% of the total fluid production of the dairy operations and approximately 68%
of the manufactured bakery products are sold to a limited number of unaffiliated
third parties. Cumberland also owns a 66 2/3% limited partnership interest in
Gulf Oil Limited Partnership, a Delaware limited partnership ("Gulf Oil L.P."),
the entity that succeeded to a substantial portion of the assets and business of
the Gulf Division of Cumberland, including the ownership and operation of 15
active petroleum storage terminals and the exclusive rights to use and license
the various "Gulf" trademarks and trade names in the six New England states, New
York, New Jersey, Delaware, Pennsylvania and most of Ohio. Finally, Cumberland
leases retail and restaurant space in buildings in which certain of the
convenience stores are located to approximately 400 independent operators.
The business was founded more than 50 years ago by Vasilios and
Aphrodite Haseotes, the parents of the current shareholders and incorporated in
Delaware in 1984. Its principal executive offices are located at 777 Dedham
Street, Canton, Massachusetts 02021.
The fiscal year ended September 30, 1997 represents the fourth fiscal
year following the Company's emergence from reorganization under Chapter 11 of
the United States Bankruptcy Code. The Company's plan of reorganization (the
"Plan") became effective on December 30, 1993. Although the Company has emerged
from bankruptcy, the Company's management and operations remain subject to the
provisions of the Plan. The Company continues to have significant interest
expense and principal repayment obligations, as well as substantial capital
expenditure requirements in order to comply with federal and state underground
storage tank system requirements by December 22, 1998.
The ability of the Company to satisfy its obligations will depend upon,
among other things, prevailing economic conditions and financial, business and
other factors, beyond the control of the Company. One such factor is the results
of operation of Gulf Oil L.P., which is a limited partnership controlled and
managed by an unaffiliated general partner Catamount Management Corporation
("CMC"). The Company derives a portion of its operating income (approximately
23% for the fiscal year ended September 30, 1997) from its equity in the
earnings of Gulf Oil L.P. Therefore, the performance of Gulf Oil L.P., an entity
where the Company does not have direct control over management, will affect the
Company's overall results of operations. The partnership agreement of Gulf Oil
L.P. provides for certain distributions to partners, however, such distributions
are subject to restrictive covenants imposed by Gulf Oil L.P.'s lenders, which
only permit distributions for tax payments, provided that there is no event of
default or unless otherwise consented to by the lenders. The Company received
aggregate distributions from Gulf Oil L.P. of $5.5 million during the fiscal
year ended September 30, 1997. Subsequent to September 30, 1997, the Company
received from Gulf Oil L.P. a distribution in the amount of $13.3 million that
was consented to by the lenders. See "Item 1 -- Business - Gulf Oil L.P.".
Aggregate cash requirements for the year ended September 30, 1997 for
principal payments under its credit agreements, debt service and capital
expenditures were approximately $71 million. Aggregate cash requirements for
fiscal year 1998 are estimated to be $65.1 million. The funding for such
anticipated cash requirements is expected to be provided from earnings of the
Company and proceeds from asset dispositions.
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BUSINESS STRATEGY
The Company's primary strategy is to increase its retail gasoline
presence which, in turn, is expected to increase retail food sales. This
strategy is designed to capitalize on the continued growth of gasoline sales by
convenience stores. Consistent with that strategy, almost all of the stores
opened by the Company since 1980 include the sale of gasoline.
The Company continues to operate in its post-reorganization phase which
contemplates a conservative financial plan to implement its growth strategy. The
Plan requires, among other things, significant periodic repayments of the
Company's restructured debt obligations. In addition to these repayment
obligations, the Company is required to make significant capital expenditures in
order to comply with federal and state underground storage tank system upgrade
requirements by December 22, 1998. The Company's financial plan also
contemplates capital expenditures for the upgrading and modernization of its
stores. These upgrades may consist of (i) conversion of existing gas stations to
combination units; (ii) major remodels of existing sites; (iii) addition of
stores to sites which presently are gas only with small kiosks; (iv) razing of
stores and rebuilding existing sites; or (v) addition of gas stations to
existing convenience stores. The Company may also pursue additional remodeling
or rehabilitation projects through the use of operating leases.
As part of the Company's business strategy, the Company continues an
aggressive program to market and dispose of certain underperforming, non-core
business properties. The Company evaluates, on an ongoing basis, the performance
of each of its stores in order to identify those stores which are
non-contributors. As part of that process, the Company considers various factors
in deciding whether to continue to operate a store or dispose of the property,
including location, rent contribution and overall profitability. During the year
ended September 30, 1997, the Company sold 40 properties, for a total of
approximately $15.1 million. As of September 30, 1997, the Company was actively
marketing approximately 110 properties, 47 of which were either under agreement
or subject to negotiation with prospective buyers. There can be no assurance
that the Company will be able to close sales of properties under agreement or
conclude satisfactory agreements for properties under negotiation. See Note 6 of
Notes to the Company's Financial Statements for information concerning the
annual debt service requirements, including requirements to pay down debt from
the proceeds of the sale of certain designated mortgaged properties (hereinafter
"Target Payments").
In addition to the Company's strategy to increase its retail presence
and the asset disposition program, the Company continues to pursue the
manufacturing and distribution of private label products for third-party
customers.
CUMBERLAND OPERATIONS
RETAIL OPERATIONS. The Company's typical convenience store is
approximately 2,400 square feet. The stores are concentrated by geographic area
in order to maximize the advantages provided by vertical integration with the
dairy, beverage and bakery product lines. The stores are generally located in
residential areas, on main thoroughfares, in small centers or on other sites
selected for easy accessibility and customer convenience. The stores' exteriors
are of a similar design and color, making them easily recognizable. The Company
emphasizes high-quality service for its customers as well as convenience by
offering a large array of food products, services and gasoline at competitive
prices. New products are continually introduced on a selected basis to expand
the Company's product and service offerings to its customers.
All stores offer well-known brand name products, and products that bear
various "Cumberland" and other private labels, including milk, bakery products,
deli sandwiches, juices and carbonated and non-carbonated beverages, ice cream
and other dairy products such as dips and cheeses. Most of these items would
typically be offered in supermarkets. The wide range of food items includes
canned foods and groceries, dairy products, beverages, snack items, candy, baked
goods and food service items, such as fountain soft drinks, coffee, deli meats
and deli sandwiches and similar foods. Non-food products and services include,
in addition to gasoline, cigarettes including privately labeled cigarettes,
health and beauty aids, publications, lottery tickets, money orders and pre-paid
phone cards. In addition, approximately 199 stores are equipped with automated
teller
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machines and 252 stores are open 24 hours. Most of the Company's private label
products are manufactured or packaged at the Company's facilities.
MANUFACTURING OPERATIONS. The Company, through its manufacturing
division, operates three fluid milk plants, an ice cream plant, a bakery, a
beverage plant and a grocery warehouse and distribution center. The Company
believes that operation of these plants offers the Company high quality products
and services at a price that allows for competitive advantage.
Dairy Operations -- The Company's dairy operations consist of
two fluid milk processing facilities located in Florence, New Jersey
(89,600 square feet) and East Greenbush, New York (28,777 square feet)
and a fluid milk and ice cream processing facility, located in Canton,
Massachusetts (68,810 square feet). These plants supply fluid dairy
products to all of the Company's convenience stores, with the exception
of Florida, and frozen products to all stores, including Florida. The
plants provide the convenience stores with consistent delivery of
high-quality dairy products. By integrating these operations, the
Company has attempted to insulate its convenience stores from arbitrary
third party treatment relative to pricing, quality and service. In
recent years, however, there has been a decrease in the sales of fluid
milk, ice cream and bakery products at the Company's convenience
stores. The Company attributes this decrease to several factors,
including consumers' shifts to lower fat diets and a reduction in the
number of its convenience stores. In part as a result of this decrease,
the Company has aggressively solicited third-party private label
business.
The Company also sells fluid dairy products to third party
customers which are primarily large supermarket chains and
distributors. The fluid milk business is extremely competitive. The
Company competes with regional dairy operations and numerous smaller
dairies. The Company does not have a strong regional brand for fluid
milk product and, therefore, its pricing must be competitive with that
of private labels. During the fiscal year ended September 30, 1997,
total fluid volume sold to third party customers was approximately 75%
of total fluid manufactured gallons; one customer, which has an "at
will" relationship with the Company, accounted for 25% of total fluid
manufactured gallons sold to third parties and a second customer, which
also has an "at will" relationship and is a customer of the Company's
bakery operations, accounted for 22% of dairy product sales to third
parties. Although the Company believes its relations with these
customers to be good, loss of either customer could have a material
adverse effect on dairy operations and because of one customer's bakery
purchases, bakery operations as well.
Bakery Operations -- The bakery operation, which is located in
a 120,000 square foot portion of the Company's Westborough,
Massachusetts facility, provides high quality bakery products,
including a limited variety of breads, donuts and deli style sandwiches
both to the Company's convenience stores and to third party customers,
primarily consisting of large supermarket chains. During the fiscal
year ended September 30, 1997, total sales of bakery products to
third-party customers were approximately 68% of total bakery product
sales; two customers, which have "at will" relationships with the
Company, accounted for more than 75% of such sales. Although the
Company believes its relations with these customers to be good, loss of
either customer could have a material adverse effect on bakery
operations and, because of one customer's dairy purchases, dairy
operations as well.
Beverage and Plastic Operations -- The beverage and plastic
operations are located in a 70,000 square foot portion of the Company's
Westborough, Massachusetts facility. The beverage operation
manufactures a high quality beverage product in 15 flavors under the
"Newport" label which is sold exclusively in the Company's convenience
stores. The plastic operation manufactures plastic bottles for use in
the Company's beverage operation as well as sales to third party
customers.
Grocery and Warehouse Distribution -- The grocery warehouse
and distribution center is located in a 377,000 square foot portion of
the Company's Westborough, Massachusetts facility. It distributes
grocery, tobacco, candy and miscellaneous other products to all of the
Company's
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convenience stores, except those in Florida, through a weekly
order/delivery system. Management believes that the grocery warehouse
and distribution operation offers the Company certain advantages in the
extremely competitive convenience store environment including favorable
pricing from vendors due to volume and centralized purchasing, maximum
allowance earnings, product selection and availability of seasonal
lines, as well as producing freight income, if feasible, on return
trips from the stores.
Distribution Fleet -- The Company owns and operates a fleet of
192 tractors, 182 trailers (including "low-temp" trailers, "mid-temp"
trailers and dry box trailers), 33 straight trucks, 24 milk transport
tankers and 62 gasoline transport tankers and numerous other support
vehicles. The average age of its tractor fleet is six years; the
average age of its trailer fleet is nine years; and the average age of
its gasoline transport fleet is nine years. The Company plans to
continue upgrading its fleet operations over the next few years.
GULF OIL L.P.
As part of the Plan, the Company entered into an arrangement with Gulf
Oil L.P. (formerly known as Catamount Petroleum Limited Partnership, a Delaware
limited partnership) and Catamount Management Corporation, a Massachusetts
corporation ("CMC"), pursuant to which the Company transferred a substantial
portion of the assets comprising its Gulf Oil Division to Gulf Oil L.P. in
exchange for a 66 2/3% limited partnership interest in Gulf Oil L.P. These
assets included certain supply contracts/franchises for Gulf branded gasoline
retailers in the New England states, New York, New Jersey, Pennsylvania,
Delaware and Ohio, certain petroleum storage terminals and the right to use and
license the various "Gulf trademarks" and tradenames in those market areas.
Cumberland retained the remaining Gulf division assets which primarily consist
of the contracts with the Lessee Dealers. The Company is a Class A limited
partner in Gulf Oil L.P. and, as a limited partner, does not have any control
over the day to day operations of Gulf Oil L.P. John Kaneb, the chief executive
officer of CMC, was for approximately 25 years an officer or chief executive
officer of Northeast Petroleum Corporation, a company engaged in the wholesaling
and retailing of petroleum products which was sold in 1983. Mr. Kaneb reentered
the petroleum business in 1986 with the founding of Catamount Petroleum Limited
Partnership.
The beneficial interests of Gulf Oil L.P. are held as follows: (i) 1%
general partnership interest is held by CMC, (ii) a 66 2/3% Class A limited
partnership interest is held by the Company, and (iii) a 32 1/3% Class B limited
partnership interest is held by members of John Kaneb's family and their
nominees (the "Kaneb Partners"). The partnership agreement of Gulf Oil L.P. (the
"Partnership Agreement") provides for mandatory distributions to partners in
amounts equal to the income tax payable on their portion of the earnings of Gulf
Oil L.P. and for other distributions as well. Distributions by Gulf Oil L.P.
are, however, subject to restrictive covenants in Gulf Oil L.P.'s agreements
with its lenders, which permit distributions only for tax payments, provided
that there is no event of default or unless otherwise consented to by the
lenders. As a result, the Company currently receives quarterly distributions of
approximately 40% of its pro rata share of partnership earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of Gulf Oil L.P.'s results of operations.
The Partnership Agreement provides that at any time on or after
January 1, 1999, the Kaneb Partners and CMC have the right, but not the
obligation, to put their partnership interests to the Company (the "Put") and
the Company has the right, but not the obligation, to call such interests (the
"Call") 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 interests to purchase
upon 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. Therefore,
there is a possibility that, at any time after 1998, the Company's entire
limited partnership interest in Gulf Oil L.P. could be purchased or that Gulf
Oil L.P. would be sold as a going concern. In such event, the Company would,
unless the purchaser of Gulf Oil L.P. otherwise agreed, lose the right to use
the "Gulf" trademarks and trade names and would, therefore, be required to make
arrangements with another major oil company for licensing and petroleum product
supply for its Lessee Dealer operations. There can be no assurance that any such
arrangement could be negotiated on terms satisfactory to the Company.
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Under the Partnership Agreement, the Company also has an early call right in the
event that (a) a successor chief executive officer of CMC is appointed prior to
January 1, 1999 and (b) Gulf Oil L.P., in the 12 calendar months following such
appointment, fails to achieve a certain level of profitability, at a purchase
price determined by a formula set forth in the Partnership Agreement.
The Company is also required to purchase all of its requirements for
petroleum products (except in Florida) from Gulf Oil L.P. through December 31,
1998 pursuant to a supply agreement executed at the time of formation of Gulf
Oil L.P. (the "Supply Agreement"). The Company is required to pay branded jobber
prices published by Gulf Oil L.P. The Supply Agreement also requires the payment
of additional amounts to cover certain of Gulf Oil L.P.'s costs in the event
that certain target earnings are not met and/or the Company fails to purchase
certain minimum amounts of branded products. The Company, for the calendar year
1996 purchased 525 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 1997 and 1998 are 483.5 and 488.7 million gallons,
respectively. The Company expects to meet all minimum purchase requirements,
though there can be no assurance in this regard. For the fiscal years ended
September 30, 1997 and 1996, the Company purchased approximately $408.8 and
$372.1 million, respectively, from Gulf Oil L.P. Brand maintenance costs, which
are based upon quantities purchased and earnings of Gulf Oil L.P., for each
calendar year, have resulted in additional brand maintenance costs of $4.0 and
$1.4 million for calendar 1996 and 1995, respectively, and $2.2 million has been
paid or accrued through September 30, 1997. The ultimate amount for 1997 will be
determined based on actual results for calendar 1997. There can be no assurance
whether Gulf Oil L.P. will achieve its target earnings in future years or
whether the Company will purchase in future years the minimum amounts of branded
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of Gulf Oil L.P.'s results of operations
and Note 5 to the Company's Financial Statements.
The Company also provides transportation services for Gulf Oil L.P.
with its fleet of vehicles as well as other services at competitive market
rates.
COMPETITION
All aspects of the Company's business are highly competitive, including
convenience store operations, gasoline operations, bakery and dairy operations
and real estate operations. In its convenience store operations, the number and
type of the Company's competitors vary by location. The Company presently
competes with other convenience stores, large integrated gasoline service
station operators, supermarket chains, neighborhood grocery stores, drugstores,
independent gasoline service stations, fast food operations and other similar
retail outlets, some of which are well recognized national or regional retail
chains and many of which have greater financial and other resources than the
Company. Key competitive factors include, among other things, location, ease of
access, store management, product selection, pricing, hours of operation, store
safety, cleanliness, product promotions and marketing.
The single largest factor affecting the convenience store industry in
recent years has been the continued expansion into the market of major oil
companies, usually as limited selection convenience stores adjacent to existing
gas properties. Such companies have a low cost, readily available supply of
gasoline and, therefore, have the ability to be gasoline price leaders in order
to establish market presence. The primary objective of these companies is to
sell large volumes of gasoline. As a result, staple convenience store products
such as tobacco and soda are frequently priced very low and sold in high
volumes. Accordingly, retail convenience store industry merchandise margins have
been under significant pressure in recent years.
Increased competition with respect to the sale of tobacco products has
also affected the convenience store industry. This has resulted primarily from
the advent of consumer tobacco warehouses and other competitors. For fiscal year
1997, the sale of tobacco products accounted for approximately 28.5% of the
Company's retail store sales.
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Based upon management's analysis of its market area, the Company's
major convenience store competitors (excluding major oil companies), by
geographic area are as follows:
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New England..... Dairy Mart, Christy's, Irving, Store 24,
Li'l Peach and Tedeschi's
Mid Atlantic.... 7-Eleven, Stewarts, Wilson Farms, Wawa and Quick Chek
Florida......... 7-Eleven, Circle K and Racetrac
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Gasoline sales are highly competitive. The Company competes with both
independent and national brand gasoline stations. Gasoline profit margins have a
significant impact on the Company's earnings. These profit margins are most
influenced by factors beyond the Company's control, such as volatility in the
wholesale gasoline market, and are continually influenced by competition in each
local market area.
ADVERTISING
The Company's advertising strategy is concentrated on all manufactured
products and immediately consumable food products such as coffee, bakery items,
candy and ice cream novelties. The current advertising slogan, "Cumberland Farms
- - The Stop That Keeps You Going," is used to promote the quick service and
complete offering of those products at all Cumberland locations. The Company's
advertising program includes periodic distribution of direct mail circulars and
newspaper and radio commercials, all designed to increase consumer awareness and
to highlight special promotions on manufactured products.
LABOR RELATIONS
The Company employs approximately 7,100 full time and part time
employees. Less than 1.5% of the Company's employees are represented by unions.
In general, the Company considers its relations with its employees to be
satisfactory.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the Company's stores generally experience higher
revenues and profit margins during the warmer weather months, which occur within
the Company's third and fourth fiscal quarters.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company uses a variety of trade names, service marks and
trademarks. Except for "Gulf," "Cumberland Farms," "Newport" and "Cloverfield
Dairy," the Company does not believe any trade name, service mark or trademark
is material to its business. The Gulf trade names and trademarks are licensed by
Chevron to Gulf Oil L.P. which, in turn, sublicenses them to the Company.
ENVIRONMENTAL REGULATIONS AND COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and
local environmental compliance laws and regulations primarily relating to
underground storage tank systems. These costs include assessment, compliance,
and remediation costs, as well as certain capital expenditures relating to the
Company's gasoline operations. The United States Environmental Protection Agency
(the "EPA") has established standards for owners and operators of Underground
Storage Tank Systems ("USTs") relating to, among other things: (i) maintaining
leak detection systems; (ii) upgrading USTs; (iii) implementing corrective
action in response to releases; (iv) closing out-of-use USTs to prevent future
releases; (v) maintaining appropriate records; and (vi) maintaining evidence of
financial responsibility for corrective action and compensating third parties
for bodily injury and property damage resulting from UST releases. All states in
which the Company operates also have adopted UST regulatory programs which, in
some cases, are more stringent than EPA regulations.
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Under current federal and certain state regulatory programs, the
Company is obligated to upgrade or replace all non-complying USTs it owns or
operates to meet corrosion protection and overfill/spill containment standards
on or before December 22, 1998. In some states, this upgrading or replacement
must be accomplished by an earlier date. The Company has evaluated each of its
sites to determine the type of expenditures required to comply with these and
other requirements under federal, state and local UST regulatory programs.
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 over recent years has made, and is committed through 1998
to make, significant capital expenditures to comply with UST system upgrade
requirements as well as other upgrades related to the marketing of motor fuels.
The Company's capital expenditures for such upgrades for the fiscal year ended
September 30, 1997 was $14.3 million, and it is projected that an additional
$19.6 million of such capital expenditures will be made through December 22,
1998. These amounts are net of estimated reimbursement from various state
environmental trust funds which have provisions for sharing or reimbursing
certain costs incurred by UST owners or operators based upon compliance with the
terms and conditions of the funds. The foregoing amounts are based on factors
and assumptions that could change due to modifications of regulatory
requirements, detection of unanticipated environmental conditions or other
unexpected circumstances. As a result, the actual costs incurred may vary
substantially from these estimates.
As of September 30, 1997, ten of the 12 states in which the Company
operated have enacted so-called "trust fund" legislation. These trust fund
programs have been submitted to or approved by the EPA, with a variety of
mechanisms for sharing or reimbursing corrective-action (remediation) costs,
many including third-party compensation. All companies that operate USTs are
required to pay a variety of fees to participate in trust fund programs for
remediation activities.
As part of its UST management program, the Company is involved in
environmental assessment and remediation activities with respect to discovered
releases of regulated substances from its existing and previously owned or
operated retail gasoline facilities. The Company systematically upgrades or
replaces USTs where appropriate and initiates any required remediation at that
time. Older tanks are replaced in conjunction with gasoline facility renovation
in order to reduce downtime and enhance revenues when the site is completed. The
Company spent approximately $3.4 million for the fiscal year ended September 30,
1997 for assessment and remediation and estimates that it will incur
approximately $3.5 million for such costs for fiscal year 1998. The Company's
estimates of costs to be incurred for environmental assessment and remediation
and for UST upgrading and other regulatory compliance are based on its review of
(i) test drilling and other subsurface activities, (ii) computerized tank
management data, and (iii) present and estimated future remediation costs and
results at UST sites. Since certain of these factors and assumptions could
change due to potential changes in the status of federal and state regulations
and state reimbursement programs, detection of unanticipated environmental
conditions or other unexpected circumstances, the actual costs incurred may vary
significantly from the estimates noted above and may vary significantly from
year to year.
The Company also incurs certain ongoing environmental costs associated
with the operation of the 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.
The Company has adopted an Environmental Compliance Program which sets
forth the Company's corporate environmental policies with respect to (i)
monitoring compliance with applicable environmental laws and regulations,
(ii) training employees, including convenience store managers, in regulatory
compliance issues and emergency response procedures, (iii) disciplinary actions
for violations of environmental policies and procedures for the Lessee Dealers,
and (iv) federal, state and local regulations. There can, of course, be no
assurance that such program will ensure compliance with applicable environmental
laws and regulations. Company management reports regularly to the Board of
Directors on environmental compliance matters.
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<PAGE> 11
OTHER REGULATORY MATTERS
In addition to being subject to extensive environmental regulation and
compliance requirements as described above, the Company's operations are highly
regulated in areas such as milk processing, retail petroleum operations, the
sale of lottery tickets, participation in federal food stamp programs and the
sale of alcoholic beverages and tobacco products. Compliance, for the most part,
with such regulations involves adhering to applicable federal and state laws
with respect to operations and, in many instances, the posting of security bonds
or other forms of collateral. These bonds secure numerous obligations incurred
in connection with the collection of motor fuel taxes, purchases of raw milk,
cigarette tax stamps and alcoholic beverages.
The ability to obtain, and, in some instances, maintain, permits from
local municipalities to store and dispense petroleum products and to sell
alcoholic beverages is increasingly difficult. The Company's profitability can
be impacted negatively by the inability to retain or obtain new permits from
towns and municipalities where the Company is interested in retailing motor
fuels or alcoholic beverages.
In addition, various federal, state and local legislative and
regulatory proposals are made from time to time to, among other things, increase
the minimum wage payable to employees, require a minimum of two employees at
convenience stores during certain nighttime hours, increase taxes on the retail
sale of certain items, such as petroleum products, cigarettes and other tobacco
products and alcoholic beverages, and health care. Changes to such laws,
regulations or ordinances may adversely affect the Company's performance by
increasing the Company's costs or affecting its sales of certain products.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements (as
such terms are defined in the rules and regulations promulgated pursuant to the
Securities Act of 1933, as amended). These forward-looking statements include
plans and objectives to upgrade and remodel store locations, to build new stores
and increase gasoline sales, to operate its manufacturing facilities, as well as
the estimated costs for environmental remediation and environmental capital
expenditures and other matters contained herein that are not historical facts.
Such statements are based on management's current expectations and are subject
to a number of factors and uncertainties that could cause actual results to
differ materially from those expressed in or implied by such forward-looking
statements. Such factors and uncertainties include, but are not limited to the
availability of capital to fund the Company's business strategy, the future
profitability of the Company, the performance of Gulf Oil L.P., competition and
pricing in the Company's market area, volatility in the wholesale gasoline
market due to supply interruptions, modifications of environmental conditions,
the timing of reimbursements from state environmental trust funds, the Company's
ability to manage its long-term indebtedness, weather conditions, the favorable
resolution of certain pending and future litigation, and general economic
conditions. The Company undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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<PAGE> 12
ITEM 2. PROPERTIES
As of September 30, 1997, the Company owned or leased the following
properties, including convenience stores and gas stations in the geographic
locations indicated.
<TABLE>
<CAPTION>
CONVENIENCE STORES AND
GASOLINE STATIONS(1) LESSEE DEALERS TOTAL
Owned Leased Owned Leased Owned Leased
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
NEW ENGLAND REGION
- ------------------
Connecticut 56 10 14 4 70 14
Maine 45 2 0 0 45 2
Massachusetts 192 35 37 4 229 39
New Hampshire 47 6 1 1 48 7
Rhode Island 60 16 6 1 66 17
Vermont 23 0 0 0 23 0
MID-ATLANTIC REGION
- -------------------
Delaware 10 0 9 1 19 1
New Jersey 55 7 75 18 130 25
New York 91 4 29 14 120 18
Ohio 0 0 1 0 1 0
Pennsylvania 15 3 40 5 55 8
FLORIDA 138 6 0 0 138 6
- ------- --- -- --- -- --- ---
TOTAL 732 89 212 48 944 137(2)
=== == === == === ===
</TABLE>
(1) Includes approximately 300 "strip centers," each of which typically has
one to three units rented to third parties.
(2) In addition to the properties shown on the chart, the Company leases or
subleases to third parties 21 properties, which are not gas stations or
convenience stores located in nine states. The Company also owns or leases
134 vacant properties and undeveloped sites located in 12 states.
The Company's leases of properties have terms extending from tenancies
at will to expirations through the year 2023. Many of these real estate leases
have multiple option periods which will enable the Company to retain favorable
locations. The annual rent expense associated with these leases for the year
ended September 30, 1997, excluding leases with related parties, was
approximately $4.1 million. The above leases include 23 properties leased from
affiliates of the Company. During the fiscal year ended September 30, 1997, the
Company paid $1.1 million to these affiliates for the lease of these properties.
See "Certain Relationships and Related Transactions".
Third-party rental income is derived from gas station rentals to Lessee
Dealers (260 tenants) and rental of retail store and office facilities
(approximately 400 units). The annual rent roll for the properties currently
under lease is approximately $19.3 million. In addition, there are currently 134
available units vacant with a potential annual rent roll of approximately $1.5
million.
In addition to the properties shown on the chart, the Company also
operates 19 warehouses, offices and manufacturing facilities, nine of which are
owned and ten of which are leased, located in eight states. The Company owns a
facility in Westborough, Massachusetts, which is used as follows: (i) bakery
operations (120,000 square feet), (ii) beverage operations (70,000 square feet),
and (iii) warehouse and distribution center (370,000 square feet). The Company's
headquarters, located in Canton, Massachusetts, consists of three
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<PAGE> 13
buildings of 97,209, 94,810 and 17,080 square feet, which includes a fluid milk
and ice cream manufacturing facility of 68,810 square feet. In the Mid-Atlantic
region, the Company owns two fluid milk processing facilities of 89,600 and
28,777 square feet.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are routine in nature and incidental to
the operation of its business. These legal actions are primarily in the areas of
personal injury and property damage, wrongful termination, environmental claims,
real estate and contract disputes as well as claims brought pursuant to the
Petroleum Marketing Practices Act, the statute regulating the franchise
relationship existing between the Company and its Lessee Dealers. The Company's
policy is to defend vigorously those actions in which it has been named as a
defendant and to pursue aggressively those actions involving the collection of
amounts owed to it or compliance by others with obligations to which the Company
believes it is entitled.
The Company has civil actions pending against Mr. Demetrios B.
Haseotes, a shareholder and Director of the Company. Two actions relate to the
Company's efforts to collect its judgments in the amount of (a) $663,267, plus
interest, which represents funds distributed to Mr. Haseotes to pay certain tax
liabilities but applied for other uses and (b) $356,456 plus interest, with
respect to funds borrowed by Mr. Haseotes but not yet repaid. Another action
relates to the Company's efforts to obtain an accounting and possible
disgorgement of funds received by him in connection with the sale of a crude oil
refinery in Canada. Mr. Demetrios B. Haseotes is also pursuing a claim against
the Company seeking reinstatement of his position and attendant compensation
which the Board of Directors terminated in 1995. In addition, the Company has an
outstanding injunction barring Mr. D.B. Haseotes' involvement in the Company's
management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the securityholders of the
Company during the fourth fiscal quarter of the fiscal year ended September 30,
1997.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
No established public trading market exists for the Company's Class A
Common Stock, par value $1.00 per share, or the Class B Common Stock, par value
$1.00 per share, and accordingly, no high and low bid information or quotations
are available with respect to the Company's Common Stock.
As of December 20, 1997, there were four holders of record of Class A
Common Stock and seven holders of record of Class B Common Stock. The Company
operates as an S Corporation under the Internal Revenue Code and, therefore, no
dividends are issued by the Company. See Note 4 to the Company's Financial
Statements for a discussion of distributions made to the shareholders in order
to pay income taxes.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended September 30,
1997, are derived from the audited financial statements of the Company. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's financial statements, related notes and other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
Statement of operations data: (in thousands except for ratios)
<S> <C> <C> <C> <C> <C>
Income
Retail revenues $ 1,169,348 $ 1,121,509 $ 1,080,389 $ 974,802 $ 949,133
Wholesale revenues (1) 299,298 274,635 240,835 213,198 150,362
Equity in earnings of Gulf Oil, L.P. (1) 7,677 7,855 13,612 6,361 -
Gain on sales of property, and
equipment 8,782 11,372 9,673 9,517 8,971
----------- ----------- ----------- ---------- ----------
Total income 1,485,105 1,415,371 1,344,509 1,203,878 1,108,466
Special charge (2) - - - (22,098) -
Operating income 33,454 46,639 57,675 19,030 39,817
Interest expense (3) (22,823) (22,872) (25,071) (27,891) (25,947)
Reorganization expense (4) - - - (2,491) (6,175)
Provision for state income taxes (600) (1,919) - - -
----------- ----------- ----------- ---------- ----------
Income (loss) before extraordinary gains 10,031 21,848 32,604 (11,352) 7,695
Extraordinary gains (4) - - 2,197 9,653 -
----------- ----------- ----------- ---------- ----------
Net income (loss) $ 10,031 $ 21,848 $ 34,801 ($ 1,699) $ 7,695
=========== =========== =========== ========== ==========
Ratio of earnings to fixed charges (5) 1.4x 1.8x 2.2x .6x 1.3x
Balance Sheet Data:
Total assets $ 362,211 $ 366,204 $ 362,427 $ 349,687 $ 422,669
Long-term debt (6) 212,906 231,506 254,265 282,023 -
Stockholders' equity (deficit) 46,667 39,211 26,074 (5,762) (1,659)
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
FOOTNOTES
(1) The Company's wholesale revenues include sales of petroleum, dairy and
bakery products to independent third parties. In January 1992, the Company
entered into an interim supply agreement, during which time the Company
earned commissions and thruput income from Catamount Petroleum Limited
Partnership, which was replaced in December 1993 by a joint venture
agreement between the Company and Catamount (following the closing,
Catamount was renamed Gulf Oil, L.P.). As a result of these agreements,
substantially all wholesale petroleum sales from January 1992 through
December 30, 1993, together with costs and expenses related thereto, have
been made by Catamount under the interim supply agreement, and
subsequently by Gulf Oil, L.P. Effective January 1, 1994, the Company
commenced recording its equity in the earnings of the Gulf Oil, L.P. and
began selling gasoline directly to the Company's Lessee Dealers (see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of results of operations of Gulf Oil, L.P.
for the fiscal year ended September 30, 1997 and 1996, Note 5 of Notes to
the Company's Financial Statements and separate financial statements of
Gulf Oil, L.P.).
(2) The special charge in fiscal year 1994, represents the write-off of
advances to a Company controlled by a related party.
(3) Interest expense decreased as a result of reductions in the Company's debt
levels and effective rate of interest.
(4) Reorganization expense and the extraordinary gains related to reductions
in debt are a result of the Company's Chapter 11 filing and subsequent
reorganization efforts.
(5) The Company's earnings were inadequate to cover the minimum fixed charge
ratio of 1.0 to 1 in the fiscal year ended September 30, 1994. The
coverage deficiencies amounted to $11.4 million.
(6) Long term debt as of September 30, 1993 excludes liabilities subject to
compromise of $359.3 million.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes the results of operations for the fiscal
years ended September 30, 1997, 1996 and 1995, which is followed by Management's
Discussion and Analysis of Financial Condition and Results of Operations. 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.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, % INCREASE (DECREASE)
1997 1996 1995 1997 1996
------------------------------------------ ---------------------
In Thousands
<S> <C> <C> <C> <C> <C>
INCOME
Retail Revenues $1,149,987 $1,101,076 $1,059,011 4.4% 4.0%
Other Income 19,361 20,433 21,378 (5.2)% (4.4)%
---------- ---------- ---------- ----- -----
Total $1,169,348 $1,121,509 $1,080,389 4.3% 3.8%
Equity in earnings of Gulf Oil, L.P 7,677 7,855 13,612 (2.3)% (42.3)%
Gains On sales of property and equipment 8,782 11,372 9,673 (22.8)% 17.6%
---------- ---------- ---------- ----- -----
Total 1,185,807 1,140,736 1,103,674 4.0% 3.4%
Wholesale revenues 299,298 274,635 240,835 9.0% 14.0%
---------- ---------- ---------- ----- -----
Total income 1,485,105 1,415,371 1,344,509 4.9% 5.3%
---------- ---------- ---------- ----- -----
Costs and expenses
Cost of sales 1,181,426 1,102,582 1,027,162 7.1% 7.3%
Operating expenses 270,225 247,447 242,131 0.3% 2.2%
Depreciation and amortization 22,299 18,703 17,541 19.2% 6.6%
---------- ---------- ---------- ----- -----
Total 1,451,651 1,368,732 1,286,834 6.1% 6.4%
---------- ---------- ---------- ----- -----
Operating income $ 33,454 $ 46,639 $ 57,675 (28.3)% (19.1)%
========== ========== ========== ===== =====
OTHER OPERATING DATA
Merchandise gross profit $ 152,308 $ 151,404 $ 147,925 0.6% 2.4%
Merchandise gross profit as a percentage of sales 29.8% 30.5% 29.9%
Gasoline gallons sold 501,050 493,623 470,576 1.5% 4.9%
Gasoline gross profit $ 58,470 $ 63,947 $ 65,737 (8.6)% (2.7)%
Gasoline gross profit
cents per gallon 11.7 13.0 14.0 (10.0)% (7.1)%
Operating income before depreciation and amortization
as a percentage of total revenues 3.7% 4.6% 5.6%
Operating income as a percentage of total revenues 2.2% 3.3% 4.3%
Comparable average store and station data:
Merchandise sales growth 3.0% 0.5% 3.5%
Gasoline gallons sold 1.5% 4.9% 10.3%
</TABLE>
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<PAGE> 17
YEAR ENDED SEPTEMBER 30, 1997 VERSUS 1996
Included in retail revenues are convenience store and retail gasoline
sales. Convenience store sales were $509.5 million for the fiscal year 1997 an
increase of $14.8 million or 3.0%, from the prior fiscal year. Sales gross
margin dollars increased slightly. Gross margin, as a percentage of sales,
decreased from 30.5% to 29.8%.
Retail gasoline sales were $640.5 million, an increase of
$34.1 million, or 5.6% over the prior fiscal year. Gasoline gallon sales were
501.1 million, an increase of 7.4 million gallons, or 1.5% over the prior fiscal
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 11.7 cents decreased 1.3 cents or 10% from the
prior fiscal 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. See Note 5 to the Company's
Financial Statements.
Gains on sales of property decreased from the prior fiscal year. The
gains for fiscal year 1997 were decreased by a provision for impairment loss on
properties held for disposal of $950,000 as required by Financial Accounting
Standards Board Statement No. 121. See Note 2 to the Company's Financial
Statements for additional explanation. For the fiscal year ended September 30,
1997, 40 properties were sold, compared to 82 sold in the prior fiscal year. A
non-operating petroleum terminal was sold in the prior fiscal year for a gain of
approximately $2.5 million.
Included in wholesale revenues are plant and wholesale petroleum sales
to third parties. Plant revenues were $160.7 million, an increase of
$15.0 million or 10.3% over the prior fiscal year. The increase is attributable
to price increases and sales to additional wholesale milk customers. Wholesale
petroleum revenues were $138.6 million, an increase of $9.7 million, or 7.5%
from the prior year. The increase results primarily from increased wholesale
selling prices in the previous quarters.
Cost of sales for the year ended September 30, 1997 increased over the
prior fiscal year primarily as a result of increases in product costs and volume
sold in the gasoline operations. A LIFO charge was incurred to recognize
increasing costs of materials purchased.
Operating expenses increased from the prior year primarily as a result
of increases in payroll, benefits and repair expenses. Depreciation and
amortization increased as a result of capital expenditures during the prior
fiscal years.
The Company has undertaken a program, utilizing both internal personnel
and a third party vendor, to ensure that the Company's computer systems are Year
2000 compliant. Cost of the program was $450,000 for fiscal year 1997, with
additional costs estimated to be $1,470,000 for fiscal year 1998 and $555,000
for fiscal year 1999.
YEAR ENDED SEPTEMBER 30, 1996 VERSUS 1995
Included in retail revenues are convenience store and retail gasoline
sales. Convenience store sales were $494.7 million for fiscal year 1996, an
increase of $2.3 million or .5%, over the prior fiscal year. Merchandise sales
gross margin dollars remained relatively stable; gross margin, as a percentage
of sales, increased from 29.9% to 30.5%, reflecting improved product gross
margins and slightly higher ancillary income.
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<PAGE> 18
Retail gasoline sales were $606.4 million, an increase of
$39.8 million, or 7.0% over the prior fiscal year, aided by a 2.4 cents per
gallon increase in the average retail selling price. Gasoline gallon sales were
493.6 million, an increase of 23.0 million gallons, or 4.9% over the prior
fiscal year. The increase in gallons sold results primarily from continued
attention to the convenience retailing aspects of selling gasoline and the
remodeling and expansion of gasoline facilities at existing locations. The
average cents per gallon margin of 13.0 cents decreased 1.0 cent or 7.1% from
the prior fiscal year principally due to an increase in the cost of gasoline,
offset to some extent by an increase in the retail selling price of gasoline.
Other income is comprised of rental income from tenants located at
retail and gasoline sites and has decreased due to fewer tenants.
On December 30, 1993, the Company entered into a joint venture
agreement with Gulf Oil L.P. 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 $13.6 million in the prior fiscal year to $7.9 million
in fiscal year 1996 resulted primarily from unusually high margins achieved by
Gulf Oil L.P. in the first quarter of the prior fiscal year.
Gains on sales of property increased over the prior fiscal year.
Eighty-two properties were sold during the fiscal year ended September 30, 1996,
compared to ninety-three sold in the prior fiscal year. A non-operating
petroleum terminal was sold in fiscal year 1996 for a gain of $2.5 million.
Included in wholesale revenues are plant and wholesale petroleum sales
to third parties. Plant revenues were $145.7 million, an increase of
$32.8 million or 29.1% over the prior fiscal year, due to price increases and
the addition of wholesale milk customers. Wholesale petroleum revenues were
$128.9 million, an increase of $1.0 million, or .8% over the prior year.
Cost of sales increased over the prior year as a result of increases in
product costs and volumes sold in the gasoline operations. A LIFO charge was
incurred to recognize the increasing costs of materials purchased. Operating
expenses increased over the prior year as a result of increases in payroll and
benefits, and as a result of increases in the volume of gasoline sold and the
severity of the winter weather. Depreciation and amortization increased as a
result of capital expenditures incurred during the year.
Interest expense decreased from the prior fiscal year principally due
to lower debt. The Company provided for estimated state income taxes.
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, $17 million of the availability
under the loan facility has been utilized for the issuance of letters of credit.
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 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.
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<PAGE> 19
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 its 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 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 $213 million as of September 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 in place a $30 million working capital and letter of
credit facility with a maturity date of December 30, 1998. This facility
provides a revolving credit line, term loan and a facility for the issuance of
letters of credit. As of September 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, resulting in unused availability of
$8 million.
Certain of the Company's credit agreements require the Company to make
principal payments from the proceeds of the sales of certain designated
mortgaged properties (such payments are hereinafter referred to as "Target
Payments"). The Company's failure to make a Target Payment does not constitute
an Event of Default, but rather permits the lender to take control of the sale
process to meet the Target Payments. The Company's remaining Target Payments
aggregated approximately $5.0 million as of September 30, 1997. Remaining Target
Payments for the next two fiscal years are estimated to be $2.6 and $.8 million,
respectively, and $1.6 million thereafter. Aggregate cash requirements for the
year ended September 30, 1997 were approximately $71 million, comprised of
debt repayment of $18.6 million, interest cost of $22.8 million and capital
expenditures of $29.6 million, including Target Payments of $2.8 million.
Aggregate cash requirements for fiscal year 1998 are estimated to be $65.1. 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
For fiscal years ended September 30, 1997 and 1996, the Company raised
$15.1 million and $21.1 million respectively, from its asset disposition
program. 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.
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<PAGE> 20
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.
INSURANCE AND BOND PROGRAMS
The Company assumes a high degree of risk as a result of the high
deductibles under its worker's compensation, general liability and automobile
insurance policies issued by an unrelated insurer. These risks, estimated at
$22.7 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 $18.0 million at September 30, 1997. The unrelated insurance
company providing these coverages required collateral in the form of a $12
million letter of credit, certain real properties, cash and reinsurance at
September 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 estimates that capital
expenditures of approximately $19.6 million will be made through December 22,
1998 in order to comply with UST regulatory requirements.
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 $29.6 and $27.6 million for the fiscal years ended September 30,
1997 and 1996, respectively.
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<PAGE> 21
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, 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
$7.7 million and $7.9 million for the years ended September 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.
The Partnership Agreement provides for certain distributions to
partners however, such distributions are subject to restrictive covenants
imposed by Gulf Oil L.P.'s lenders which only permit distributions for tax
payments, provided there is no event of default or unless otherwise consented to
by the lenders. The Company received aggregate distributions from Gulf Oil L.P.
of $5.5 million during the fiscal year ended September 30, 1997. Subsequent to
September 30, 1997, the Company received a distribution in the amount of $13.3
million consented to by the lenders.
The Partnership Agreement provides that at any time on or after
January 1, 1999, CMC 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 (which expires on December 31, 1998). The Company, for the calendar
year 1996, purchased 525 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 periods 1997 through 1998 are 483.5, and 488.7
million gallons, respectively. The Company expects to meet all minimum purchase
requirements, though there can be no assurances in this regard. For the fiscal
years ended September 30, 1997 and 1996, the Company purchased approximately
$408.8 and $372.1 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 $4.0 million and $1.4 million for the calendar years 1996 and 1995,
respectively, and $2.2 million has been paid or accrued through September 30,
1997.
At September 30, 1997 and 1996, accounts payable due to Gulf Oil L.P.
were approximately $7.8 million and $8.1 million, respectively.
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<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company and Gulf Oil L.P. and the notes
thereto appear on pages F-1 through F-33 of this Form 10-K.
-22-
<PAGE> 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
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<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information (and the ages as of
December 22, 1997) with respect to Executive Officers and Directors of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Lily H. Bentas 57 Chairperson of the Board of Directors, President and
Chief Executive Officer; Member of Compensation and
Audit Committees of the Board of Directors
Harry J. Brenner 48 Executive Vice President and Chief Operating Officer
Donald E. Holt 52 Senior Corporate Vice President
Arthur G. Koumantzelis** 67 Senior Vice President and Chief Financial Officer
Francis G. Locklin 61 Senior Vice President--Real Estate
Daniel E. Phaneuf 55 Senior Vice President--Retail Operations
Mark G. Howard 41 Associate General Counsel and Secretary;
General Counsel, Gulf Division
Michael A. Kelly 44 General Counsel
Robert J. Handforth 59 Vice President of Manufacturing and Distribution
George P. Haseotes 35 Vice President, Gulf Division
John E. Burke* 58 Director; Member of Compensation Committee of the
Board of Directors
Dr. Paul Hand* 66 Director
Byron Haseotes 65 Director
Demetrios B. Haseotes 69 Director; Chairman, Corporation Development
Committee
George Haseotes 66 Director
Kenneth T. Koehler* 51 Director; Member of Compensation and Audit
Committees of the Board of Directors
James C. McDermott* 43 Director; Member of Audit Committee of the Board of
Directors
Dr. Geoffrey Pottow* 64 Director
</TABLE>
- ----------------------------
* Independent Directors
**Mr. Koumantzelis has notified the Board of Directors of his intention to
retire from his position as Chief Financial Officer in early 1998. It is
expected that a replacement for Mr. Koumantzelis will be appointed by the
Board of Directors sometime in the first quarter of 1998.
The Plan mandates that the Board of Directors consist of a total of
nine directors, five of whom are not affiliated with the shareholders or the
Company (the "Independent Directors") and four of whom are members of the
Haseotes family. The Plan provides that the Independent Directors shall serve a
term commencing December 30, 1993 and ending, in effect, on the date when the
claims of the Unsecured Creditors Group have been paid in full which, absent
prepayments, is scheduled to occur on December 30, 1998. In addition, it is an
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<PAGE> 25
event of default under the Company's working capital facility if less than a
majority of the Board consists of Independent Directors.
The Independent Directors were initially selected by Lily H. Bentas and
the Committee of Unsecured Creditors (as defined in the Plan). The Plan provides
that in the event an Independent Director resigns or is otherwise unable to
serve, the person to fill such vacancy will be selected by a member of the Post-
Confirmation Committee (as defined in the Plan) and a representative of the
Company selected by the shareholders. If the two parties cannot agree, the
vacancy will be filled by arbitration.
At such time when the majority of the Board of Directors does not
consist of Independent Directors, certain actions, as prescribed by certain of
the Company's credit agreements, will require approval by an Independent
Mediation Board, consisting of three individuals who are not affiliates of the
Company. One of the three individuals will be selected by the Company, and the
other two will be selected in the same manner as the Independent Directors. If
the Company is unable to find individuals willing to serve pursuant to the
selection procedure for Independent Directors, the two members may be selected
by the Company provided that such members are not affiliates and do not have a
material business or personal relationship with the Company or any affiliate of
the Company and the Trustee determines such qualifications are met.
Directors who are not Independent Directors are elected by the
shareholders and serve a one year term or until a successor is duly appointed
and qualified. The Plan requires that Lily Bentas serve as chairperson of the
Board of Directors until the claims of the Unsecured Creditor Group have been
paid in full. Vacancies with respect to directors who are not Independent
Directors (as defined in the Plan) are filled by the shareholders.
The positions of General Counsel, Senior Vice President of Retail
Operations, Vice President of Manufacturing and Distribution and Vice President
of the Gulf Division are appointed by the President. All other Executive
Officers are appointed by the Board of Directors annually to serve a one year
term or until a successor is duly appointed and qualified.
The following is a description of the business experience of each
Executive Officer and Director. Except as indicated, each of the named
individuals has held the position for more than the past five years. Ms. Bentas
is the sister of Demetrios B., George and Byron Haseotes, all of whom are
brothers. Mr. George P. Haseotes is the son of Demetrios B. Haseotes.
LILY H. BENTAS serves as Chairperson of the Board of Directors,
President and Chief Executive Officer. Ms. Bentas has been employed in key
management positions at the Company for her entire business career.
HARRY J. BRENNER has served as Chief Operating Officer and Executive
Vice President since 1993. Prior to that time, Mr. Brenner was Senior Vice
President, Retail Operations. Mr. Brenner has served the Company in various
management capacities since 1984 and has 20 years of experience in the
convenience store business.
DONALD E. HOLT serves as Senior Corporate Vice President. Mr. Holt has
served the Company since 1985 and has over 25 years of experience in
manufacturing and convenience store businesses. Mr. Holt also serves as
President and Director of Conven-Petro Insurance Company, an affiliate of the
Company. Mr. Holt is a Certified Public Accountant.
ARTHUR G. KOUMANTZELIS has served as Senior Vice President and Chief
Financial Officer since July 1990. Prior to that time, Mr. Koumantzelis was
employed at the international accounting firm of Ernst & Young for 37 years,
including 24 years as a senior partner, serving in various management positions.
Mr. Koumantzelis also serves as a trustee of Hospitality Properties Trust, a
real estate investment trust which is listed on the New York Stock Exchange. Mr.
Koumantzelis has notified the Board of Directors of his intention to retire from
his
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<PAGE> 26
position as Chief Financial Officer in early 1998. It is expected that a
replacement for Mr. Koumantzelis will be appointed by the Board of Directors
sometime in the first quarter of 1998.
FRANCIS G. LOCKLIN serves as Senior Vice President--Real Estate. Mr.
Locklin also serves as Vice President and Director of Conven-Petro Insurance
Company, an affiliate of the Company.
DANIEL E. PHANEUF has served as Senior Vice President of Retail
Operations since October 1996. Mr. Phaneuf has served the Company in various
management capacities since 1969.
MARK G. HOWARD serves as Associate General Counsel of the Company, a
position he has held since 1986. Effective January 1, 1995, he was appointed to
the additional positions of Secretary to the Corporation and General Counsel of
the Gulf Division. Prior to joining Cumberland Farms, Mr. Howard was Corporate
Counsel with Exxon Corporation. His practice specialties include general
corporate, environmental, litigation and petroleum issues. Mr. Howard is a
member of the bars of Connecticut, Massachusetts, New Jersey, New York, Texas
and Washington, D.C.
MICHAEL A. KELLY has served as General Counsel since January 1995.
Prior to that time, Mr. Kelly was a senior partner with Adler, Pollock &
Sheehan. During his time at Adler, Pollock & Sheehan, Mr. Kelly specialized in
real estate, land use, construction and environmental litigation and published
several articles and lectured on these subjects. Mr. Kelly also served as
General Counsel to the Rhode Island Port Authority and Economic Development
Corporation. Mr. Kelly is chairman of the Rhode Island Judicial Nominating
Commission and is a member of the Massachusetts and Rhode Island bars.
ROBERT J. HANDFORTH has served as Vice President of Manufacturing and
Distribution since November 1994. Prior to that time, he was Vice President and
Director of Operations for Lehigh Valley Dairies, Inc., formerly a Division of
John LaBatt Ltd.
GEORGE P. HASEOTES has served as Vice President of the Gulf Division
since October 1, 1996. Prior to that time, Mr. Haseotes was Director of
Wholesale Petroleum Sales for the Company. Mr. Haseotes has extensive experience
in various aspects of the petroleum business.
JOHN E. BURKE has served as an Independent Director since December 30,
1993. Mr. Burke is Vice President, Credit and Collections of Nestle, USA. He
joined Nestle Company, Inc. as Assistant Credit Manager in 1971. In 1979 he was
appointed Assistant Treasurer of Nestle Corporation, and, in 1991 was appointed
to his current position. He is presently on the Board of Directors of the
National Food Manufacturers Credit Association, and a director of several
organizations. He is past Chairman of the National Food Manufacturers Credit
Association. He has chaired or served on creditor's committees for a number of
food company reorganization cases.
DR. PAUL HAND has served as an Independent Director since December 30,
1993. Dr. Hand was Secretary and General Manager of the Atlantic Dairy
Cooperative from 1982 until July 1993, and retired after 36 years as an
executive in the dairy industry.
BYRON HASEOTES serves as a Director and an Executive Employee and has
served in key management positions of the Company for his entire business
career.
DEMETRIOS B. HASEOTES serves as a Director and an Executive Employee
and has served in key management positions of the Company for his entire
business career.
GEORGE HASEOTES serves as a Director and an Executive Employee and has
served in key management positions of the Company for his entire business
career.
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<PAGE> 27
KENNETH T. KOEHLER has served as an Independent Director since
December 30, 1993. Mr. Koehler was elected President, Chief Executive Officer
and Director of Golden City Commercial Bank in 1994. Mr. Koehler was Principal
of Lyons, Zomback & Ostrowski, Inc., Bank and Thrift Consultants from 1992 to
1993. Mr. Koehler was also President and Chief Executive Officer of Dollar Dry
Dock Bank from 1989 to 1992. He has spent 17 years as a commercial banker with
Rhode Island Hospital Trust National Bank as well as serving as a director of
various corporate and non-profit entities.
JAMES C. MCDERMOTT has served as an Independent Director since May
1994. Mr. McDermott has served as National Credit Manager for Bemis Co., Inc.
since November 1995. Prior to that time, Mr. McDermott served as the Division
Manager of Credit of Continental Baking Company.
DR. GEOFFREY POTTOW has served as an Independent Director since
December 30, 1993. Dr. Pottow has been employed in various capacities at the
Becker Milk Co., Ltd. of Scarborough, Ontario, a convenience store company which
is publicly traded on the Toronto Stock Exchange, since 1964 and has served as
President/Director since 1984.
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<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for services rendered
of the Chief Executive Officer and the four most highly compensated Executive
Officers of the Company for fiscal years 1997, 1996 and 1995.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ALL OTHER COMPENSATION
--------------------------- ---- -------- -------- ----------------------
(1)
<S> <C> <C> <C> <C>
Lily H. Bentas, President, 1997 $488,000 $150,000 $42,000(3)
Chairperson of the Board of Directors 1996 $469,000 $200,000 $43,500(3)
and Chief Executive Officer 1995 $394,000 $150,000 $30,500(3)
Harry J. Brenner,
Executive Vice President and Chief 1997 $285,000 $ 93,750
Operating Officer 1996 $275,000 $125,000
1995 $250,000 $125,000
Michael A. Kelly, General Counsel 1997 $265,000 $ 18,750
1996 $259,375 $ 25,000
1995 $187,500(2) $ 25,000
Mark G. Howard, Associate General 1997 $180,000 $ 45,000
Counsel and Secretary 1996 $166,250 $ 60,000
1995 $159,844 $ 50,000
Daniel Phaneuf, Senior Vice 1997 $175,000 $ 48,750
President--Retail Operations 1996 $157,000 $ 65,000
1995 $147,500 $ 65,000
</TABLE>
- -------------------------------------------
(1) The Company made matching 401(k) contributions for fiscal year 1995, 1996
and 1997 as follows: Ms. Bentas $3,848, $4,485, $4,750, Mr. Brenner $1,964,
$4,500, $4,750, Mr. Kelly $0, $3,750, $4,750, Mr. Howard $4,500, $4,500, $4,750
and Mr. Phaneuf $4,183, $4,500, $4,750, respectively.
(2) Mr. Kelly was hired as General Counsel of the Company at an annual salary
of $250,000, effective January 1, 1995.
(3) Director's fees.
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<PAGE> 29
DIRECTOR COMPENSATION
Each director receives an annual director's fee of $30,000 payable in
arrears at the end of each fiscal year. Directors also receive $1,000 for each
regularly scheduled meeting, $500 for each telephonic meeting in excess of 30
minutes, $500 for each committee meeting and $1,000 per day for special
projects, and $2,500 for service on committees of the Board.
EXECUTIVE EMPLOYEE COMPENSATION
For fiscal year 1997, the Company paid compensation, including
director's fees, to the Executive Employees as follows: Demetrios B. Haseotes --
$34,500 (Director fees only), George Haseotes -- $310,333, and Byron Haseotes --
$332,000. The aggregate annual compensation paid to members of the Haseotes
family who are "Affiliates" (which is defined in certain credit agreements of
the Company to include shareholders of the Company) is limited by the Indentures
and other credit agreements of the Company. The Indentures limit such
compensation to an annual aggregate amount of $2 million, subject to
cost-of-living increases and other amounts approved by the Board, including by a
majority of Independent Directors or, if the Independent Directors are not a
majority of the Board, by the Independent Mediation Board. The Board of
Directors has suspended, effective April 30, 1995, the payment of compensation
to Mr. Demetrios B. Haseotes as a result of the Company's concerns about
improper receipt of funds by Mr. Haseotes from the sale of a crude oil refinery
in Canada.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of Lily
H. Bentas, President and Chief Executive Officer, Harry J. Brenner, Chief
Operating Officer and Mark G. Howard, Associate General Counsel and Secretary
and General Counsel of the Gulf Division. Each of these agreements became
effective as of October 1, 1997. The employment agreements for Ms. Bentas and
Mr. Brenner provide for a lump sum severance payment equal to one year's salary
in the event employment is terminated without cause, at any time, and also
contain a covenant not to compete following termination. The employment
agreement with Mr. Howard provides for a lump sum severance payment equal to one
year's salary in the event his employment is terminated without cause at any
time.
401(k) SAVINGS PLAN
For fiscal year 1997, the Company had in effect an Employee Savings
Plan (the "Savings Plan") which provided coverage to all eligible Company
employees. The Savings Plan is in the form of a 401(k) plan and has been
established for the primary purpose of providing eligible employees with an
opportunity to accumulate savings by means of salary adjustment and
contributions by the Company.
Participation in the Savings Plan is available to employees who meet
the eligibility requirements. To be eligible, an employee must be employed for
at least one year and must actually work 1,000 hours in a plan year. Enrollment
is permitted on the first day of the calendar quarter following the completion
of the eligibility requirements. An employee may defer from 1% to 15% of his/her
total compensation but in no event to exceed the maximum amount prescribed by
the Internal Revenue Code of 1986, as amended (the "Code") for each calendar
year. On a quarterly basis, the Company matches $.50 on the dollar up to 6% of
an employee's gross quarterly compensation. Each participant may select among
several investment funds in which the amounts credited to a participant's
account are invested. An employee will always be 100% vested in his/her
contributions. The Company matching contribution will vest 25% after two years
of service, 50% after three years of service, 75% after four years of service
and 100% after five years of service.
The vested portion of the contributions allocable to a participant are
distributable upon termination of employment, other than by reason of
retirement, disability or death. All contributions allocable to a participant,
whether or not vested, are payable upon retirement, disability or death. A full
distribution is available upon attainment of age 59 1/2 or prior to age 59 1/2
if a participant qualifies for financial hardship. The Savings Plan also has a
loan feature and allows for rollover contributions from other qualified plans.
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<PAGE> 30
TRANSFERRED EMPLOYEES RETIREMENT PLAN
For fiscal year 1997, the Company contributed to the Cumberland Farms
Transferred Employees Retirement Plan (the "Retirement Plan"), a defined benefit
plan, which covers the employees transferred to the Company upon acquisition in
1986 of certain of the Gulf assets from Chevron U.S.A. Inc. (some of whom are
now employed by Gulf Oil L.P.). None of the Directors or Executive Officers are
covered by the Retirement Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Following the Company's Reorganization, the Board of Directors
appointed a Compensation Committee which presently consists of Lily H. Bentas
(the Chairperson of the Board of Directors, President and Chief Executive
Officer), John Burke and Kenneth Koehler. The purpose of the committee is to
determine the compensation of Executive Officers, including the President and
key employees. The Compensation Committee considers several factors in
determining annual compensation, including past performance, individual talents
and industry standards. See "Item 13 -- Certain Relationships and Related
Transactions" for a discussion of certain transactions between the Company and
certain entities affiliated with Ms. Bentas.
The Compensation Committee has determined salaries for fiscal year 1997
as it did for fiscal years 1995 and 1996. The Compensation Committee has also
determined the bonuses paid to Executive Officers, including the President and
Chief Executive Officer, for fiscal years 1995, 1996 and 1997. In determining
the bonuses, the Compensation Committee took into account the overall
contribution made by the individual over the past year and bonuses paid to
individuals in comparable positions at similarly situated companies. The
committee may also, from time to time, make recommendations concerning
compensation arrangements for directors to be submitted to the full Board for
approval.
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<PAGE> 31
ITEM 12. SECURITY OWNERSHIP
The Company's equity securities consist of two classes of Common Stock,
par value $1.00 per share, Class A Common Stock and Class B Common Stock. The
two classes are identical, except that the Class B Common Stock has no voting
rights. The following table provides information as of December 22, 1997, with
respect to the shares of Class A Common Stock and Class B Common Stock deemed to
be beneficially owned by each person known by the Company to own more than 5% of
the outstanding Class A Common Stock, by each Director, each Executive Officer,
and all Directors and Executive Officers as a group. Except as noted below, each
holder has sole voting and investment power. The mailing address of each party
named below is c/o Cumberland Farms, Inc., 777 Dedham Street, Canton, MA 02021.
<TABLE>
<CAPTION>
Percentage of
Name Title of Class Owned Amount of Class Owned Class Owned
---- -------------------- --------------------- -------------
<S> <C> <C> <C>
Demetrios B. Haseotes* Class A Common 2 25%
Class B Common 30,253.5 25%
Byron Haseotes Class A Common 2 25%
Class B Common 30,253.5 25%
George Haseotes** Class A Common 2 25%
Class B Common 30,253.5 25%
Lily H. Bentas Class A Common 2 25%
Class B Common 7,566 6.25%
</TABLE>
Directors and Executive Officers as a group own eight shares,
constituting 100%, of the Class A Common Stock and 98,326.5 shares, constituting
81.25%, of the Class B Common Stock; all Directors and Executive Officers who
hold stock are members of the Haseotes Family.
* Shares are subject to liens in favor of Conven-Petro Insurance Company as
assigned to the Company.
** Shares are subject to liens in favor of David Wilkes, a creditor of
Mr. Haseotes.
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<PAGE> 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has had significant transactions since October 1, 1996 with
the following affiliates:
<TABLE>
<CAPTION>
Name of Affiliate Nature of Affiliate
----------------- -------------------
<S> <C>
Bay Colony Realty Associates ("Bay Colony") Owned by the Class A Shareholders
Cumberland Farms of Vermont, Inc. Owned by the Class A Shareholders
("CFI of Vermont")
Cumberland Farms of Massachusetts, Inc. Owned by the Class A Shareholders
("CFI of Mass.")
Conven-Petro Insurance Company Owned by CFI of Vermont
LHB Enterprises, Inc. Owned by Lily H. Bentas
Public Petroleum, Inc. Owned by Demetrios E. Haseotes, son of
("Public Petroleum") Demetrios B. Haseotes, a Director and
Shareholder
</TABLE>
LEASES. For fiscal year 1997, the Company leased 19 properties from Bay
Colony and paid to Bay Colony an aggregate of $1.0 million under leases related
to such properties. Effective September 30, 1997, the Company entered into a new
fifteen (15) year master lease arrangement with Bay Colony which includes the
lease of the units operated, and previously leased during fiscal year 1997, by
the Company, as well as units leased to third party tenants.
The Company leases four properties located in Florida, Maine and New
Hampshire from LHB Enterprises. The Company paid an aggregate of $65,350 during
fiscal year 1997 to LHB Enterprises for the lease of these properties.
The Company leases two properties located in Massachusetts to Public
Petroleum which are operated as retail gasoline stations. The Company received
for the fiscal year ended 1997 the aggregate amount of $90,726 for the lease of
these two properties.
The Company believes that all of its leases with affiliates are on
terms at least as favorable to the Company as would be negotiated with
unaffiliated third parties.
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<PAGE> 33
LOANS BETWEEN THE COMPANY AND AFFILIATES. As of September 30, 1997, the
Company had outstanding loans in excess of $60,000 with its shareholders and
affiliates in the amounts detailed below. Interest was being accrued on the
outstanding indebtedness; however, the Company stopped accruing interest at
different times over the past years. Interest has not been paid on any of these
loans since May 1, 1992.
<TABLE>
<CAPTION>
AMOUNTS DUE TO THE COMPANY AMOUNTS DUE FROM THE
COMPANY
-------------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
SHAREHOLDERS
Demetrios B. Haseotes $1,621 $3,107
George Haseotes 1,212 604
Byron Haseotes 1,212 322
Lily H. Bentas 303 282
Anastasia Marty 303 68
Hytho Pantazelos 303 69
JoAnn Tambakis 303
AFFILIATED PARTIES
Bay Colony $1,154
</TABLE>
LIQUOR AFFILIATES. Certain of the Company's stores provide space and
personnel to affiliates whose sole business is to hold liquor licenses and sell
alcoholic beverages, principally beer, in the Company's stores. The Company
believes that the terms of such arrangements are at least as favorable to it as
would be negotiable with a third party. A summary of such sales, costs charged
by the Company to such affiliates and the profitability of such affiliates
during each the last fiscal year is as follows:
<TABLE>
<CAPTION>
FISCAL 1997
(IN THOUSANDS)
--------------
<S> <C>
CFI of Vermont
Sales $1,817
Intercompany charges 1,783
Net Profit 34
CFI of Mass.
Sales $ 205
Intercompany charges 202
Net Profit 3
</TABLE>
DISTRIBUTIONS. The Company is an S corporation for federal and certain
state tax purposes. As such, the Company's principal tax liabilities are payable
by its shareholders rather than by the Company. Pursuant to agreements between
the Company and its shareholders, distributions will be made for any taxes
payable by the shareholders as a result of the examination of the Company's tax
returns. The Company paid approximately $2.6 million to its shareholders for
estimated tax liabilities during fiscal years 1997. The IRS is presently
conducting an audit of fiscal years 1992, 1993 and 1994. See Note 2 to the
Company's Financial Statements.
TRANSACTIONS WITH CONVEN-PETRO. Conven-Petro is the Company's captive
insurance company and is owned by CFI of Vermont which is, in turn, owned by the
Company's Class A Shareholders. As a result of
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<PAGE> 34
the Company's insurance arrangements with Conven-Petro, Conven-Petro earns
interest on funds deposited by the Company to secure letters of credit issued in
connection with the Company's self-insurance program. The interest earned by
Conven-Petro from these arrangements for the fiscal year ended September 30,
1997 was $253,063. The Company believes that the terms of such arrangements are
at least as favorable to it as would be negotiated with a third party. Donald E.
Holt, an Executive Officer of the Company is also President and Director of
Conven-Petro. Francis G. Locklin, an Executive Officer of the Company, is also
Vice President and Director of Conven-Petro. See Note 7 to the Company's
Financial Statements for a discussion regarding payments made to Conven-Petro.
PURCHASE OF PROPERTY. In April, 1997, the Company acquired three
properties from a third party landlord for 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. Under an arrangement
between the third party and Mr. Haseotes, the proceeds were paid to Mr.
Haseotes. The transaction was approved by the Board of Directors as a
transaction at least as favorable to the Company as would be negotiated with a
third party.
OTHER. In addition to compensation paid to Demetrios B. Haseotes, Byron
Haseotes, George Haseotes and Lily Bentas, during the fiscal year ended
September 30, 1997, the Company paid $177,000 to George P. Haseotes, Vice
President of the Gulf Division, a member of the Haseotes family. The Company
believes that the terms of such arrangements are at least as favorable to it as
would be negotiated with a third party.
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<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following financial statements of the Company and Gulf Oil L.P. and
the Independent Auditors' Reports relating thereto, respectively, are
filed under Item 8 in Part II of this report:
FINANCIAL STATEMENTS OF CUMBERLAND FARMS, INC.
Report of Independent Auditors - Ernst & Young LLP
Balance Sheets as of September 30, 1997 and 1996
Statements of Operations and Retained Earnings
Years ended September 30, 1997, 1996 and 1995
Statements of Cash Flows, Years ended September 30, 1997,
1996 and 1995
Notes to Financial Statements
FINANCIAL STATEMENTS OF GULF OIL L.P.
Independent Auditors Report - Coopers & Lybrand L.L.P.
Balance sheets as of September 30, 1997 and 1996
Statements of Operations for the years ended September 30,
1997, 1996 and 1995
Statements of Changes in Partners' Capital for the Years ended
September 30, 1997, 1996 and 1995
Statements of Cash Flows for the Years ended September 30,
1997, 1996 and 1995
Notes to Financial Statements
The following financial statement schedules of the Company and Gulf
Oil, L.P. and the Independent Auditors' Report relating thereto are
filed as part of this report:
Schedule II - Cumberland Farms, Inc. Valuation and Qualifying Accounts
Schedule III - Gulf Oil L.P. Valuation and Qualifying Accounts
(a)(3) Exhibits filed as part of this report:
As listed on the Exhibit Index beginning on page 38 hereof.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended September 30, 1997.
-35-
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
Financial Statement of Cumberland Farms, Inc.
Report of Independent Auditors -- Ernst & Young LLP.................. F-2
Balance Sheets as of September 30, 1997 and 1996 .................... F-3
Statements of Operations and Retained Earnings, Years Ended
September 30, 1997, 1996, and 1995................................. F-4
Statements of Cash Flows, Years Ended September 30, 1997,
1996 and 1995...................................................... F-5
Notes to Financial Statements........................................ F-6
Financial Statements of Gulf Oil L.P.
Report of Independent Auditors -- Coopers & Lybrand L.L.P. .......... F-22
Balance Sheets as of September 30, 1997 and 1996..................... F-23
Statements of Operations for the Years Ended September 30, 1997,
1996 and 1995...................................................... F-24
Statements of Changes in Partners' Capital for the Years Ended
September 30, 1997, 1996 and 1995.................................. F-25
Statements of Cash Flows for the Years Ended September 30,
1997, 1996 and 1995................................................ F-26
Notes to Financial Statements........................................ F-27
Schedule II --
Valuation and Qualifying Accounts -- Cumberland Farms, Inc. ......... S-1
Report of Independent Accountants on Schedule of Gulf Oil L.P. --
Coopers & Lybrand L.L.P. ............................................ S-2
Schedule III --
Valuation and Qualifying Accounts -- Gulf Oil, L.P. ................. S-3
F-1
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cumberland Farms, Inc.
We have audited the accompanying balance sheets of Cumberland Farms, Inc. as of
September 30, 1997 and 1996, and the related statements of operations and
retained earnings, and cash flows for each of the three years in the period
ended September 30, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits. The financial statements of the Gulf Oil Limited Partnership (Gulf
Oil, L.P.), a partnership in which the Company has a 66-2/3% limited partnership
interest, have been audited by other auditors whose report has been furnished to
us; insofar as our opinion on the financial statements relates to data included
for Gulf Oil, L.P., it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Cumberland Farms, Inc. at September 30, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects the information set forth
therein.
Boston, Massachusetts
December 11, 1997 Ernst & Young LLP
F-2
<PAGE> 38
CUMBERLAND FARMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
------------------------
(000'S OMITTED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,824 $ 24,116
Cash escrow 406 793
Short-term investments, at cost -- 12,200
Accounts receivable, net 22,463 21,476
Inventories, at FIFO cost 63,325 59,042
Less: adjustment to LIFO cost (30,761) (29,100)
-------- --------
Net inventories 32,564 29,942
-------- --------
Prepaid insurance (Note 7) 912 431
Property under agreement 1,697 3,343
Other current assets 4,298 5,382
-------- --------
Total current assets 86,164 97,683
Property and equipment (Note 3) 353,028 343,151
Accumulated depreciation 130,653 124,396
-------- --------
Net property and equipment 222,375 218,755
Notes and accrued interest
receivable from stockholders (Note 4) 5,257 5,224
Investment in Gulf Oil, L.P. (Note 5) 40,321 36,445
Other assets, net 8,094 8,097
-------- --------
$362,211 $366,204
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 14,361 $ 13,108
Accounts payable 44,582 39,819
Accrued gasoline taxes 7,976 7,573
Accrued insurance liability (Note 7) 5,168 5,000
Accrued payroll 6,599 5,995
Other accrued expenses 6,126 9,761
-------- --------
Total current liabilities 84,812 81,256
Long-term debt (Note 6) 198,545 218,398
Accrued insurance liability (Note 7) 12,880 9,075
Deferred credits and other liabilities 13,595 12,806
Notes and accrued interest
payable to related parties (Note 4) 5,712 5,458
-------- --------
Total liabilities 315,544 326,993
-------- --------
Commitments and contingencies (Notes 7 and 8)
Stockholders' equity:
Common stock (Note 2) 121 121
Additional paid-in capital 8,617 8,617
Retained earnings (Note 4) 37,929 30,473
-------- --------
Total stockholders' equity 46,667 39,211
-------- --------
$362,211 $366,204
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 39
CUMBERLAND FARMS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
-----------------------------------------------
(000'S OMITTED)
<S> <C> <C> <C>
Income
Revenues (see Note below) $1,468,646 $1,396,144 $1,321,224
Equity in earnings of Gulf Oil, L.P. 7,677 7,855 13,612
Gains on sales of property and equipment 8,782 11,372 9,673
---------- ---------- ----------
Total income 1,485,105 1,415,371 1,344,509
---------- ---------- ----------
Cost & expenses
Cost of sales 1,181,426 1,102,582 1,027,162
Operating expenses 270,225 266,150 259,672
---------- ---------- ----------
Total costs & expenses 1,451,651 1,368,732 1,286,834
---------- ---------- ----------
Operating income 33,454 46,639 57,675
Interest expense, net (22,823) (22,872) (25,071)
---------- ---------- ----------
Income before provision for state income
taxes and extraordinary gain 10,631 23,767 32,604
Provision for state income taxes (600) (1,919) --
---------- ---------- ----------
Income before extraordinary gain 10,031 21,848 32,604
Extraordinary gain (Note 1) -- -- 2,197
---------- ---------- ----------
Net income 10,031 21,848 34,801
Retained earnings at beginning of year 30,473 18,851 (13,231)
Distributions to shareholders (2,575) (10,226) (2,719)
---------- ---------- ----------
Retained earnings at end of year $ 37,929 $ 30,473 $ 18,851
========== ========== ==========
</TABLE>
Note: Excise taxes of approximately $263,000, $243,000, and $231,000 collected
from customers on retail gasoline and cigarette sales are included in Revenues
and Cost of sales for fiscal years 1997, 1996 and 1995, respectively.
See accompanying notes.
F-4
<PAGE> 40
CUMBERLAND FARMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
---------------------------------------
(000's OMITTED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,031 $ 21,848 $ 34,801
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 22,299 18,703 17,541
Gain on sales of property and equipment (8,782) (11,372) (9,673)
Equity in earnings of Gulf Oil, L.P. (7,677) (7,855) (13,612)
Brand maintenance income adjustment (Note 5) (1,649) -- --
Distribution of earnings by Gulf Oil, L.P. 5,450 2,650 7,650
Extraordinary gain -- -- (2,197)
Changes in assets and liabilities:
Cash escrow 387 (793) 0
Accounts receivable (987) (2,395) (3,198)
Inventories (2,622) 1,837 (3,309)
Other current assets 1,084 (341) (2,951)
Receivables from related parties (33) (33) (343)
Other assets (933) 162 (2,288)
Prepaid/accrued insurance 3,492 22,509 22,560
Accounts payable and accrued expenses 2,135 228 9,214
Other liabilities 1,043 611 (2,632)
-------- -------- --------
Net cash provided by operating activities 23,238 45,759 51,563
-------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment (29,648) (27,582) (23,636)
Proceeds from sales of property and equipment 15,093 21,108 21,244
Purchases, sales and maturities of short-term
investments - net 12,200 (12,200) --
-------- -------- --------
Net cash (used) by investing activities (2,355) (18,674) (2,392)
-------- -------- --------
FINANCING ACTIVITIES
Payments of debt (18,600) (27,758) (25,561)
Distributions to shareholders (2,575) (10,227) (2,719)
Proceeds from new debt -- 5,000 --
-------- -------- --------
Net cash (used) by financing activities (21,175) (32,985) (28,280)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (292) (5,900) 20,891
Cash and cash equivalents at beginning of year 24,116 30,016 9,125
-------- -------- --------
Cash and cash equivalents at end of year $ 23,824 $ 24,116 $ 30,016
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 22,814 $ 23,415 $ 24,933
======== ======== ========
Income taxes paid $ 1,066 $ 529 $ 304
======== ======== ========
Non-cash investing and financing transactions:
Transfer of assets to Gulf Oil, L.P. $ -- $ -- $ 127
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 41
CUMBERLAND FARMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Cumberland Farms, Inc. is an independent oil marketer and convenience store
operator. The Company is organized into three divisions: Cumberland Farms, Gulf
Oil and VSH Realty. The Cumberland Farms division includes the convenience
store, retail gasoline and manufacturing operations. The Gulf Oil division
markets refined petroleum products on a wholesale basis to lessee dealers as
well as to company-operated locations. In addition to management and disposition
of real property, the VSH Realty division acquires and develops properties for
lease to the other divisions of the Company and others for use as retail and
wholesale sales locations.
On May 1, 1992 (the "petition date"), the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The Company's
amended and restated Plan of Reorganization (the "Plan"), as modified, became
effective on December 30, 1993. The Plan provided for, among other things, the
cancellation of certain indebtedness in exchange for cash or new indebtedness.
During fiscal 1995, the Company repaid debt at less than face value, resulting
in an extraordinary gain of $2.2 million.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
The Company includes as cash and cash equivalents, cash in banks, certificates
of deposit and U.S. Government and other short-term securities readily
convertible into cash with original maturities of three months or less when
purchased. Investments with a maturity period of more than three months, but
less than one year, are classified as short-term investments. Included in the
cash escrow account are certain savings accounts whose balances, aggregating
approximately $139,000 and $660,000 at September 30, 1997 and 1996,
respectively, contain the proceeds from sales of property and equipment which
are to be used to repay secured debt. In addition, the Plan permits the Company
to withhold from the proceeds of sales of capital assets an amount equal to the
imputed income tax on the gain recognized in the transaction, to be available
for distributions to shareholders for their
F-6
<PAGE> 42
tax payments (See Note 4). These amounts ($267,000 at September 30, 1997 and
$130,000 at September 30, 1996) were held in escrow by the Trustee and were also
included in the cash escrow account. Due to the short maturity of short-term
investments, the carrying amounts approximate fair value.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowances for doubtful accounts of
$1,509,000 at September 30, 1997 and $1,590,000 at September 30, 1996.
The Company has a working capital and letter of credit facility (see Note 6).
The facility is secured by certain of the Company's accounts receivable,
inventories and real property.
REVENUE RECOGNITION
Retail revenues are recognized upon sale at the stores and stations. Wholesale
revenues are recognized upon shipment. Rental revenues are recorded ratably over
the lease term.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with financially
responsible institutions. Concentration of credit risk with respect to trade
receivables are limited due to the number of customers comprising the Company's
customer base and the prompt payment terms. The Company has not experienced
significant losses related to trade receivables.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost for inventories
having a carrying value of approximately $27,362,000 and $24,918,000 at
September 30, 1997 and 1996, respectively, was determined by the last-in,
first-out ("LIFO") inventory method. The excess of current cost (determined on a
first-in, first-out basis) of LIFO inventories over their carrying value was
approximately $30,761,000 and $29,100,000 at September 30, 1997 and 1996,
respectively. Other inventories, which include construction-related supplies and
plastics, are valued at cost based on the first-in, first-out ("FIFO") method.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is calculated using straight-line and accelerated methods.
Provision for depreciation is based upon the estimated useful lives of the
assets or the lease terms, if shorter, as follows:
F-7
<PAGE> 43
Buildings 15 to 39 years
Leasehold Improvements 7 to 19 years
Machinery and equipment 3 to 10 years
DEBT ACQUISITION COSTS
Debt acquisition costs, amounting to approximately $1.8 million at September 30,
1997 and 1996, were included in other assets and are being amortized on a
straight-line basis over the term of the loans. Accumulated amortization
amounted to $1,189,000 at September 30, 1997 and $696,000 at September 30, 1996.
INCOME TAXES
The Company operates as an S Corporation under the Internal Revenue Code and,
accordingly, no provision for Federal income taxes was made on account of income
for 1997, 1996 and 1995, since the stockholders are individually liable for
Federal income taxes on their share of the Company's earnings. Provision has
been made for income taxes due to certain states which do not recognize S
Corporation status.
The Company's Federal income tax returns have been examined by the Internal
Revenue Service through the year ended September 30, 1991 (see Note 4). The
Internal Revenue Service is currently examining the fiscal years ended September
30, 1992 and 1993 and has also 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,
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 during
fiscal 1996, was required to distribute $3.9 million to its shareholders for tax
assessments for the years 1988 to 1991 and 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 (See Note 4).
GULF OIL, L.P.
The Company owns a 66-2/3% limited partnership interest in Gulf Oil Limited
Partnership ("Gulf Oil, L.P.") (see Note 5). Because control of Gulf Oil, L.P.
resides with the general partner, the Company accounts for its investment in
Gulf Oil, L.P. under the equity method.
ADVERTISING COSTS
The Company charges advertising costs to expense as incurred. Advertising
expense amounted to $4,221,000, $5,463,000 and $4,132,000, in fiscal years 1997,
1996 and 1995, respectively.
F-8
<PAGE> 44
ENVIRONMENTAL REMEDIATION COSTS
Costs incurred to investigate and remediate contaminated sites, caused
principally by the release of petroleum from underground storage tanks, are
expensed unless the remediation extends the economic useful life of the assets
employed at the site. Remediation costs that extend the economic life of the
assets are capitalized and amortized over the remaining economic life of the
assets.
Remediation costs for properties held for sale are considered in the assessment
of the property's net realizable value. To the extent that such costs are
expected to result in a loss on sale, such costs are accrued. To the extent not
previously accrued, the Company provides for these costs at time of sale of the
property.
The Company may also be liable for environmental remediation relating to
properties previously sold. These costs are accrued as they become probable and
determinable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts and notes receivable, accounts payable, short and long-term debt and
letters of credit. The Company believes that the carrying value of its financial
instruments approximates fair value. The Company has made this determination for
its fixed rate, long-term debt based upon interest rates currently available to
refinance such debt.
IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company adopted Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". The Company evaluates, on an ongoing
basis, the performance of each of its properties in order to identify those
which are non-contributors. It also has a program to market and dispose of
certain underperforming, non-core business properties. At September 30, 1997,
the Company had provided $950,000, which was recorded as a reduction of Gain on
Sales of Property and Equipment, representing the difference between the
carrying value (approximately $3 million) of certain properties held for sale
and the estimated proceeds to be received or the appraised value of the
properties. The Company has additional properties held for sale with a carrying
value of $7.4 million which the Company believes will be sold at a gain.
POST-EMPLOYMENT OR POST-RETIREMENT BENEFITS
The Company does not have any material post-employment or post-retirement
benefits.
F-9
<PAGE> 45
COMMON STOCK
The authorized, issued and outstanding common stock of the Company consists of:
o Class A Voting, $1 par value, 8 shares
o Class B Non-voting, $1 par value, 121,014 shares
RECLASSIFICATIONS
Certain amounts in the financial statements for the years ended September 30,
1996 and 1995 have been reclassified to conform to 1997 classifications.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, and consist of the following
(in thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
----------------------
<S> <C> <C>
Land and buildings $242,002 $249,246
Leasehold improvements 6,454 6,458
Machinery and equipment 104,572 87,447
-------- --------
353,028 343,151
Less accumulated depreciation 130,653 124,396
-------- --------
Net property, plant and
equipment $222,375 $218,755
======== ========
</TABLE>
During the years ended September 30, 1997 and 1996, the Company wrote off
approximately $6,665,000 and $5,339,000, respectively, of fully-depreciated
assets, some of which are still in use.
4. TRANSACTIONS WITH RELATED PARTIES
Amounts due to and notes receivable from related parties were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
1997 1996
-----------------
<S> <C> <C>
Notes receivable from stockholders $4,065 $4,065
Accrued interest thereon 1,192 1,159
------ ------
Total $5,257 $5,224
====== ======
</TABLE>
F-10
<PAGE> 46
<TABLE>
<S> <C> <C>
Amounts due to related parties:
Due to V.S. Haseotes & Sons $ 9 $ 9
Due to other related parties 2,562 2,308
Due to Bay Colony Realty Assoc. 1,154 1,154
Notes payable to stockholders 1,500 1,500
------ ------
5,225 4,971
Accrued interest thereon 487 487
------ ------
Total $5,712 $5,458
====== ======
</TABLE>
Interest, at rates ranging from 9% to 10.5%, was accrued through September 30,
1992 on notes receivable from stockholders amounting to $3,750,000.
Under the terms of the Company's Plan, the above amounts due to related parties
are subordinated to claims of other creditors. No interest has been accrued on
these notes since September 30, 1992.
During fiscal year 1995, the Company purchased from a related party, a note
receivable from Demetrios B. Haseotes in the face amount of $315,000. Interest
accrues on the unpaid balance at the rate of two (2) percent over prime. The
unpaid balance plus interest at September 30, 1997 was approximately $409,000.
The face amount, plus interest, will be offset against payables to such
stockholder when permitted by the Company's Plan.
The Company leases real property from affiliated parties. Related-party rental
expense in 1997, 1996 and 1995 was approximately $1,166,000, $1,124,000 and
$1,153,000, respectively.
In May 1996, the Company's President, a voting shareholder, purchased a property
from the Company for $275,000. In October 1995, a non-voting shareholder
purchased a property from the Company for $225,000. On April 1, 1997, the
Company acquired three properties 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 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. The purchase and sales of the properties were
approved by the Company's Board of Directors.
The terms of the Company's secured debt prohibit the payment of dividends,
except for income taxes payable by the shareholders on account of corporate
income, as provided in agreements between the Company and its shareholders.
Pursuant to agreements between the Company and its shareholders, distributions
will be made for any taxes payable by the shareholders as a result of the
examination of the Company's tax returns. In fiscal year 1996, the Company
distributed approximately $3.9 million to the shareholders for income taxes and
interest payable by the shareholders as a result of an Internal Revenue Service
examination of the Company's federal income tax returns for the fiscal years
ended 1988-1991 (See Note 2). In addition, the Company paid approximately $2.6,
$6.3 and $2.7 million to its shareholders for estimated tax liabilities during
fiscal years 1997, 1996 and 1995, respectively.
F-11
<PAGE> 47
5. GULF OIL/GULF OIL, L.P.
In 1986, the Company acquired the Northeast marketing and distribution
organization of Chevron/Gulf and has the exclusive rights to use and license the
trade name "Gulf" in New England and the rest of the northeastern United States.
The business consists of wholesale and retail petroleum operations.
On December 30, 1993, the Company entered into an agreement with Catamount
Petroleum Limited Partnership ("Catamount") pursuant to which the Company
transferred a substantial portion of the assets comprising its Gulf Oil Division
to Catamount in exchange for a 66-2/3% limited partnership (Class A) interest in
Catamount. The General Partner, and holder of a 1% general partnership interest,
is Catamount Management Corporation ("CMC"). The remaining limited partnership
interest (Class B) is held by affiliates of the Chief Executive Officer of
Catamount. Upon consummation of the arrangement, Catamount changed its name to
Gulf Oil, L.P. The assets transferred were, among other things, certain
petroleum storage terminals, equipment, all rights to the "Gulf" name and all of
its rights under contracts and agreements with its contract dealers, jobbers and
certain customers. The Class B limited partners contributed Catamount's existing
business and assets and arranged for financing for the partnership.
The Partnership Agreement provides that at any time on or after January 1, 1999,
CMC 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
the 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.
Gulf Oil, L.P.'s partnership agreement provides for distributions to partners.
However, such distributions are subject to restrictive covenants in Gulf Oil,
L.P.'s agreements with its lenders, which only permit distributions for tax
payments, provided that there is no event of default or unless otherwise
consented to by the lenders. Distributions amounted to $5,450,000 in 1997 and
$2,650,000 in 1996. Subsequent to September 30, 1997, the Company received a
distribution in the amount of $13.3 million, consented to by the lenders.
F-12
<PAGE> 48
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
(ending December 30, 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 periods 1997 and 1998 are 483.5 and 488.7 million gallons,
respectively. The Company expects to meet all minimum purchase requirements. For
the fiscal years ended September 30, 1997 and 1996, the Company purchased
approximately $408.8 and $372.1 million, respectively, from Gulf Oil, L.P. Brand
maintenance costs, which are based upon quantities purchased and earnings of the
Gulf Oil, L.P., for each calendar year, have resulted in additional brand
maintenance costs of $4.0 and $1.4 million for calendar years 1996 and 1995,
respectively, and $2.2 million has been paid or accrued through September 30,
1997. The ultimate amount for 1997 will be determined based on actual results
for calendar 1997.
At September 30, 1997 and 1996, there was approximately $7.8 and $8.1 million,
respectively, in accounts payable due to Gulf Oil, L.P.
Summarized financial statements of Gulf Oil, L.P. were as follows (000's
omitted):
<TABLE>
<CAPTION>
September 30,
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,990 $ 4,891
Margin deposits 332 3,131
Receivables, net 52,181 58,193
Inventory 49,647 50,488
Other 7,359 6,697
-------- --------
Total current assets 111,509 123,400
Property and equipment, net 26,276 22,529
Intangible and other assets, net 13,454 14,556
-------- --------
$151,239 $160,485
======== ========
</TABLE>
F-13
<PAGE> 49
<TABLE>
<S> <C> <C>
Current liabilities:
Note payable to bank $ 8,900 $ 27,950
Current portion of long-term debt -- 2,500
Accounts payable and accrued
expenses 59,069 56,626
Subordinated notes payable
to partners 5,269 3,722
-------- --------
Total current liabilities 73,238 90,798
Long-term debt 20,000 17,500
Partners' capital 58,001 52,187
-------- --------
$151,239 $160,485
======== ========
</TABLE>
For the years ended September 30, 1997, 1996 and 1995 (000's omitted):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $2,110,096 $1,925,498 $1,817,324
Cost of Sales 2,071,703 1,882,170 1,762,441
---------- ---------- ----------
Gross profit 38,393 43,328 54,883
Operating expenses 11,589 12,388 12,088
Selling, general and
administrative expenses 10,635 15,828 16,118
Interest expense, net 2,883 3,330 5,956
Gain on fixed asset disposal (703) -- --
---------- ---------- ----------
Net income $ 13,989 $ 11,782 $ 20,721
========== ========== ==========
Equity in Earnings of Gulf Oil, L.P. $ 7,677 $ 7,855 $ 13,612
========== ========== ==========
</TABLE>
The Company's equity in the net income of Gulf Oil, L.P. for the year ended
September 30, 1997, has been reduced by $1,649,000 to reflect the Company's
share of brand maintenance income earned by Gulf Oil, L.P. from the Company,
which was included as a reduction of the related costs of approximately
$2,500,000 in the Company's financial statements for the prior fiscal year.
6. SECURED DEBT
Approximately $173,100,000 of secured debt has fixed interest rates ranging
principally from 8.0% to 10.5%. Variable rates are slightly higher than the
prime rate (9.02% at September 30, 1997). The notes payable to the previously
unsecured creditors (amounting to $4,522,000 at September 30, 1997) are
interest-free through December 1997, with a variable rate thereafter.
F-14
<PAGE> 50
The maturities of the Company's secured debt at September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
Fiscal Year (000'S OMITTED)
-----------
<S> <C>
1998 $ 14,361
1999 12,360
2000 3,593
2001 3,751
2002 3,939
Thereafter 174,902
--------
$212,906
========
</TABLE>
Included in the current portion of long-term debt at September 30, 1997 are
target payments aggregating approximately $2.6 million. Nonpayment of these
amounts when due would not constitute an event of default under the related loan
agreements, but would permit the lender to assume control of the process of
disposal of identified real estate, pledged as collateral for the loan, during
the remaining term of the loan.
Included in other assets in the accompanying balance sheets at September 30,
1997 and 1996 were approximately $1.0 and $1.9 million, respectively, from sales
of property and equipment held in a cash collateral account by State Street Bank
& Trust, as Trustee for certain secured lenders. Such amounts have been or will
be used to pay down secured debt. The restructured loan agreements contain
financial covenants and restrict, among other things, transactions with
affiliates, capital expenditures, total indebtedness and dividends.
Substantially all of the Company's real property and other assets are encumbered
by the secured debt.
The Company has a $30 million working capital and letter of credit facility. The
facility provides a revolving credit line, term loan and a facility for the
issuance of letters of credit. The facility is secured by certain of the
Company's accounts receivable, inventory and real properties. As of September
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
programs. The loan agreement provides for, among other things, certain financial
covenants including leverage and fixed charge coverage ratios, to be met on a
quarterly and annual basis. Borrowings under the facility are due December 30,
1998 and bear interest at a variable rate based upon the prime rate or LIBOR
(8.72% at September 30, 1997).
7. COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, is a party to various legal
actions which the Company believes are routine in nature and incidental to the
operation of its business. These legal actions are primarily in the areas of
personal injury and property damage, wrongful termination, environmental claims,
real estate and contract disputes, as well as claims brought pursuant to the
Petroleum Marketing Practices Act, the statute regulating
F-15
<PAGE> 51
the franchise relationship existing between the Company and its Gulf branded
service station dealers.
In connection with the Reorganization, the Company entered into a settlement
agreement relating to certain actions brought by former employees of the Company
regarding the Company's loss prevention program. A settlement pool of
approximately $5.5 million was funded substantially by the Company's insurers to
satisfy these claims which pool had been completely disbursed by September 30,
1995. There are seven related cases still pending in various Appellate Courts in
the Commonwealth of Massachusetts having been dismissed by the applicable trial
courts. The Company believes they will be dismissed or precluded under the
settlement agreement referred to above.
The Company entered into a Settlement Agreement with Chevron in fiscal 1996,
which provides for the allocation of environmental cleanup responsibilities with
respect to certain sites transferred to the Company in connection with the 1986
acquisition of certain "Gulf" assets. The Settlement Agreement requires Chevron
to remediate or reimburse the Company for remediation at certain designated
sites. The Settlement Agreement also confirms the Company's responsibility for
the remediation of the other sites acquired from Chevron, indemnification of
Chevron for Chevron allocated sites after cleanup to State standards and the
indemnification of Chevron for all future releases as provided for in the
original asset purchase documents. The Company believes its obligations under
the Settlement Agreement will not have a material effect on the Company's
financial statements, or results of operations taken as a whole.
At September 30, 1997, remaining litigation related to the Reorganization
consisted primarily of various objections to claims which will be settled or,
failing settlement, tried before the Bankruptcy Court or District Court in the
ordinary course. If such claims are not settled on terms acceptable to the
Company, the Company will continue to contest such claims vigorously. The
Company does not believe the outcome of these claims will materially effect the
financial position of the Company at September 30, 1997 or results of operations
taken as a whole.
The Company assumes a high degree of risk as a result of the high deductibles
under worker's compensation, general liability and automobile insurance policies
issued by an unrelated insurer. These risks, estimated at $22.7 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 $18.0 at
September 30, 1997. The unrelated insurance company providing these coverages
required collateral in the form of a $12.0 million letter of credit and certain
real properties, cash and reinsurance at September 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. Payments and deposits to
Conven-Petro amounted to $.1 million, $3.6 million and $1.1
F-16
<PAGE> 52
million for the years ended September 30, 1997, 1996 and 1995, respectively. 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 also
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.
The Company has civil actions pending against Mr. Demetrios B. Haseotes, a
shareholder and Director of the Company. Two actions related to the Company's
efforts to collect its judgments in the amount of (a) $663,267, plus interest,
which represents funds distributed to Mr. Haseotes to pay certain tax
liabilities but applied for other uses and (b) $365,455 plus interest, with
respect to funds borrowed by Mr. Haseotes but not yet repaid. Another action
relates to the Company's efforts to obtain an accounting and possible
disgorgement of funds received by him in connection with the sale of a crude oil
refinery in Canada. Mr. Haseotes is also pursuing a claim against the Company
seeking reinstatement of his position and attendant compensation which the Board
of Directors terminated in 1995.
In addition to the above contingencies, the Company has certain environmental
contingencies related to ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures related to its petroleum
operations. In the ordinary course of business, the Company is involved in
environmental assessment and remediation activities with respect to releases of
regulated substances from its existing and previously operated retail gasoline
and wholesale petroleum facilities. The Company accrues its estimates of all
costs to be incurred for assessment and remediation for known releases. These
accruals are adjusted periodically if, and when, new information becomes known.
Due to the nature of such releases, the actual costs of assessment and
remediation activities may vary significantly from year to year. Additionally,
under current federal and state regulatory programs, the Company will be
obligated by December 22, 1998 to upgrade or replace a significant amount of all
underground storage tanks ("USTs") it owns or operates. The Company currently
estimates that capital expenditures related to the upgrading or replacing of
USTs as well as other environmentally related expenditures will amount to
approximately $15.7 million for fiscal year 1998 and an additional $3.9 million
through December 1998, which expenditures could be reduced for locations which
may be closed in lieu of capital costs of compliance or sold. In addition, the
Company has agreed to indemnify Gulf Oil, L.P. (see Note 2) for any costs or
liabilities arising from remediation and cleanup of certain terminals for
conditions existing prior to December 30, 1993. Management believes that certain
of these expenditures are eligible for reimbursement through government
programs, insurance or indemnification by the prior owner; a provision was made
for agreed upon receivables amounting to approximately $.2 million at September
30, 1997. Included in other accrued and deferred credits and other liabilities
at September 30, 1997 was approximately $7.2 million, representing an
undiscounted allowance for estimated remediation costs. The Company believes the
amounts provided are sufficient for reasonably determinable liabilities as of
September 30, 1997.
F-17
<PAGE> 53
Amounts charged to expense related to environmental remediation costs, including
costs to administer the remediation program, amounted to approximately $3.4,
$2.0 and $2.0 million for fiscal years 1997, 1996 and 1995, respectively.
8. LEASES
Operating leases with nonaffiliated lessors for real estate, vehicles and
equipment generally have terms ranging from three to five years. Many have
multiple option periods. Many real estate leases provide for the Company to pay
its share of increases in real estate taxes and other costs. Total rent expense
on these leases was approximately $14,804,000, $14,729,000 and $11,354,000 for
1997, 1996 and 1995, respectively. Minimum lease payments for operating leases
with nonaffiliated lessors having initial or remaining noncancelable lease terms
in excess of one year at September 30, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $9,504
1999 8,198
2000 6,428
2001 4,484
2002 3,147
Thereafter 2,678
</TABLE>
Leases with nonaffiliated lessees, principally for store and station locations,
are generally for short terms, usually three years or less.
9. RETIREMENT PLANS
The Company has a 401-k savings plan under which employees generally may elect
to contribute up to 15% of their income to the 401-k Plan. The Company's
matching contribution vests in increasing percentages beginning after two years
of service through five years of service. The Company's matching contribution
for the years ended September 30, 1997, 1996 and 1995 amounted to $1,510,000,
$1,444,000 and $1,390,000, respectively.
Certain employees are covered by the Cumberland Farms Transferred Employees'
Retirement Plan (the "Plan"), a defined benefit plan. The following table sets
forth the Plan's funded status and amounts recognized in the balance sheets at
September 30, 1997 and 1996 (in thousands):
F-18
<PAGE> 54
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, (totally vested) $6,159 $6,910
====== ======
Projected benefit obligation for service rendered
to date $6,159 $6,910
Plan assets at fair value, consisting of corporate
obligations and common stocks 8,451 7,284
------ ------
Plan assets in excess of projected benefit obligation 2,292 374
Unrecognized net (gain) loss from past experience different
from that assumed and effects of changes
in assumptions (124) 1,257
Unrecognized net obligation at transition being
recognized over 15 years (5) (8)
------ ------
Prepaid pension costs $2,163 $1,623
====== ======
</TABLE>
Net pension cost included the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ -- $ -- $ 297
Interest cost on projected benefits
obligations 462 524 649
Actual return on plan assets (1,970) (988) (1,420)
Net amortization and deferral 1,437 502 815
------- ----- -------
Net periodic pension cost (income) $ (71) $ 38 $ 341
======= ===== =======
</TABLE>
The assumptions used to determine the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
Rate of increase in future
compensation 4.0% 4.0% 4.0%
Expected rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
Contributions of $444,260, $1,097,717 and $1,344,088 were made in the years
ended September 30, 1997, 1996 and 1995, respectively.
F-19
<PAGE> 55
The Company's arrangement with Gulf Oil, L.P. contemplates a funding schedule
for the pension plan, subject to modification resulting from actuarial
assumptions or if required by government authorities. Payments are not required
for fiscal year 1998.
In fiscal year 1995, the Company amended the pension plan to freeze benefit
accruals, resulting in a curtailment gain of approximately $786,000. In
addition, lump sum payments during fiscal years 1997, 1996 and 1995 resulted in
settlement (gain) losses of approximately ($25,000), $390,000 and $505,000,
respectively.
F-20
<PAGE> 56
10. BUSINESS SEGMENT INFORMATION
The Company's operating results and other financial data are presented for its
principal business segments for the years ended September 30, 1997, 1996 and
1995, as follows:
<TABLE>
<CAPTION>
Retail Wholesale Corporate Total
------ --------- --------- -----
(000's Omitted)
<S> <C> <C> <C> <C>
Year Ended September 30, 1997
- -----------------------------
Revenues $1,185,807 $299,298 $ 0 $1,485,105
Operating income (loss) 40,527 12,858 (19,931) 33,454
Identifiable assets 251,685 37,022 73,504 362,211
Capital expenditures 27,079 2,147 422 29,648
Depreciation and Amortization 19,897 2,015 387 22,299
Year Ended September 30, 1996
- -----------------------------
Revenues $1,140,736 $274,635 $ 0 $1,415,371
Operating income (loss) 51,658 16,421 (21,440) 46,639
Identifiable assets 242,883 40,056 83,265 366,204
Capital expenditures 25,599 1,929 54 27,582
Depreciation and Amortization 16,560 1,771 372 18,703
Year Ended September 30, 1995
- -----------------------------
Revenues $1,103,674 $240,835 $ 0 $1,344,509
Operating income (loss) 59,206 18,741 (20,272) 57,675
Identifiable assets 259,012 50,047 53,368 362,427
Capital expenditures 21,541 1,936 159 23,636
Depreciation and Amortization 15,497 1,625 419 17,541
</TABLE>
F-21
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Gulf Oil Limited Partnership:
We have audited the accompanying balance sheets of Gulf Oil Limited
Partnership as of September 30, 1997 and 1996, and the related statements of
operations, changes in partners' capital, and cash flows for the years ended
September 30, 1997, 1996 and 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gulf Oil Limited Partnership
as of September 30, 1997 and 1996, and the results of its operations and its
cash flows for the years ended September 30, 1997, 1996 and 1995 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 10, 1997
F-22
<PAGE> 58
GULF OIL LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,989,947 $ 4,891,281
Margin deposits (market value of $61,186 in 1997, and $2,612,956
in 1996) (Notes 2 and 3) 332,064 3,131,127
Accounts receivable, trade (net of allowance for doubtful accounts of
$1,250,000 in 1997 and $1,500,000 in 1996) 39,924,883 43,603,621
Credit card receivables (net of allowance for doubtful accounts of
$1,870,000 in 1997 and $1,935,000 in 1996) 12,255,974 14,588,943
Inventory (Notes 2 and 3) 49,646,887 50,487,970
Current portion dealer advances, jobber loans and notes receivable 3,261,898 3,080,071
Other current assets 4,097,389 3,616,966
------------ ------------
Total current assets 111,509,042 123,399,979
Property and equipment, net (Notes 2 and 4) 26,276,027 22,529,182
Intangible assets (net of accumulated amortization of $5,535,532 and
$5,022,551 in 1997 and 1996, respectively) (Note 2) 4,089,611 4,602,592
Noncurrent portion dealer advances, jobber loans and notes receivable 9,323,042 9,713,138
Other assets 41,511 239,920
------------ ------------
Total assets $151,239,233 $160,484,811
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Note payable (Note 5) $ 8,900,000 $ 27,950,000
Current portion of long-term debt (Note 6) - 2,500,000
Accounts payable, trade 55,044,335 52,318,540
Accrued expenses 4,024,656 4,307,665
Subordinated notes payable to partners (Note 7) 5,269,181 3,721,688
------------ ------------
Total current liabilities 73,238,172 90,797,893
Long-term debt (Note 6) 20,000,000 17,500,000
Commitments (Notes 5, 6, 7 and 8)
Partners' capital 58,001,061 52,186,918
------------ ------------
Total liabilities and partners' capital $151,239,233 $160,484,811
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 59
GULF OIL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1995
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Sales $2,110,096,359 $1,925,498,444 $1,817,324,643
Cost of sales 2,071,703,229 1,882,170,625 1,762,441,378
-------------- -------------- --------------
Gross profit 38,393,129 43,327,819 54,883,265
Operating expenses 11,589,125 12,388,140 12,088,275
Selling, general and administrative expenses 10,635,314 15,828,255 16,118,196
-------------- -------------- ---------------
Operating income 16,168,690 15,111,424 26,676,794
Other income (expense):
Interest income 388,306 218,273 243,138
Interest expense (3,271,208) (3,548,096) (6,198,598)
Gain on fixed asset disposal 703,355 - -
-------------- -------------- --------------
Net income $13,989,143 $11,781,601 $20,721,334
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 60
GULF OIL LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1995
------------------ ----------------- -----------------
<S> <C> <C> <C>
Beginning balance $ 52,186,918 $ 44,380,317 $ 34,603,459
Net income 13,989,143 11,781,601 20,721,334
Contributions from partners (Note 9) - - 530,524
Distributions to partners (8,175,000) (3,975,000) (11,475,000)
---------------- ---------------- ----------------
Ending balance $ 58,001,061 $ 52,186,918 $ 44,380,317
================ ================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 61
GULF OIL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,989,143 $ 11,781,601 $ 20,721,334
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,675,359 2,179,210 1,434,184
Amortization 2,185,530 2,090,750 2,096,066
Changes in operating assets and liabilities:
(Increase) decrease in margin deposits 2,799,063 (1,431,432) 3,196,008
(Increase) decrease in accounts receivable, trade 3,678,738 (2,161,179) (12,098,263)
Decrease in credit card receivables 2,332,969 3,601,342 2,465,665
(Increase) decrease in inventory 841,083 (8,767,431) 31,721,244
Decrease (increase) in other current assets (480,423) 510,931 43,979
(Increase) in dealer advances and jobber loans (1,464,280) (4,639,682) (1,675,477)
(Increase) decrease in other assets 198,409 (221,460) (2,338,973)
Increase (decrease) in accounts payable, trade 2,725,795 15,005,590 (236,306)
Increase (decrease) in accrued expenses (283,009) 372,043 1,142,427
----------- ------------- ------------
Net cash provided by operating activities 29,198,377 18,320,283 46,471,888
----------- ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (6,422,204) (5,447,940) (5,970,663)
Additions to intangible assets - (80,250) -
--------- ------------- ------------
Net cash used in investing activities (6,422,204) (5,528,190) (5,970,663)
Cash flows from financing activities:
Distributions to partners (8,175,000) (3,975,000) (11,475,000)
Payment of subordinated notes payable (1,837,507) (328,312) (4,750,000)
Proceeds from issuance of subordinated note payable to
partners 3,385,000 1,325,000 4,475,000
Net payments under line of credit agreement (19,050,000) (11,850,000) (26,200,000)
Payments of long-term debt - (750,000) (3,000,000)
Proceeds from issuance of long-term debt - 6,500,000 -
------------- ------------ -------------
Net cash used in financing activities (25,677,507) (9,078,312) (40,950,000)
Net increase (decrease) in cash (2,901,334) 3,713,781 (448,775)
------------- ------------- --------------
Cash at beginning of period 4,891,281 1,177,500 1,626,275
------------ ------------- --------------
Cash at end of period $ 1,989,947 $ 4,891,281 $ 1,177,500
============ ============= ==============
Interest paid $ 3,271,694 $ 3,811,126 $ 6,010,990
Noncash investing transactions:
Contribution of property and equipment from partners
(Note 9) $ 530,524
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 62
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Gulf Oil Limited Partnership is engaged in the business of wholesale
distribution of petroleum products, enters into forward contracts to
purchase and sell products in the cash market and also buys and sells
product futures contracts on regulated exchanges.
On December 30, 1993, Cumberland Farms, Inc. ("CFI") contributed the assets
of its Gulf Oil Division to Catamount Petroleum Limited Partnership
("Catamount") in return for a 66.67% Limited Partnership interest. The
remaining Limited Partnership interest is held by the original limited
partners of Catamount. The general partner and holder of the 1% general
partner interest remains Catamount Management Corporation ("CMC").
Catamount's name was changed to Gulf Oil Limited Partnership (the "Company")
on January 3, 1994. CFI contributed certain petroleum storage terminals and
related terminal machinery and equipment used in the wholesale petroleum
business, all its rights to the "Gulf" name, and all its rights under
contracts and agreements with certain customers. In addition, the Company
purchased CFI's credit card receivables, receivables and advances due from
certain dealers and customers, and certain inventories.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
VALUATION OF INVENTORY, HEDGING, AND RELATED ACTIVITIES
Inventory represents petroleum products held for resale and amounts due
under exchange contracts. The Company values inventory at the lower of
cost, first-in, first-out basis, or market. Revenue from sales
transactions is recognized when title is passed. In order to mitigate
the risk of market and price fluctuations in its inventory and purchases
and sales commitments, the Company enters into futures transactions on
commodity exchanges. These contracts are accounted for as hedges and,
accordingly, gains and losses on open contracts are deferred and
recognized in cost of sales along with the cost of the product hedged,
when they are closed. Deferred unrealized losses included in inventory,
hedging and related activities amounted to $969,831 and $1,822,797 at
September 30, 1997 and 1996, respectively.
Sales and cost of sales include the value of futures contracts closed.
For the years ended September 30, 1997, 1996 and 1995, the value of
futures contracts closed were $936,789,966, $893,430,695 and
$898,752,196, respectively.
Continued
F-27
<PAGE> 63
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at acquisition cost or historical cost in the
case of contributed property and equipment. Expenditures for repairs and
maintenance are charged to expense as incurred. The cost of assets sold or
retired and related accumulated depreciation are removed from the accounts at
the time of sale and any resulting gain or loss is recognized in income.
Depreciation is computed over the estimated useful lives using a combination of
straight-line and accelerated methods. The estimated useful lives of property
and equipment are as follows:
YEARS
-----
Buildings 19-31
Improvements and equipment 4-31
Furniture and Fixtures 7
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," was
implemented in October 1996. This statement had no impact on the Company's
fiscal 1997 results of operations or financial position.
INTANGIBLE ASSETS
Intangible assets contributed consists principally of goodwill and trademarks
and are amortized on a straight-line basis over periods of 4 to 40 years.
INCOME TAXES
The Company has elected limited partnership status for federal and state tax
reporting purposes. Under this election the Company passes through to its
partners as individual taxpayers, net income or loss, on a pro rata basis.
Accordingly, no federal or state income tax provision is provided by the
Company.
AMORTIZATION OF DEALER ADVANCES
Dealer advances are stated at historical cost less accumulated amortization.
Amortization on dealer advances is computed over the life of the contract based
on actual gallons sold.
FINANCE CHARGES
Finance charges on credit card collections are fully reserved for when billed.
Finance charges are taken into income when collected.
Continued
F-28
<PAGE> 64
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs for the
years ended September 30, 1997, 1996 and 1995 are $1,973,054, $2,513,683
and $1,526,481, respectively.
BASIS OF PRESENTATION
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The Company uses established petroleum futures exchanges to hedge a portion
of the market risks associated with its petroleum inventory, purchases, and
sales activities. Futures are used as hedge instruments to reduce the
Company's exposure to price volatility. These instruments may be used to
establish margins, and may be used in conjunction with specifically
identified transactions or projected purchases/sales of inventory. In
implementing its hedging program, the Company analyzes the sensitivity of its
commodity-based cash flows to market price changes. Based on this market risk
profile, as well as trends in prices and overall business objectives, a
determination is made as to the appropriate hedging strategy. Futures
contracts expose the Company to counterparty credit risk; however, management
views this risk to be minimal.
As discussed in Note 2, the net unrealized gains or losses on any open
positions have been deferred by the Company until the underlying product is
sold, or the contract has been fulfilled.
At September 30, 1997 and 1996, there were open futures contracts required to
be settled in cash. Notional contract amounts, excluding unrealized gains and
losses were $47 million and $85 million, respectively. These amounts
principally represent future values of contract volumes over the remaining
duration of outstanding futures contracts at the respective dates.
The Company has adopted FAS No. 107, Disclosures about Fair Values of
Financial Instruments. The carrying amounts of notes payable, long-term debt
and subordinated notes payable to partners approximate fair value because
these financial instruments contain variable interest rates. The fair value
of margin deposits is determined through quoted market prices.
Continued
F-29
<PAGE> 65
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment consists of the following:
1997 1996
---- ----
<S> <C> <C>
Land $ 9,779,500 $ 9,779,500
Buildings 2,772,657 2,772,657
Improvements and equipment 18,874,798 14,377,080
Office furniture and equipment 2,198,741 1,861,016
Leasehold improvements 126,164 98,523
Construction in progress 3,309,462 1,750,342
------------ ------------
37,061,322 30,639,118
Less accumulated depreciation and amortization (10,785,295) (8,109,936)
------------ ------------
$ 26,276,027 $ 22,529,182
============ ============
</TABLE>
5. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company has available a demand line of credit agreement with two
banks which provide for a combination of loans and letters of credit
aggregating $100,000,000 at September 30, 1997. Certain assets of the
Company are pledged as collateral under this agreement. At September 30,
1997 and 1996 the Company had outstanding letters of credit of
approximately $24,117,000 and $30,548,000, respectively. Interest is
payable monthly on the aggregate outstanding principal at the bank's base
rate plus 1/2%. At September 30, 1997 and 1996 borrowings outstanding
under this agreement were $8,900,000 and $27,950,000, respectively, and
the interest rate was 9.00% and 8.75%, respectively.
CFI has agreed to indemnify the Company for any costs or liabilities
arising from the remediation and clean-up of certain terminals for
conditions existing on or prior to December 30, 1993. The level of future
expenditures for environmental remediation is not estimable at this time.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term loan $20,000,000 $20,000,000
Less current portion - (2,500,000)
----------- -----------
$20,000,000 $17,500,000
=========== ===========
</TABLE>
(Continued)
F-30
<PAGE> 66
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Company maintains a term loan agreement with a bank in the aggregate
amount of $20,000,000. Certain assets of the Company are pledged as
collateral under this agreement. During 1997 the Company amended this term
loan agreement such that the entire loan matures and is payable on March 31,
1999. Interest is payable quarterly on the aggregate outstanding principal
balance at the bank's base rate plus 1% or the LIBOR rate plus 3%. At
September 30, 1997 and 1996 the interest rate was 8.719% and 8.531%,
respectively.
The credit agreement contains financial covenants that include requirements
to maintain certain financial ratios and minimum working capital
requirements. The Company is in compliance with all covenants at September
30, 1997 and 1996.
On October 31, 1997, subsequent to year end, the Company entered into and
subsequently drew down a $20,000,000 revolving credit agreement. The credit
facility matures and full payment is due on March 31, 1999. The facility is
cross collateralized with the line of credit (See note 5). The funds received
from the revolving credit agreement may be used to support general
partnership purposes and capital expenditures.
7. RELATED PARTIES:
Under the provisions of the agreement of Limited Partnership, CMC is entitled
to a fee for providing certain management and administrative services to the
Company. Included in the statement of operations for the years ended
September 30, 1997, 1996 and 1995 is a fee for such services of $706,000,
$825,000, and $850,000, respectively.
During 1997, 1996 and 1995 the Company sold petroleum products to Gibbs Oil
Company Limited Partnership ("Gibbs"), a related entity. Total sales for the
years ended September 30, 1997, 1996, and 1995 were approximately
$53,000,000, $54,000,000 and $23,000,000, respectively. The amounts due from
Gibbs at September 30, 1997 and 1996 were approximately $3,370,000 and
$2,100,000, respectively.
During 1997, 1996 and 1995, the Company sold petroleum products to CFI, and
utilized miscellaneous trucking and administrative services provided by CFI.
Total sales to CFI for the years ended September 30, 1997, 1996, 1995 were
approximately $409,000,000, $373,000,000, and $348,000,000, respectively. At
September 30, 1997 and 1996, there was approximately $8,200,000 and
$8,100,000 respectively, in trade accounts receivable due from CFI. Total
expenditures for trucking and administrative services for the years ended
September 30, 1997, 1996 and 1995 were approximately $3,300,000, $3,400,000
and $3,600,000 respectively. At September 30, 1997 and 1996, there was
approximately $232,000 and $796,000 respectively, due to CFI.
(Continued)
F-31
<PAGE> 67
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Under the terms of a Supply Agreement with CFI, the Company is entitled to
reimbursement for certain costs. The amount is calculated by determining
whether the Company exceeds target earnings (as defined in the Supply
Agreement) in any calendar year and the quantity of product purchased by CFI.
After January 1, 1999, the Company is no longer eligible for these
reimbursements. For the year ended September 30, 1997, the selling, general
and administrative expenses have been reduced by $4,090,000 as a result of
these reimbursements. Of this amount, $2,596,000 has been paid by CFI and
$1,494,000 is included in accounts receivable at September 30, 1997.
During 1997, 1996 and 1995, the Company sold petroleum products to New
England Petroleum Limited Partnership ("NEP"), a related entity. Total sales
for the years ended September 30, 1997, 1996 and 1995, were approximately
$10,000,000 $7,300,000 and $3,600,000, respectively. The amount due from NEP
at September 30, 1997 and 1996 was approximately $201,000 and $150,000,
respectively.
Subordinated notes payable to partners in the accompanying financial
statements consist of amounts owed to certain partners and CMC. These amounts
are subordinate to the demand line of credit and the term loan agreement (the
"credit agreements"). No payment of interest or principal shall be paid on
the subordinated notes if such payment would cause an event of default or
noncompliance under the "credit agreements." Interest is calculated at the
prime rate in effect from time to time plus 2%. The effective rate at
September 30, 1997 and 1996 on these notes was 10.50% and 10.25%,
respectively. These notes are payable on demand.
8. LEASE COMMITMENTS:
In April 1994, the Company leased new office space under an operating lease
arrangement for a period of five years with an option on an additional five
years. Rent expense for the years ended September 30, 1997, 1996 and 1995
totaled $515,906, $505,825, and $471,330, respectively.
At September 30, 1997, long-term lease commitments were as follows:
OPERATING LEASES
----------------
1998 $ 463,225
1999 311,048
2000 98,000
2001 98,000
2002 58,583
Thereafter 224,583
-----------
Total $ 1,253,439
===========
9. SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
(Continued)
F-32
<PAGE> 68
GULF OIL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS, CONTINUED
During the year ended September 30, 1995, CFI contributed property and
equipment with a net book value of $530,524.
10. DEFERRED COMPENSATION ARRANGEMENTS:
The Company has a defined contribution pension plan which is subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("Plan").
Eligible for the Plan are all employees who have worked at the Company for a
period of at least one year and have achieved age twenty one. The Company's
contribution to the Plan is discretionary. During the years ended September
30, 1997, 1996 and 1995, the Company made a matching contribution to the
Plan of approximately $135,000, $160,000 and $120,000, respectively.
F-33
<PAGE> 69
CUMBERLAND FARMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
------------additions-------------
BEGINNING CHARGED TO CHARGED TO ENDING
DESCRIPTION BALANCE COSTS & EXPENSES OTHER ACCOUNTS DEDUCTIONS BALANCE
- ----------- ------- ---------------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997
Reserves deducted from asset accounts:
Allowance for Accounts and Notes Receivable $1,591,000 $ 97,000 $ 179,000 $1,509,000
Environmental reserve 6,526,000 3,450,000 2,786,000 7,190,000
Year ended September 30, 1996
Reserves deducted from asset accounts:
Allowance for Accounts and Notes Receivable 1,614,000 136,000 159,000 1,591,000
Environmental reserve 7,408,000 2,068,000 2,950,000 6,526,000
Year ended September 30, 1995
Reserves deducted from asset accounts:
Allowance for Accounts and Notes Receivable 1,210,000 756,000 352,000 1,614,000
Environmental reserve 6,151,000 2,467,000 1,210,000 7,408,000
</TABLE>
S-1
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
of Gulf Oil Limited Partnership:
In connection with our audit of the balance sheets of Gulf Oil Limited
Partnership as of September 30, 1997 and 1996, and the related statement of
operations, changes in partners' capital and cash flows for the years ended
September 30, 1997, 1996 and 1995, we have also audited the accompanying
"Schedule III - Valuation and Qualifying Accounts."
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
December 10, 1997
S-2
<PAGE> 71
GULF OIL LIMITED PARTNERSHIP
SCHEDULE III - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1997
- -----------------------------
Allowance for doubtful accounts - accounts receivable, trade $1,500,000 $163,583 $413,583 $1,250,000
Allowance for doubtful accounts - credit card receivables $1,935,000 $696,000 $761,000 $1,870,000
Year Ended September 30, 1996
- -----------------------------
Allowance for doubtful accounts - accounts receivable, trade $1,500,000 $227,986 $227,986 $1,500,000
Allowance for doubtful accounts - credit card receivables $1,780,000 $960,000 $805,000 $1,935,000
Year Ended September 30, 1995
- -----------------------------
Allowance for doubtful accounts - accounts receivable, trade $550,000 $945,240 ($4,760) $1,500,000
Allowance for doubtful accounts - credit card receivables $1,492,631 $1,000,000 $712,631 $1,780,000
</TABLE>
S-3
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Boston, Commonwealth of Massachusetts, on the 22nd day of December,
1997.
CUMBERLAND FARMS, INC.
By: /s/ Lily H. Bentas
---------------------------------------------
Name: Lily H. Bentas
Title: President, Chairperson of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant in the capacities indicated and on
the dates set forth opposite their names.
NAME: DATE:
- ----- -----
By: /s/ Lily H. Bentas 12/22/97
- --------------------------------------------------- --------------
Name: Lily H. Bentas
Title: President, Chairperson of the
Board and Chief Executive Officer
By: /s/ Kevin P. Johnson 12/22/97
- --------------------------------------------------- --------------
Name: Kevin P. Johnson
Title: Vice president and Corporate Controller
By: /s/ Arthur G. Koumantzelis 12/22/97
- --------------------------------------------------- --------------
Name: Arthur G. Koumantzelis
Title: Senior Vice President and
Chief Financial Officer
By: /s/ John E. Burke 12/22/97
- --------------------------------------------------- --------------
Name: John E. Burke
Title: Director
<PAGE> 73
By: /s/ Paul E. Hand 12/22/97
- --------------------------------------------------- --------------
Name: Dr. Paul Hand
Title: Director
By: /s/ Byron Haseotes 12/22/97
- --------------------------------------------------- --------------
Name: Byron Haseotes
Title: Director
- --------------------------------------------------- --------------
Name: Demetrios B. Haseotes
Title: Director
- --------------------------------------------------- --------------
Name: George Haseotes
Title: Director
By: /s/ James C. Mcdermott 12/22/97
- --------------------------------------------------- --------------
Name: James C. McDermott
Title: Director
By: /s/ Dr. Geoffrey Pottow 12/22/97
- --------------------------------------------------- --------------
Name: Dr. Geoffrey Pottow
Title: Director
By: /s/ Kenneth T. Koehler 12/22/97
- --------------------------------------------------- --------------
Name: Kenneth T. Koehler
Title: Director
37
<PAGE> 74
EXHIBIT INDEX
Each exhibit marked with an asterisk (*) was previously filed as an Exhibit
to the Registration Statement filed on August 17, 1995. Each exhibit marked with
a double asterisk (**) was previously filed as an Exhibit to Amendment No. 1 to
the Registration Statement filed on November 6, 1995. Each exhibit marked with a
triple asterisk (***) was previously filed as an exhibit to the Company's
quarterly report on Form 10-Q for the fiscal quarter ended June 30, 1996.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit Item Exhibit
------- ---- -------
No.
---
<S> <C> <C>
2 Third Amended and Restated Plan of Reorganization, dated Filed as Exhibit 2*
as of July 1, 1993, of the Registrant, as amended by
Omnibus Amended and Restated Modification of Third
Amended and Restated Plan of Reorganization dated as of
October 15, 1993
3.1 Certificate of Incorporation of the Registrant, filed with the Filed as Exhibit 3.1*
Secretary of State of Delaware on September 14, 1984, as
amended
3.2 Bylaws of the Registrant Filed as Exhibit 3.2*
4.1A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.1A*
Registrant and State Street Bank & Trust Company, as
Trustee (Class 11A 10.5% Secured Notes due 2003)
4.1B Supplemental Indenture, dated as of October 1, 1993, Filed as
Exhibit 4.1B* between the Registrant and State Street Bank &
Trust Company, as Trustee (Class 11A 10.5% Secured Notes due
2003)
4.1C Supplemental Indenture, dated as of March 1, 1994, between
Filed as Exhibit 4.1C* the Registrant and State Street Bank &
Trust Company, as Trustee (Class 11A 10.5% Secured Notes due
2003)
4.2A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.2A*
Registrant and State Street Bank & Trust Company, as
Trustee (Class 11F 10.5% Secured Notes due 2003)
4.2B Supplemental Indenture, dated as of January 3, 1995, Filed as
Exhibit 4.2B* between the Registrant and State Street Bank &
Trust Company, as Trustee (Class 11F 10.5% Secured Notes due
2003)
4.2C Supplemental Indenture, dated as of January 11, 1995, Filed
as Exhibit 4.2C* between the Registrant and State Street Bank
& Trust Company, as Trustee (Class 11F 10.5% Secured Notes
due 2003)
4.2D Supplemental Indenture, dated as of April 1, 1995, between
Filed as Exhibit 4.2D* the Registrant and State Street Bank &
Trust Company, as Trustee (Class 11F 10.5% Secured Notes due
2003)
</TABLE>
38
<PAGE> 75
<TABLE>
<S> <C> <C>
4.3A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.3A*
Registrant and State Street Bank & Trust Company, as
Trustee (Class 11G 9.75% Secured Notes due 2003)
4.3B Supplemental Indenture, dated as of November 1, 1994, Filed as Exhibit 4.3B*
between the Registrant and State Street Bank & Trust
Company, as Trustee (Class 11G 9.75% Secured Notes due
2003)
4.3C Supplemental Indenture, dated as of January 11, 1995, Filed
as Exhibit 4.3C* between the Registrant and State Street Bank
& Trust Company, as Trustee (Class 11G 9.75% Secured Notes
due 2003)
4.4 "S Corporation" Agreement among Shareholders of Filed as Exhibit 4.4*
Cumberland Farms, Inc., dated September 14, 1984, among
the Registrant, the shareholders named therein and Allan van
Gestel, as Agent
4.5 Supplement No. 1 to "S Corporation" Agreement among Filed as Exhibit 4.5*
Shareholders of Cumberland Farms, Inc., dated September
10, 1993, among the Registrant, the shareholders named
therein and Allan van Gestel, as Agent
5 Opinion of Sullivan & Worcester with respect to the legality Filed as Exhibit 5**
of the Notes and the status of the Notes as binding obligations
of the Registrant
10.1 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.1*
between the Registrant and the Securityholders named therein
with respect to the Class 11A 10.5% Secured Notes due 2003
10.2 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.2*
between the Registrant and the Securityholders named therein
with respect to the Class 11F 10.5% Secured Notes due 2003
10.3 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.3*
between the Registrant and the Securityholders named therein
with respect to the Class 11G 9.75% Secured Notes due 2003
10.4A Joint Venture Agreement, dated June 30, 1993, among the Filed as Exhibit 10.4A*
Registrant, Catamount Petroleum Limited Partnership and
Catamount Management Corporation
10.4B Amendment of Joint Venture Agreement, dated as of Filed as Exhibit 10.4B*
December 29, 1993, among the Registrant, Catamount
Petroleum Limited Partnership and Catamount Management
Corporation
10.5 Second Amended and Restated Agreement of Limited Filed as Exhibit 10.5**
Partnership, dated December 29, 1993, of Gulf Oil L.P.
</TABLE>
39
<PAGE> 76
<TABLE>
<S> <C> <C>
10.6 Supply Agreement, dated December 29, 1993, between the Filed as Exhibit 10.6**
Registrant and Gulf Oil L.P.
10.7 Amended and Restated Credit Agreement, dated December Filed as Exhibit 10.7*
29, 1993, between the Registrant and The Industrial Bank of
Japan Trust Company
10.8 Amended and Restated Credit Agreement, dated December Filed as Exhibit 10.8*
29, 1993, between the Registrant and Chevron U.S.A. Inc.
10.9 Indenture, dated as of December 29, 1993, between the Filed as Exhibit 10.9*
Registrant and Shawmut Bank, N.A. as trustee
10.10 Amended, Restated and Consolidated Loan Agreement, dated Filed as Exhibit 10.10*
as of December 30, 1993, between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith, Inc.
10.11 Loan Agreement, dated as of December 30, 1993, between Filed as Exhibit 10.11*
the Registrant and First Fidelity Bank, N.A.
10.12 Note Modification Agreement, dated as of December 30, Filed as Exhibit 10.12*
1993, between the Registrant and Metropolitan Life Insurance
10.13 Employment Agreement between the Registrant and Lily H. Filed as Exhibit 10.13*
Bentas
10.14 Indemnity Agreements between the Registrant and the Filed as Exhibit 10.14*
independent directors of the Registrant
10.15 Loan and Security Agreement, dated as of June 14, 1996, by Filed as Exhibit 10***
and between the Registrant and Transamerica Business Credit
Corporation
10.16 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.16
the Company and Lily H. Bentas
10.17 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.17
the Company and Harry J. Brenner
10.18 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.18
the Company and Mark G. Howard
12 Statement re computation of ratios Filed as Exhibit 12
27 Financial Data Schedule Filed as Exhibit 27
======================================================================================================================
</TABLE>
40
<PAGE> 1
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 3rd day of November,
1997, is entered into by Cumberland Farms, Inc., a Delaware corporation (the
"Company"), and Lily H. Bentas, residing at 431 Lewis Wharf, Boston,
Massachusetts (the "Employee").
The Company desires to employ the Employee, and the Employee desires to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on October 1, 1997 (the
"Commencement Date"), and ending on September 30, 1999 (such period, as it may
be extended, the "Employment Period"), unless sooner terminated in accordance
with the provisions of Section 4.
2. TITLE, CAPACITY. The Employee shall serve as the President and Chief
Executive Officer of the Company. The Employee shall be subject to the
supervision of, and shall have such authority as is generally exercised by, a
chief executive officer of similar companies of like size and as delegated to
her by the Board. The Employee hereby accepts such employment and agrees to
undertake the duties and responsibilities or such other duties and
responsibilities as the Board shall from time to time
<PAGE> 2
-2-
reasonably assign to her. The Employee agrees to devote her entire business
time, attention and energies to the business and interests of the Company during
the Employment Period.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in monthly
installments, an annual base salary to be set by a majority vote of the
Compensation Committee of the Board ("Base Salary") for each fiscal year during
the Employment Period, and an allocable portion of such Base Salary in the event
that the Employee is employed by the Company under this Agreement for less than
all of any particular fiscal year during the Employment Period. The Compensation
Committee shall determine the amount of Employee's Base Salary to be effective
as of October 1, 1997, and such Base Salary shall be subject to adjustment from
time to time as determined by a majority vote of the Compensation Committee,
with the consent of the Employee.
3.2 FRINGE BENEFITS. The Employee shall be entitled to participate in
all bonus and benefit programs that the Company establishes and makes available
to its employees, if any, to the extent that Employee's position, tenure,
salary, age, health and other qualifications make her eligible to participate,
including, but not limited to, the programs indicated on SCHEDULE A to this
Agreement. The Employee shall be entitled to a minimum of four weeks paid
vacation, or any greater amount pursuant to any plan adopted by the Company, for
each fiscal year, to be taken at such times as the Employee deems appropriate
consistent with her obligations under this Agreement.
<PAGE> 3
-3-
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of her
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as may be appropriate.
4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 Expiration of the Employment Period in accordance with Section 1;
PROVIDED, HOWEVER, that the Company may continue to employ Employee thereafter
on such terms and conditions as Employee and the Company may agree; and PROVIDED
FURTHER that this Agreement may be renewed only upon a majority vote of the
Board.
4.2 By a majority vote of the Board, for cause, immediately upon
written notice by the Company to the Employee. For the purposes of this Section
4.2, cause for termination shall only be deemed to exist upon (a) a finding by a
Justice of the Superior Court of Massachusetts of failure of the Employee to
perform her assigned duties for the Company, dishonesty, gross negligence or
misconduct, or (b) the conviction of the Employee of, or the entry of a pleading
of guilty or nolo contendere by the Employee to, any crime involving moral
turpitude or any felony.
<PAGE> 4
-4-
4.3 Thirty days after the death or disability of the Employee. As used
in this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90 consecutive
days during any 360-day period to perform the services contemplated under this
Agreement. A determination that Employee is disabled made by the Company's
disability insurance carrier shall be binding on the Company. However, if the
Company's disability insurance carrier determines that Employee is not disabled,
Employee shall be free to challenge the carrier's determination by seeking a
disability determination from a physician satisfactory to both the Employee and
the Company; PROVIDED THAT if the Employee and the Company do not agree on a
physician, the Employee and the Company shall each select a physician and these
two together shall select a third physician, whose determination as to
disability shall be binding on all parties.
4.4 At the election of either party without cause, but subject to the
provision of Section 5 hereof, upon not less than 60 days' prior written notice
of termination; PROVIDED, HOWEVER, that Employee's employment may not be
terminated by the Company pursuant to this paragraph except upon a majority vote
of the Board.
5. EFFECT OF TERMINATION.
5.1 TERMINATION FOR CAUSE. In the event the Employee's employment is
terminated for cause pursuant to Section 4.2, or at the Employee's election, the
Company shall pay to the Employee the compensation and benefits otherwise
payable
<PAGE> 5
-5-
to her under Section 3 through the last day of her actual employment by the
Company.
5.2 TERMINATION AT THE BOARD'S ELECTION. For the purposes of this
paragraph "Anticipated Annual Compensation" shall mean the greater of (i)
Employee's Base Salary at the time of termination, or (ii) Employee's Base
Salary effective as of October 1, 1997, as defined in Section 3.1 above. In the
event that the Board elects to terminate the Employee without cause, under
paragraph 4.4 hereof, then the Company shall pay Employee severance pay at an
annualized rate equal to the Anticipated Annual Compensation for the greater of
(i) twelve (12) months or (ii) the number of months then remaining between the
date of termination and September 30, 1999. To the extent that Employee is
terminated on or after September 30, 1998, Employee's entitlement to receive
this severance pay shall not be affected or reduced by any earnings she may
receive from a subsequent employer during the severance period. However, if
Employee is terminated BEFORE September 30, 1998, then, for the period from the
date of termination until September 30, 1998 ONLY (but not during the period
from October 1, 1998 to September 30, 1999), Employee's entitlement to receive
this severance pay shall be reduced by any earnings she may receive from a
subsequent employer during such period.
5.3 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment
is terminated by death or because of disability pursuant to Section 4.3, the
Company shall pay to the estate of the Employee or to the Employee, as the case
may be, the compensation which would otherwise be payable to the Employee
<PAGE> 6
-6-
up to the end of the month in which the termination of her employment because of
death or disability occurs. In addition, in the event that termination is for
disability, the Company shall also pay the difference between the monthly
long-term disability insurance coverage provided and that amount received from
Social Security and the Employee's Base Salary, and shall keep in force all
medical coverage, for the period remaining in this Agreement.
5.4 SEVERANCE PAY AFTER THE EXPIRATION OF THIS AGREEMENT. Should (a)
Employee continue to be employed by the Company on or after September 30, 1999,
and (b) the Company terminate Employee's employment at the expiration of the
Employment Period or thereafter other than for cause (as defined in Section 4.2
above), the Company shall pay Employee severance pay at a rate equal to the
Anticipated Annual Compensation (as defined in Section 5.2 above) for a period
of twelve (12) months following Employee's termination date. Employee's
entitlement to receive this severance pay shall not be affected by any earnings
she may receive from a subsequent employer during the severance period. Such
severance payments shall be made to Employee at such times as Employee would
have received salary payments during such twelve (12) month period. This
paragraph shall survive the expiration of this Agreement.
5.5 EXCEPTION TO SEVERANCE OBLIGATIONS. The Company shall not be
obligated to pay severance pay to Employee pursuant to paragraphs 5.2 and 5.4
above if (i) Employee's employment with the Company is terminated in connection
with a sale of all or substantially all of the assets of the Company and (ii)
Employee
<PAGE> 7
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is offered employment with the entity acquiring such assets in exchange for
compensation and benefits (including severance benefits) at least equal to those
then being offered to Employee by the Company.
5.6 INDEMNIFICATION AND ADEQUATE ASSURANCE AGAINST PERSONAL LIABILITY.
The Company hereby agrees to indemnify the Employee against any claims against
the Company for which she may have personal liability. Notwithstanding any other
provision of this Agreement, prior to the effective date of the Employee's
termination, and for one year thereafter, whether for cause or otherwise, the
Company shall provide the Employee with adequate assurance that all the
liabilities of the Company which, if unpaid, may constitute a personal liability
of the Employee have been satisfied or will be satisfied by the Company, which
adequate assurance, at the Employee's election may include, without limitation,
requiring the Company to make advance payments to establish a cash escrow fund
for or set aside and pledge to secure such liabilities. This Contract and the
Employee's compensation shall not terminate until such adequate assurance is
provided.
6. RESTRICTIVE COVENANTS. Unless otherwise agreed in writing by the
parties to this Agreement, during Employee's employment by the Company, and for
a period of one (1) year (or, if longer, for the period of time during which
Employee continues to receive severance payments from the Company) after
Employee's employment with the Company terminates for any reason, voluntarily or
involuntarily, or with or without cause, Employee will not, directly or
indirectly, whether through Employee's own
<PAGE> 8
-8-
efforts or through the efforts of another, or in any way assisting or employing
the assistance of, any other person or entity:
a. engage in any business in competition with the business of the
Company; or
b. hire or employ any employee of the Company at the Vice President
level or higher, or recruit, solicit or induce (or in any way assist another in
soliciting or inducing) any such employee of the Company to terminate his or her
relationship with the Company.
Employee understands and agrees that the above restrictions are reasonable
and necessary to protect the confidential information, goodwill, and other
legitimate business interests of the Company, and that, in the event of an
actual or threatened breach of the above provisions, the Company will suffer
immediate and irreparable harm, and will be entitled to injunctive relief to
prevent such a breach, in addition to any other remedies to which it may be
entitled by law. If any of the provisions of this Agreement are determined to be
unenforceable in whole or in part, Employee understands and agrees that such a
determination shall not affect the validity and enforceability of this
Agreement.
7. CONFIDENTIALITY. Employee agrees that she will not, at any time during
or after her employment by the Company, without the Company's prior written
consent, reveal or disclose to any person outside of the Company, or use for her
own benefit or the benefit of any other person or entity, any confidential
information concerning the business or affairs of the Company, or
<PAGE> 9
-9-
concerning the Company's customers, clients or employees ("Confidential
Information"). For purposes of this Agreement, Confidential Information shall
include, but shall not be limited to, financial information or plans; sales and
marketing information or plans; business or strategic plans; salary, bonus or
other personnel information of any type; information concerning methods of
operation; proprietary systems or software; legal or regulatory information;
cost and pricing information or policies; information concerning new or
potential products or markets; and information concerning new or potential
investors, customers, clients, or shareholders. Confidential Information shall
not include Confidential Information already available to the public through no
act of Employee's.
Employee further understands and agrees that all such Confidential
Information, however or whenever produced, shall be the Company's sole property,
and shall not be removed by Employee (or anyone acting at Employee's direction
or on her behalf) from the Company's custody or premises without the Company's
prior written consent. Upon the termination of Employee's employment, Employee
will promptly deliver to the Company all copies of all documents, equipment,
property or materials of any type in her possession, custody or control, that
belong to the Company, and/or that contain, in whole or in part, any
Confidential Information.
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid,
<PAGE> 10
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addressed to the other party at the address shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 8.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
10. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
11. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business, provided, however, that the
obligations of the Employee are personal and shall not be assigned by her.
13. MISCELLANEOUS.
13.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
<PAGE> 11
-11-
13.2 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
13.3 All amounts of compensation referred to in this Agreement are
subject to withholding as required by law.
13.4 Nothing in this Agreement shall limit or restrict in any way the
rights of the Employee to act as a shareholder or member of the Board of
Directors of the Company.
13.5 The Company shall pay all reasonable attorney's fees and costs
incurred by the Employee in connection with the defense of any action brought by
a third party in which this Agreement or the Employee's performance thereunder
is in issue.
13.6 The Company shall pay (and shall advance to Employee) all
reasonable costs and attorneys' fees incurred by the Employee in connection with
any action or claim brought by Employee to enforce the Company's obligations
under this Agreement; provided, however, that in the event that it is finally
determined that the action or claim as to which such costs and fees were
advanced was frivolous, Employee will repay such costs and fees to the Company.
For purposes of this paragraph, it shall not be "finally determined" that an
action or claim was frivolous unless all appeals as to that issue have been
resolved, or all appeal periods as to that issue have expired without an appeal
of that issue having been taken.
<PAGE> 12
-12-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
CUMBERLAND FARMS, INC.
By: /s/ Arthur Koumantzelis
--------------------------------
Arthur Koumantzelis
Title: Chief Financial Officer
EMPLOYEE
/s/ Lily H. Bentas
-----------------------------------
Lily H. Bentas
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 3rd day of November,
1997, is entered into by Cumberland Farms, Inc., a Delaware corporation (the
"Company"), and Harry J. Brenner, residing at 404 Montclair Drive, North
Attleboro, Massachusetts (the "Employee").
The Company desires to employ the Employee, and the Employee desires to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on October 1, 1997 (the
"Commencement Date"), and ending on September 30, 1999 (such period, as it may
be extended, the "Employment Period"), unless sooner terminated in accordance
with the provisions of Section 4.
2. TITLE, CAPACITY. The Employee shall serve as the Executive Vice
President and Chief Operating Officer of the Company. The Employee shall be
subject to the supervision of, and shall have such authority as is generally
exercised by, a chief operating officer of similar companies of like size and as
delegated to him by the Company's chief executive officer and/or the Board. The
Employee hereby accepts such employment and agrees to undertake the duties and
responsibilities or such other
<PAGE> 2
-2-
duties and responsibilities as the chief executive officer and/or the Board
shall from time to time reasonably assign to him. The Employee agrees to devote
his entire business time, attention and energies to the business and interests
of the Company during the Employment Period.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in monthly
installments, an annual base salary to be set by the Compensation Committee of
the Board ("Base Salary") for each fiscal year during the Employment Period, and
an allocable portion of such Base Salary in the event that the Employee is
employed by the Company under this Agreement for less than all of any particular
fiscal year during the Employment Period. The Compensation Committee shall
determine the amount of Employee's Base Salary to be effective as of October 1,
1997, and such Base Salary shall be subject to adjustment from time to time as
determined by the Compensation Committee, with the consent of the Employee.
3.2 FRINGE BENEFITS. The Employee shall be entitled to participate in
all bonus and benefit programs that the Company establishes and makes available
to its employees, if any, to the extent that Employee's position, tenure,
salary, age, health and other qualifications make him eligible to participate,
including, but not limited to, the programs indicated on SCHEDULE A to this
Agreement. The Employee shall be entitled to a minimum of four weeks paid
vacation, or any greater amount pursuant to any plan adopted by the Company, for
each fiscal year, to be taken at such
<PAGE> 3
-3-
times as the Employee deems appropriate consistent with his obligations under
this Agreement.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as may be appropriate.
4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 Expiration of the Employment Period in accordance with Section 1;
PROVIDED, HOWEVER, that the Company may continue to employ Employee thereafter
on such terms and conditions as Employee and the Company may agree; and PROVIDED
FURTHER that this Agreement may be renewed only upon a majority vote of the
Board.
4.2 By a majority vote of the Board, for cause, immediately upon
written notice by the Company to the Employee. For the purposes of this Section
4.2, cause for termination shall only be deemed to exist upon (a) a finding by a
Justice of the Superior Court of Massachusetts of failure of the Employee to
perform his assigned duties for the Company, dishonesty, gross negligence or
misconduct, or (b) the conviction of the Employee of, or the entry of a pleading
of guilty or nolo contendere by
<PAGE> 4
-4-
the Employee to, any crime involving moral turpitude or any felony.
4.3 Thirty days after the death or disability of the Employee. As used
in this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90 consecutive
days during any 360- day period to perform the services contemplated under this
Agreement. A determination that Employee is disabled made by the Company's
disability insurance carrier shall be binding on the Company. However, if the
Company's disability insurance carrier determines that Employee is not disabled,
Employee shall be free to challenge the carrier's determination by seeking a
disability determination from a physician satisfactory to both the Employee and
the Company; PROVIDED THAT if the Employee and the Company do not agree on a
physician, the Employee and the Company shall each select a physician and these
two together shall select a third physician, whose determination as to
disability shall be binding on all parties.
4.4 At the election of either party without cause, but subject to the
provision of Section 5 hereof, upon not less than 60 days' prior written notice
of termination; PROVIDED, HOWEVER, that Employee's employment may not be
terminated by the Company pursuant to this paragraph except upon a majority vote
of the Board.
5. EFFECT OF TERMINATION.
5.1 TERMINATION FOR CAUSE. In the event the Employee's employment is
terminated for cause pursuant to Section 4.2, or at the Employee's election, the
Company shall pay
<PAGE> 5
-5-
to the Employee the compensation and benefits otherwise payable to him under
Section 3 through the last day of his actual employment by the Company.
5.2 TERMINATION AT THE BOARD'S ELECTION. For the purposes of this
paragraph "Anticipated Annual Compensation" shall mean the greater of (i)
Employee's Base Salary at the time of termination, or (ii) Employee's Base
Salary effective as of October 1, 1997, as defined in Section 3.1 above. In the
event that the Board elects to terminate the Employee without cause, under
paragraph 4.4 hereof, then the Company shall pay Employee severance pay at an
annualized rate equal to the Anticipated Annual Compensation for the greater of
(i) twelve (12) months or (ii) the number of months then remaining between the
date of termination and September 30, 1999. Such severance payments shall be
made in monthly installments equal to one twelfth (1/12th) of the Anticipated
Annual Compensation. To the extent that Employee is terminated on or after
September 30, 1998, Employee's entitlement to receive this severance pay shall
not be affected or reduced by any earnings he may receive from a subsequent
employer during the severance period. However, if Employee is terminated BEFORE
September 30, 1998, then, for the period from the date of termination until
September 30, 1998 ONLY (but not during the period from October 1, 1998 to
September 30, 1999), Employee's entitlement to receive this severance pay shall
be reduced by any earnings he may receive from a subsequent employer during such
period.
5.3 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment
is terminated by death or because of
<PAGE> 6
-6-
disability pursuant to Section 4.3, the Company shall pay to the estate of the
Employee or to the Employee, as the case may be, the compensation which would
otherwise be payable to the Employee up to the end of the month in which the
termination of his employment because of death or disability occurs. In
addition, in the event that termination is for disability, the Company shall
also pay the difference between the monthly long-term disability insurance
coverage provided and that amount received from Social Security and the
Employee's Base Salary, and shall keep in force all medical coverage, for the
period remaining in this Agreement.
5.4 SEVERANCE PAY AFTER THE EXPIRATION OF THIS AGREEMENT. Should (a)
Employee continue to be employed by the Company on or after September 30, 1999,
and (b) the Company terminate Employee's employment at the expiration of the
Employment Period or thereafter other than for cause (as defined in Section 4.2
above), the Company shall pay Employee severance pay at a rate equal to the
Anticipated Annual Compensation (as defined in Section 5.2 above), for a period
of twelve (12) months following Employee's termination date. Such severance
payments shall be made to Employee at such times as Employee would have received
salary payments during such twelve (12) month period. This paragraph shall
survive the expiration of this Agreement. Employee's entitlement to receive this
severance pay shall not be affected by any earnings that he may receive from a
subsequent employer during the severance period.
5.5 EXCEPTION TO SEVERANCE OBLIGATIONS. The Company shall not be
obligated to pay severance pay to Employee pursuant
<PAGE> 7
-7-
to paragraphs 5.2 and 5.4 above if (i) Employee's employment with the Company is
terminated in connection with a sale of all or substantially all of the assets
of the Company and (ii) Employee is offered employment with the entity acquiring
such assets in exchange for compensation and benefits (including severance
benefits) at least equal to those then being offered to Employee by the Company.
5.6 INDEMNIFICATION AND ADEQUATE ASSURANCE AGAINST PERSONAL LIABILITY.
The Company hereby agrees to indemnify the Employee against any claims against
the Company for which he may have personal liability. Notwithstanding any other
provision of this Agreement, prior to the effective date of the Employee's
termination, and for one year thereafter, whether for cause or otherwise, the
Company shall provide the Employee with adequate assurance that all the
liabilities of the Company which, if unpaid, may constitute a personal liability
of the Employee have been satisfied or will be satisfied by the Company, which
adequate assurance, at the Employee's election may include, without limitation,
requiring the Company to make advance payments to establish a cash escrow fund
for or set aside and pledge to secure such liabilities. This Contract and the
Employee's compensation shall not terminate until such adequate assurance is
provided.
6. RESTRICTIVE COVENANTS. Unless otherwise agreed in writing by the
parties to this Agreement, during Employee's employment by the Company, and for
a period of one (1) year (or, if longer, for the period of time during which
Employee continues to receive severance payments from the Company) after
Employee's
<PAGE> 8
-8-
employment with the Company terminates for any reason, voluntarily or
involuntarily, or with or without cause, Employee will not, directly or
indirectly, whether through Employee's own efforts or the efforts of another, or
in any way assisting or employing the assistance of, any other person or entity:
a. engage in any business in competition with the business of the
Company; or
b. hire or employ any employee of the Company at the Vice President
level or higher, or recruit, solicit or induce (or in any way assist another in
recruiting, soliciting or inducing) any such employee of the Company to
terminate his or her relationship with the Company.
Employee understands and agrees that the above restrictions are reasonable,
enforceable and necessary to protect the confidential information, goodwill and
other legitimate business interests of the Company, and that, in the event of an
actual or threatened breach of the above provisions, the Company will suffer
immediate and irreparable harm, and will be entitled to injunctive relief to
prevent such a breach, in addition to any other remedies to which it may be
entitled by law. If any of the provisions of this Agreement are determined to be
unenforceable, in whole or in part, Employee understands and agrees that such a
determination shall not affect the validity and enforceability of the remainder
of this Agreement.
7. CONFIDENTIALITY. Employee agrees that he will not, at any time during
or after his employment by the Company, without the Company's prior written
consent, reveal or disclose to any person outside of the Company, or use for his
own benefit or the
<PAGE> 9
-9-
benefit of any other person or entity, any confidential information concerning
the business or affairs of the Company, or concerning the Company's customers,
clients or employees ("Confidential Information"). For purposes of this
Agreement, Confidential Information shall include, but shall not be limited to,
financial information or plans; sales and marketing information or plans;
business or strategic plans; salary, bonus or other personnel information of any
type; information concerning methods of operation; proprietary systems or
software; legal or regulatory information; cost and pricing information or
policies; information concerning new or potential products or markets; and
information concerning new or potential investors, customers, clients, or
shareholders. Confidential Information shall not include Confidential
Information already available to the public through no act of Employee's.
Employee further understands and agrees that all such Confidential
Information, however or whenever produced, shall be the Company's sole property,
and shall not be removed by Employee (or anyone acting at Employee's direction
or on his behalf) from the Company's custody or premises without the Company's
prior written consent. Upon the termination of Employee's employment, Employee
will promptly deliver to the Company all copies of all documents, equipment,
property or materials of any type in his possession, custody or control, that
belong to the Company, and/or that contain, in whole or in part, any
Confidential Information.
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon
<PAGE> 10
-10-
personal delivery or upon deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown above, or at such other address or addresses as either party
shall designate to the other in accordance with this Section 8.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
10. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
11. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business; PROVIDED, HOWEVER, that the
obligations of the Employee are personal and shall not be assigned by him.
13. MISCELLANEOUS.
13.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and
<PAGE> 11
-11-
shall not be construed as a bar or waiver of any right on any other occasion.
13.2 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
13.3 All amounts of compensation referred to in this Agreement are
subject to withholding as required by law.
13.4 Nothing in this Agreement shall limit or restrict in any way the
rights of the Employee to act as a shareholder or member of the Board of
Directors of the Company.
13.5 The Company shall pay all reasonable attorney's fees and costs
incurred by the Employee in connection with the defense of any action brought by
a third party in which this Agreement or the Employee's performance thereunder
is in issue.
13.6 The Company shall pay (and shall advance to Employee) all
reasonable costs and attorneys' fees incurred by the Employee in connection with
any action or claim brought by Employee to enforce the Company's obligations
under this Agreement; provided, however, that in the event that it is finally
determined that the action or claim as to which such costs and fees were
advanced was frivolous, Employee will repay such costs and fees to the Company.
For purposes of this paragraph, it shall not be "finally determined" that an
action or claim was frivolous unless all appeals as to that issue have been
resolved, or all appeal periods as to that issue have expired without an appeal
of that issue having been taken.
<PAGE> 12
-12-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
CUMBERLAND FARMS, INC.
By: /s/ Arthur Koumantzelis
--------------------------------
Arthur Koumantzelis
Title: Chief Financial Officer
EMPLOYEE
/s/ Harry J. Brenner
-----------------------------------
Harry J. Brenner
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 3rd day of
November, 1997, is entered into by Cumberland Farms, Inc., a Delaware
corporation (the "Company"), and Mark G. Howard, residing at 15 Greylock Road,
Wellesley, Massachusetts (the "Employee").
The Company desires to employ the Employee, and the Employee desires to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on October 1, 1997 (the
"Commencement Date"), and ending on December 31, 1998 (such period, as it may be
extended, the "Employment Period"), unless sooner terminated in accordance with
the provisions of Section 4.
2. TITLE, CAPACITY. The Employee shall serve as the Associate General
Counsel and Secretary of the Company, and General Counsel of its Gulf Division.
The Employee shall be subject to the supervision of, and shall have such
authority as is generally exercised by, a general counsel of similar companies
of like size and as delegated to him by the Company's chief executive officer
and/or the Board. The Employee hereby accepts such employment and agrees to
undertake the duties and
<PAGE> 2
-2-
responsibilities or such other duties and responsibilities as the chief
executive officer and/or the Board shall from time to time reasonably assign to
him. The Employee agrees to devote his entire business time, attention and
energies to the business and interests of the Company during the Employment
Period.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in monthly
installments, an annual base salary to be set by a majority vote of the
Compensation Committee of the Board ("Base Salary") for each fiscal year during
the Employment Period, and an allocable portion of such Base Salary in the event
that the Employee is employed by the Company under this Agreement for less than
all of any particular fiscal year during the Employment Period. The Compensation
Committee shall determine the amount of Employee's Base Salary to be effective
as of October 1, 1997, and such Base Salary shall be subject to adjustment from
time to time as determined by the Compensation Committee, with the consent of
the Employee.
3.2 FRINGE BENEFITS. The Employee shall be entitled to participate in
all bonus and benefit programs that the Company establishes and makes available
to its employees, if any, to the extent that Employee's position, tenure,
salary, age, health and other qualifications make him eligible to participate,
including, but not limited to, the programs indicated on SCHEDULE A to this
Agreement. The Employee shall be entitled to a minimum of four weeks paid
vacation, or any greater amount pursuant to any plan adopted by the Company, for
each fiscal year, to be taken at such
<PAGE> 3
-3-
times as the Employee deems appropriate consistent with his obligations under
this Agreement.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as may be appropriate.
4. EMPLOYMENT TERMINATION. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 Expiration of the Employment Period in accordance with Section 1;
PROVIDED, HOWEVER, that the Company may continue to employ Employee thereafter
on such terms and conditions as Employee and the Company may agree; and PROVIDED
FURTHER that this Agreement may be renewed only upon a majority vote of the
Board.
4.2 By a majority vote of the Board, for cause, immediately upon
written notice by the Company to the Employee. For the purposes of this Section
4.2, cause for termination shall only be deemed to exist upon (a) a finding by a
Justice of the Superior Court of Massachusetts of failure of the Employee to
perform his assigned duties for the Company, dishonesty, gross negligence or
misconduct, or (b) the conviction of the Employee of, or the entry of a pleading
of guilty or nolo contendere by
<PAGE> 4
-4-
the Employee to, any crime involving moral turpitude or any felony.
4.3 Thirty days after the death or disability of the Employee. As
used in this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90 consecutive
days during any 360-day period to perform the services contemplated under this
Agreement. A determination that Employee is disabled made by the Company's
disability insurance carrier shall be binding on the Company. However, if the
Company's disability insurance carrier determines that Employee is not disabled,
Employee shall be free to challenge the carrier's determination by seeking a
disability determination from a physician satisfactory to both the Employee and
the Company; PROVIDED THAT if the Employee and the Company do not agree on a
physician, the Employee and the Company shall each select a physician and these
two together shall select a third physician, whose determination as to
disability shall be binding on all parties.
4.4 At the election of either party without cause, but subject to the
provision of Section 5 hereof, upon not less than 60 days' prior written notice
of termination; PROVIDED, HOWEVER, that Employee's employment may not be
terminated by the Company pursuant to this paragraph except upon a majority vote
of the Board.
5. EFFECT OF TERMINATION.
5.1 TERMINATION FOR CAUSE. In the event the Employee's employment is
terminated for cause pursuant to Section 4.2, or at the Employee's election, the
Company shall pay to the
<PAGE> 5
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Employee the compensation and benefits otherwise payable to him under Section 3
through the last day of his actual employment by the Company.
5.2 TERMINATION AT THE BOARD'S ELECTION. For the purposes of this
paragraph "Anticipated Annual Compensation" shall mean the greater of (i)
Employee's Base Salary at the time of termination, or (ii) Employee's Base
Salary effective as of October 1, 1997, as defined in Section 3.1 above. In the
event that the Board elects to terminate the Employee without cause, under
paragraph 4.4 hereof, then the Company shall pay Employee severance pay at an
annualized rate equal to the Anticipated Annual Compensation for the greater of
(i) twelve (12) months or (ii) the number of months then remaining between the
date of termination and December 31, 1998. Such severance payments shall be made
in monthly installments equal to one-twelfth (1/12th) of the Anticipated Annual
Compensation. To the extent that Employee is terminated on or after December 31,
1997, Employee's entitlement to receive this severance pay shall not be affected
or reduced by any earnings he may receive from a subsequent employer during the
severance period. However, if Employee is terminated before December 31, 1997,
then, for the period from the date of termination until December 31, 1997 ONLY
(but not during the period from January 1, 1998 to December 31, 1998),
Employee's entitlement to receive this severance pay shall be reduced by any
earnings he may receive from a subsequent employer during such period.
5.3 TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment
is terminated by death or because of
<PAGE> 6
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disability pursuant to Section 4.3, the Company shall pay to the estate of the
Employee or to the Employee, as the case may be, the compensation which would
otherwise be payable to the Employee up to the end of the month in which the
termination of his employment because of death or disability occurs. In
addition, in the event that termination is for disability, the Company shall
also pay the difference between the monthly long-term disability insurance
coverage provided and that amount received from Social Security and the
Employee's Base Salary, and shall keep in force all medical coverage, for the
period remaining in this Agreement.
5.4 SEVERANCE PAY AFTER THE EXPIRATION OF THIS AGREEMENT. Should (a)
Employee continue to be employed by the Company on or after December 31, 1998,
and (b) the Company terminate Employee's employment at the expiration of the
Employment Period or thereafter other than for cause (as defined in Section 4.2
above), the Company shall pay Employee severance pay at a rate equal to the
Anticipated Annual Compensation (as defined in Section 5.2 above), for a period
of twelve (12) months following Employee's termination date. Such severance
payments shall be made to Employee at such times as Employee would have received
salary payments during such twelve (12) month period. This paragraph shall
survive the expiration of this Agreement. Employee's entitlement to receive this
severance pay shall not be affected by any earnings he may receive from a
subsequent employer during the severance period.
5.5 EXCEPTION TO SEVERANCE OBLIGATIONS. The Company shall not be
obligated to pay severance pay to Employee pursuant
<PAGE> 7
-7-
to paragraphs 5.2 and 5.4 above if (i) Employee's employment with the Company is
terminated in connection with a sale of all or substantially all of the assets
of the Company and (ii) Employee is offered employment with the entity acquiring
such assets in exchange for compensation and benefits (including severance
benefits) at least equal to those then being offered to Employee by the Company.
5.6 INDEMNIFICATION AND ADEQUATE ASSURANCE AGAINST PERSONAL LIABILITY.
The Company hereby agrees to indemnify the Employee against any claims against
the Company for which he may have personal liability. Notwithstanding any other
provision of this Agreement, prior to the effective date of the Employee's
termination, and for one year thereafter, whether for cause or otherwise, the
Company shall provide the Employee with adequate assurance that all the
liabilities of the Company which, if unpaid, may constitute a personal liability
of the Employee have been satisfied or will be satisfied by the Company, which
adequate assurance, at the Employee's election may include, without limitation,
requiring the Company to make advance payments to establish a cash escrow fund
for or set aside and pledge to secure such liabilities. This Contract and the
Employee's compensation shall not terminate until such adequate assurance is
provided.
6. RESTRICTIVE COVENANTS. Unless otherwise agreed in writing by the
parties to this Agreement, during Employee's employment by the Company, and for
a period of one (1) year (or, if longer, for the period of time during which
Employee continues to receive severance payments from the Company) after
Employee's
<PAGE> 8
-8-
employment with the Company terminates for any reason, voluntarily or
involuntarily, or with or without cause, Employee will not, directly or
indirectly, whether through Employee's own efforts or through the efforts of
another, or in any way assisting or employing the assistance of, any other
person or entity, hire or employ any employee of the Company at the Vice
President level or higher, or recruit, solicit or induce (or in any way assist
another in soliciting or inducing) any such employee of the Company to terminate
his or her relationship with the Company.
Employee understands and agrees that the above restrictions are reasonable
and necessary to protect the confidential information, goodwill, and other
legitimate business interests of the Company, and that, in the event of an
actual or threatened breach of the above provisions, the Company will suffer
immediate and irreparable harm, and will be entitled to injunctive relief to
prevent such a breach, in addition to any other remedies to which it may be
entitled by law. If any of the provisions of this Agreement are determined to be
unenforceable in whole or in part, Employee understands and agrees that such a
determination shall not affect the validity and enforceability of this
Agreement.
7. CONFIDENTIALITY. Employee agrees that he will not, at any time during
or after his employment by the Company, without the Company's prior written
consent, reveal or disclose to any person outside of the Company, or use for his
own benefit or the benefit of any other person or entity, any confidential
information concerning the business or affairs of the Company, or
<PAGE> 9
-9-
concerning the Company's customers, clients or employees ("Confidential
Information"). For purposes of this Agreement, Confidential Information shall
include, but shall not be limited to, financial information or plans; sales and
marketing information or plans; business or strategic plans; salary, bonus or
other personnel information of any type; information concerning methods of
operation; proprietary systems or software; legal or regulatory information;
cost and pricing information or policies; information concerning new or
potential products or markets; and information concerning new or potential
investors, customers, clients, or shareholders. Confidential Information shall
not include Confidential Information already available to the public through no
act of Employee's.
Employee further understands and agrees that all such Confidential
Information, however or whenever produced, shall be the Company's sole property,
and shall not be removed by Employee (or anyone acting at Employee's direction
or on his behalf) from the Company's custody or premises without the Company's
prior written consent. Upon the termination of Employee's employment, Employee
will promptly deliver to the Company all copies of all documents, equipment,
property or materials of any type in his possession, custody or control, that
belong to the Company, and/or that contain, in whole or in part, any
Confidential Information.
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid,
<PAGE> 10
-10-
addressed to the other party at the address shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 8.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
10. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Employee.
11. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business; PROVIDED, HOWEVER, that the
obligations of the Employee are personal and shall not be assigned by him.
13. MISCELLANEOUS.
13.1 No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
<PAGE> 11
-11-
13.2 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
13.3 All amounts of compensation referred to in this Agreement are
subject to withholding as required by law.
13.4 Nothing in this Agreement shall limit or restrict in any way the
rights of the Employee to act as a shareholder or member of the Board of
Directors of the Company.
13.5 The Company shall pay all reasonable attorney's fees and costs
incurred by the Employee in connection with the defense of any action brought by
a third party in which this Agreement or the Employee's performance thereunder
is in issue.
13.6 The Company shall pay (and shall advance to Employee) all
reasonable costs and attorneys' fees incurred by the Employee in connection with
any action or claim brought by Employee to enforce the Company's obligations
under this Agreement; provided, however, that in the event that it is finally
determined that the action or claim as to which such costs and fees were
advanced was frivolous, Employee will repay such costs and fees to the Company.
For purposes of this paragraph, it shall not be "finally determined" that an
action or claim was frivolous unless all appeals as to that issue have been
resolved, or all appeal periods as to that issue have expired without an appeal
of that issue having been taken.
<PAGE> 12
-12-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
CUMBERLAND FARMS, INC.
By: /s/ Arthur Koumantzelis
--------------------------------
Arthur Koumantzelis
Title: Chief Financial Officer
EMPLOYEE
/s/ Mark G. Howard
-----------------------------------
Mark G. Howard
<PAGE> 1
Exhibit 12
CUMBERLAND FARMS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
000's OMITTED
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income (Loss) before $10,031 $21,848 $32,604 ($11,352) $ 7,695
extraordinary gains
Fixed Charges 26,237 26,262 27,792 30,202 28,645
------- ------- ------- -------- -------
$36,268 $48,110 $60,396 $ 18,850 $36,340
======= ======= ======= ======== =======
Fixed Charges
Interest $22,823 $22,872 $25,071 $ 27,891 $25,947
Interest re: Rentals 3,194 3,170 2,501 2,146 2,698
Amortization of
Deferred Debt Expense 220 220 220 165
------- ------- ------- -------- -------
Total Fixed Charges $26,237 $26,262 $27,792 $ 30,202 $28,645
======= ======= ======= ======== =======
Ratio of Earnings to
Fixed Charges 1.4 to 1 1.8 to 1 2.2 to 1 .62 to 1 1.3 to 1
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 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> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 24,230
<SECURITIES> 0
<RECEIVABLES> 23,972
<ALLOWANCES> 1,509
<INVENTORY> 32,564
<CURRENT-ASSETS> 86,164
<PP&E> 353,028
<DEPRECIATION> 130,653
<TOTAL-ASSETS> 362,211
<CURRENT-LIABILITIES> 84,812
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 46,546
<TOTAL-LIABILITY-AND-EQUITY> 362,211
<SALES> 1,468,646
<TOTAL-REVENUES> 1,485,105
<CGS> 1,181,426
<TOTAL-COSTS> 1,451,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,823
<INCOME-PRETAX> 10,631
<INCOME-TAX> 600
<INCOME-CONTINUING> 10,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,031
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
