<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
--------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
Commission file number 33-95962
--------
Cumberland Farms, Inc.
- ----------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2843586
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 Dedham Street, Canton, MA 02021
---------------------------------------
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 828-4900
---------------
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of February 14, 1997, the outstanding shares of each class of the
Registrant's common stock was as follows:
Class A Stock 8 shares
Class B Stock 121,014 shares
(Neither class of stock is registered under the Securities Act of 1933, as
amended.)
<PAGE> 2
INDEX
CUMBERLAND FARMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - December 31, 1996 and
September 30, 1996
Condensed Statements of Operations - Three Months Ended
December 31, 1996 and 1995.
Condensed Statements of Retained Earnings - Three Months
Ended December 31, 1996 and 1995
Condensed Statements of Cash Flows - Three Months Ended
December 31, 1996 and 1995
Notes to Condensed Financial Statements - December
31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE> 3
<TABLE>
CUMBERLAND FARMS, INC.
CONDENSED BALANCE SHEETS
(000'S OMITTED)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- -------------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Current Assets:
Cash $ 7,756 $ 24,909
Short term investments, at cost 22,201 12,200
Accounts receivable, net 23,707 21,476
Inventories, at FIFO cost 62,872 59,042
Less: adjustment to LIFO cost (29,100) (29,100)
-------- --------
Net inventories 33,772 29,942
Prepaid insurance 215 431
Other current assets 7,417 8,725
-------- --------
Total current assets 95,067 97,683
Net property and equipment 220,237 218,755
Investment in Gulf Oil, L.P. (Note 2) 38,094 36,445
Other assets, net 15,834 13,321
-------- --------
$369,232 $366,204
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 11,385 $ 13,108
Accounts payable 44,419 39,819
Other accrued expenses 29,915 28,329
-------- --------
Total current liabilities 85,720 81,256
Long-term debt 215,442 218,398
Accrued insurance liability 11,498 9,075
Deferred credits and other liabilities 18,241 18,264
-------- --------
Total liabilities 330,901 326,993
Commitments & contingencies
Stockholders' equity:
Common stock:
Class A Voting, $1 par value; 8 shares
authorized, issued and outstanding
Class B Non-voting, $1 par value;
121,014 shares authorized, issued
and outstanding 121 121
Additional paid in capital 8,617 8,617
Retained earnings 29,593 30,473
-------- --------
Total stockholders' equity 38,331 39,211
-------- --------
$369,232 $366,204
=====================
</TABLE>
Note: The balance sheet at September 30, 1996 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed financial statements.
<PAGE> 4
<TABLE>
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
---------------------
(000'S OMITTED)
<S> <C> <C>
Income:
Revenues (see Note below) $367,173 $333,473
Equity in earnings of Gulf Oil, LP. 2 113
Gains on sales of property and equipment 3,662 1,893
---------------------
Total income 370,837 335,479
Costs and expenses:
Cost of sales 293,807 253,499
Operating expenses 67,238 65,071
Depreciation 4,891 4,416
---------------------
Total costs & expenses 365,936 322,986
---------------------
Operating income 4,901 12,493
Interest expense 5,717 5,812
---------------------
Income (loss) before provision for state income taxes (816) 6,681
State income taxes -- 435
---------------------
Net income (loss) ($ 816) $ 6,246
=====================
</TABLE>
Note: Excise taxes approximating $62,969 and $60,151 collected from customers on
retail gasoline and cigarette revenues are included in Sales and Cost of
Sales for the three months ended December 31, 1996 and 1995 respectively.
See notes to condensed financial statements.
<PAGE> 5
<TABLE>
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF RETAINED EARNINGS
(UNAUDITED)
<CAPTION>
Three months ended
December 31,
1996 1995
---------------------
(000's omitted)
<S> <C> <C>
Retained earnings beginning of period $30,473 $18,851
Net income (loss) (816) 6,247
Distributions to shareholders (64) (3,969)
------- -------
Retained earnings end of period $29,593 $21,129
======= =======
</TABLE>
See notes to condensed financial statements.
<PAGE> 6
<TABLE>
CUMBERLAND FARMS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
-----------------------
OPERATING ACTIVITIES (000'S omitted)
- -------------------------------------------------
<S> <C> <C>
Net income (loss) ($ 816) $ 6,247
Change not affecting cash:
Depreciation and amortization 4,891 4,416
Gains on sales of property & equipment (3,662) (1,893)
Equity in earnings of Gulf Oil, L.P. (Note 2) (2) (113)
Changes in assets & liabilities (1,911) 8,046
-------- --------
Net cash provided (used) by operating activities (1,500) 16,703
-------- --------
INVESTING ACTIVITIES
- -------------------------------------------------
Additions to property and equipment (7,025) (5,199)
Proceeds from sales of property and equipment 6,117 2,988
Purchases, sales and maturities of short-term
investments, net (10,001) --
-------- --------
Net cash (used) by investing activities (10,910) (2,211)
-------- --------
FINANCING ACTIVITIES
- -------------------------------------------------
Payments of debt (4,679) (10,920)
Distributions to shareholders (64) (3,969)
-------- --------
Net cash (used) by financing activities (4,743) (14,889)
-------- --------
NET (DECREASE) IN CASH (17,153) (397)
CASH AT BEGINNING OF PERIOD 24,909 30,016
-------- --------
CASH AT END OF PERIOD $ 7,756 $ 29,619
======== ========
Non-cash investing activity:
Increases in equity of Gulf Oil, L.P., offset
by accrued liability (Note 2) $ 1,647
========
</TABLE>
See notes to condensed financial statements
<PAGE> 7
CUMBERLAND FARMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1996
Note 1 - Basis of Presentation
- ------------------------------
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the three months ended December 31, 1996 are not
necessarily indicative of the results that may be expected for the full year
ended September 30, 1997. For further information, refer to the audited
financial statements and footnotes thereto for the year ended September 30,
1996.
Note 2 - Joint Venture Investment
- ---------------------------------
The Company has a 66 2/3% investment in Gulf Oil, L.P. and accounts for its
investment using the equity method. As of December 31, 1996, the Company's
investment in Gulf Oil, L.P. amounted to $38.1 million which represents the
Company's cost plus its equity in the earnings of Gulf Oil, L.P., less cash
distributions received from Gulf Oil, L.P. Shown below is unaudited condensed
financial information relative to the Joint Venture.
<TABLE>
The following summarizes the income statements of the Gulf Oil, L.P.:
<CAPTION>
Quarter ended
December 31,
(000's Omitted)
1996 1995
-------- --------
<S> <C> <C>
Net Sales $601,888 $414,404
Gross Margin 7,851 7,551
Operating Expenses (7,258) (6,661)
Brand Maintenance Income 2,831 349
Interest Expense (950) (1,070)
Net Income (a) $ 2,474 $ 169
Equity in Net Income of
Gulf Oil, L.P. (a) $ 2 $ 113
<FN>
(a) - The Company's equity in the net income of the Gulf Oil, L.P. for the
quarter ended December 31, 1996 has been reduced by $1,647,000 to reflect the
Company's share of brand maintenance income, earned by the L.P. from the
Company, which was included as a reduction of the related costs in the Company's
financial statements for the prior fiscal year.
</TABLE>
<PAGE> 8
Note 3: Related Party Transactions
- -----------------------------------
In November 1996, the Court granted the Company's motion for summary judgment
with respect to D.B. Haseotes', a Shareholder and Director, claim for
compensation relating to the failure to account for certain funds distributed
to him. The Court, however, did not rule on the issue of suspension of
compensation resulting from the violation of his agreement relating to his
affiliates, and that issue will proceed to trial. (See Part II, Item 1, Legal
Proceedings included elsewhere herein.)
Note 4 - Income Taxes
- ---------------------
The Company's Federal income tax returns have been examined by the Internal
Revenue Service through the year ended September 30, 1991. The Internal Revenue
Service is currently examining the fiscal year ended September 30, 1992 and 1993
and has selected the 1994 return for examination. Additional taxes, if any, as a
result of assessments for years under audit are not the responsibility of the
Company because of its S Corporation status. However, the Company, may be
required to make significant distributions to shareholders in the future for any
assessments for tax years commencing with the year ended September 30, 1992.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following table summarizes the results of operations for the three
months ended December 31, 1996 and 1995, which is followed by Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Operating results for the three months ended December 31, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending September 30, 1997. The financial information set forth below should be
read in conjunction with the Company's financial statements, related notes and
other financial information included elsewhere herein.
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, % INCREASE
1996 1995 (DECREASE)
-------- -------- ----------
(in thousands except ratios and gross profit per gallon information)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
INCOME
Retail revenues $285,792 $262,942 8.7%
Other income 4,996 5,247 (4.8)%
-------- -------- ----
Total $290,788 $268,189 8.4%
Equity in earnings of
Gulf Oil, L.P. 2 113 (98.2)%
Gains on sales of
property and equipment 3,662 1,893 93.4%
-------- -------- ----
Total 294,452 270,195 9.0%
Wholesale revenues 76,386 65,285 17.0%
-------- -------- ----
Total income 370,838 335,480 10.5%
-------- -------- ----
Costs and expenses
Cost of sales 293,807 253,499 15.9%
Operating expenses 67,239 65,071 3.3%
Depreciation and amortization 4,891 4,416 10.8%
-------- -------- ----
Total 365,937 322,986 13.3%
Operating income $ 4,901 $ 12,494 (60.8)%
======== ======== ====
OTHER OPERATING DATA
Merchandise gross profit $ 36,555 $ 36,221 0.9%
Merchandise gross profit
as a percentage of sales 29.3% 30.3%
Gasoline gallons sold 125,023 123,591 1.2%
Gasoline gross profit $ 13,166 $ 16,802 (21.6)%
Gasoline gross profit
cents per gallon 10.5 13.6 (22.8)%
Operating income before
depreciation and amortization
as a percentage of total
revenues 2.6% 5.0%
Operating income as a
percentage of total revenues 1.3% 3.7%
Comparable average store and
station data:
Merchandise sales growth 4.4% (0.7)%
Gasoline gallons sold 1.2% 7.1%
</TABLE>
<PAGE> 11
THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS DECEMBER 31, 1995
Included in retail revenues are convenience store and retail gasoline sales.
Convenience store sales were $124.1 million for the three months ended December
31, 1996 an increase of $5.0 million or 4.4%. Gross margin, as a percentage of
sales, decreased from 30.3% to 29.3%, primarily due to lower margins on dairy
and tobacco sales.
Retail gasoline sales were $161.7 million, an increase of $17.9 million, or
12.4% over the prior year, principally due to an average increase of 13.0(cent)
per gallon in the retail selling price. Gasoline gallon sales were 125.0
million, an increase of 1.4 million gallons, or 1.2% over the prior year. The
level of gallons sold reflects continued attention to the convenience retailing
aspects of selling gasoline through improved dispenser amenities and from
competitive marketing strategies. The average cents per gallon gross margin of
10.5(cent) decreased 3.1(cent) or 22.8% from the prior 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, as a result of sales of
properties.
The Company owns a 66-2/3% limited partnership interest in Gulf Oil, L.P.
Control of the partnership rests with the general partner. The Company accounts
for its investment under the equity method. The Gulf Oil, L.P.'s earnings
continue to be impacted by lower gasoline margins in the current year's fiscal
quarter.
Gains on sales of property increased significantly over the prior year. While
thirteen properties were sold during the three months ended December 31, 1996,
compared to twelve sold in the prior year, the increase resulted from a
significant gain achieved on the sale of one property in the quarter ended
December 31, 1996.
Included in wholesale revenues are plant and wholesale petroleum sales. Plant
revenues were $42.1 million, an increase of $7.5 million or 21.7 % over the
prior year, due to price increases and the additional wholesale milk customers.
Wholesale petroleum revenues were $34.3 million, an increase of $3.6 million, or
11.7% over the prior year. The increases result primarily from higher wholesale
selling prices.
Cost of sales increased over the prior year's quarter ended December 31,
primarily as a result of increases in product costs. The Company's retail and
wholesale gasoline operations were negatively affected in the quarter ended
December 31, 1996 by margin reductions which have impacted the entire industry.
Store margins were lower because of a pricing strategy to increase volume of
milk and cigarettes sold. Plant margins were reduced, by approximately $2.1
million, as a result of an increase in the cost of milk produced by the
Company.
<PAGE> 12
Operating expenses increased over the prior year's first quarter primarily
because of higher payroll and related expenses resulting from increased sales
volumes, but decreased as a percentage of sales.
Depreciation and amortization increased over the prior year's first quarter as a
result of capital expenditures incurred during the prior year.
Interest expense decreased from the prior year principally due to lower debt as
compared to the prior year.
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 and its cash available to meet debt obligations and capital
expenditures, although adequate, continues to be limited. In addition, because
$20 million of the availability under the loan facility was utilized by the
issuance of letters of credit, the Company remains dependent on its asset
disposition program to fund cash shortfalls. Substantially all net proceeds from
asset sales are utilized to pay secured debt. There can be no assurance that the
Company's business will continue to generate income at or above current
projections. Moreover, the Company's ability to generate sufficient funds to
meet its obligations is dependent upon future economic conditions, general
business and industry performance and other matters, many of which are beyond
the control of the Company and which cannot be predicted at this time. If the
Company is unable to generate sufficient income from operations and proceeds
from property sales to service its debt requirements, including various required
Target Payments, and make necessary capital expenditures, the Company may be
required to seek additional sources of financing. There can be no assurance that
any additional financing could be achieved. Moreover, additional financing may
not be a viable option or may be viable only with credit enhancement or
overcollateralization.
Among those obligations and capital expenditures that now, or in the future
may, require significant commitments of the Company's available cash are (i)
debt service, including principal repayment, Target Payments under the
Company's restructured indebtedness and debt service under the working capital
facility, (ii) insurance coverage for worker's compensation and general and
automobile liability claims, (iii) costs associated with environmental
compliance, (iv) capital expenditures, (v) payments to meet certain tax
obligations of the Company's shareholders and (vi) the Company's potential
response to the Put or exercise of the Call
<PAGE> 13
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 $227 million as of December 31, 1996. 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 consummated a $30 million working capital and letter of credit
facility in June of 1996. The facility provides a revolving credit line, term
loan and a facility for the issuance of letters of credit. As of December 31,
1996, the Company had drawn down $5 million of the revolving credit line and
used $20 million to provide letters of credit for its insurance and bond
program.
Certain of the Company's credit agreements require the Company to make Target
Payments of the outstanding principal amount due each year from the sales
proceeds of certain designated mortgaged properties. The Company's remaining
Target Payments with its Target Payment Lenders aggregated approximately $5.9
million as of December 31, 1996. Remaining Target Payments for the next four
fiscal years are estimated to be $1.7, $1.8, $.8 and $.5 million, respectively,
and $1.1 million thereafter. Aggregate cash requirements for fiscal 1997 are
estimated to be $62.7 million, (debt repayment $13.1 million, interest cost
$22.0 million and capital expenditures, $27.6 million), including $2.8 million
in Target Payments. The funding for such anticipated cash requirements is
expected to be provided from existing cash and short term investments, earnings
of the Company and proceeds from asset dispositions.
ASSET DISPOSITION PROGRAM
During the three month periods ended December 31, 1996 and 1995, the Company
raised $6.1 and $3.0 million, respectively, from its asset disposition program.
Proceeds from asset dispositions for the fiscal year ended September 30, 1997
are estimated to be $16.0 million. Substantially all proceeds from asset
dispositions have been or will be used to pay down secured debt.
To date, the Company has generated adequate cash flow from its asset disposition
program and operations to meet its cash flow needs. The properties anticipated
to be sold consist of vacant lots, closed locations, underperforming locations
based on a profit-per-store analysis, and properties located in market areas
<PAGE> 14
where the Company has decided to reduce or eliminate its presence. The objective
of the asset disposition program has been to increase capital resources and
liquidity and improve operations by retaining the better-performing properties
of the Company. The Company's asset disposition program has contemplated
disposal, in most instances, of non-performing or under-performing properties
and accordingly has not had, nor is the program expected to have an adverse
effect on the Company's historical or future results of operations. Although the
Company believes that, to date, the asset disposition program has been
beneficial and has both accelerated debt repayment and contributed to the
improvement in average store sales per week, the asset disposition program could
in the future adversely affect the Company's results of operations if, in order
to meet its cash flow needs or make required Target Payments, the Company found
it necessary to sell properties it did not wish to and would not otherwise sell.
INSURANCE PROGRAM
The Company assumes a high degree of risk as a result of the high deductibles
under its worker's compensation, general liability and automobile liability
insurance policies issued by an unrelated insurer. These risks, estimated at
$21.2 million, on a present value basis for the years 1992 through 1996, net of
cash and reinsurance deposits of $4.7 million, resulted in accrued insurance
liabilities of $16.5 million at December 31, 1996. 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
December 31, 1996. 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 an
$8 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
<PAGE> 15
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 86% of the Company's USTs meet the December 22, 1998 environmental
protection requirements, and approximately 115 more USTs require upgrading or
replacement by December 22, 1998. The Company currently estimates that capital
expenditures of approximately $21.3 million will be made, through December 22,
1998, in order to comply with UST regulatory requirements, which expenditures
could be reduced for locations which may be closed in lieu of capital costs of
compliance or sold.
The Company also incurs certain ongoing environmental costs associated with the
operations of its plants. Among other things, the large quantities of ammonia
used by the fluid milk plants and the wastewater treatment facilities and waste
oil burners located at the plants are subject to federal, state and local
regulations. In addition, the Company may also, from time to time, incur
liability as a result of contamination associated with the operation of the
plants.
CAPITAL EXPENDITURES
Capital expenditures, including those for environmental compliance, amounted to
$7.0 and $5.2 million for the quarters ended December 31, 1996 and 1995,
respectively. Additional capital expenditures of approximately $20.7 million are
anticipated through the Company's year ended September 30, 1997.
TAX DISTRIBUTIONS TO SHAREHOLDERS
The Company's Federal income tax returns have been examined by the Internal
Revenue Service through the year ended September 30, 1991. The Internal Revenue
Service is currently examining the fiscal years ended September 30, 1992 and
1993 and has selected the 1994 return for examination. Additional taxes, if any,
as a result of assessments for years under audit are not the responsibility of
the Company because of its S Corporation status. However, the Company, may be
required to make significant distributions to Shareholders in the future for any
assessments for tax years commencing with the year ended September 30, 1992.
GULF OIL, L.P.
In connection with the Plan, a substantial portion of the Company's wholesale
petroleum and gasoline operations was transferred to Gulf Oil, L.P. in exchange
for a 66-2/3% Class A limited partnership interest in Gulf Oil, L.P.
The Company's equity in the earnings of Gulf Oil, L.P. was approximately $2
thousand and $113 thousand for the quarter ended December 31, 1996 and 1995,
respectively. Gulf Oil, L.P.'s
<PAGE> 16
earnings are dependent upon volumes and margins from wholesale sales of
petroleum products, which may fluctuate depending upon economic conditions and
other factors that may exist in the future. Accordingly, there can be no
assurance that the Company's equity in Gulf Oil, L.P. will generate earnings
consistent with prior year's levels.
Although the Partnership Agreement provides for certain distributions to
partners, such distributions are subject to restrictive covenants in Gulf Oil,
L.P.'s agreements with its lenders, which permit distributions only for tax
payments and only if no defaults exist. As a result, the Company currently
receives distributions of only approximately 40% of the cash attributable to its
pro rata share of partnership earnings.
The Partnership Agreement provides that at any time on or after January 1, 1999,
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
(five years). The Company, for the calendar year 1996 purchased 525.0 million
gallons of branded products from Gulf Oil, L.P.; the minimum requirement was
476.7 million gallons. Future calendar year minimums of branded product for the
years 1997 and 1998 are 483.5 and 488.7 million gallons, respectively. The
Company expects to meet all minimum purchase requirements. For the quarters
ended December 31, 1996 and 1995, the Company purchased approximately $104.8
million and $84.7 million, respectively, from Gulf Oil, L.P. Brand maintenance
costs, which are based upon quantities purchased and target earnings of Gulf
Oil, L.P. for each calendar year, have resulted in additional brand maintenance
costs of $4.0 and $1.4 for the calendar years ended December 31, 1996 and 1995,
respectively. Brand maintenance costs for calendar 1996 have increased over the
prior year as a result of a shortfall in the Gulf Oil, L.P.'s target earnings
for calendar 1996.
At December 31, 1996 and 1995, there was approximately $8.2 million and $9.2
million, respectively, in accounts payable due to Gulf Oil, L.P.
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In civil actions that the Company has brought against Demetrios B.
Haseotes, a shareholder and Director of the Company, the Company has obtained
(a) an injunction barring Mr. Haseotes' involvement in the Company's management,
and (b) a judgment in the amount of $663,267, plus interest, which sum reflects
funds distributed by the Company to Mr. Haseotes to pay certain tax liabilities
which he diverted to other uses. The Company also has pending an action against
Mr. Haseotes seeking an accounting and possible disgorgement of funds received
by him in connection with the sale of a crude oil refinery in Canada. Mr.
Haseotes filed an action seeking reinstatement of his compensation which the
Board of Directors suspended when Mr. Haseotes refused to comply with is request
for a complete accounting of the funds described above. The Company subsequently
learned that there was cause to treat Mr. Haseotes' employment as terminated on
or about November 1994, when Mr. Haseotes violated the terms of an agreement
with the Company relating to his affiliates, and counterclaimed for damages in
his action. In November 1996, the Court granted the Company's motion for summary
judgment with respect to Mr. Haseotes' claim for compensation following the
failure to account for funds described above. The Court, however, did not rule
dispositively on the issue of retro-active suspension of compensation resulting
from the violation of his agreement relating to his affiliates, and that issue
will proceed to trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
--------------------------------------------------
The annual meeting of shareholders was held on January 31, 1997. At the
meeting, the shareholders unanimously elected Lily H. Bentas, Demetrios B.
Haseotes, George Haseotes, Byron Haseotes, John Burke, Paul Hand, James
McDermott, Kenneth Koehler and Geoffrey Pottow to serve as directors until their
respective successors are duly elected and qualified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibit 27 Financial Data Schedule
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the day of February, 1997.
CUMBERLAND FARMS, INC.
Date: February 14, 1997 By:/s/ Arthur G. Koumantzelis
---------------------------- ---------------------------
Name: Arthur G. Koumantzelis
Title: Sr. Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
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<ALLOWANCES> 1,298
<INVENTORY> 33,772
<CURRENT-ASSETS> 95,067
<PP&E> 342,346
<DEPRECIATION> 122,109
<TOTAL-ASSETS> 369,232
<CURRENT-LIABILITIES> 85,720
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 38,210
<TOTAL-LIABILITY-AND-EQUITY> 369,232
<SALES> 367,173
<TOTAL-REVENUES> 370,837
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