-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D70hMnaoz0cEGxwSa+REOIfQ3yGxutgYRMKdgntYlPxGesfJW3/fpNMbyEooHD4X tuoQvsRowqeDsGAMNJWNgQ== 0000950135-97-003477.txt : 19970815 0000950135-97-003477.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950135-97-003477 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUMBERLAND FARMS INC CENTRAL INDEX KEY: 0000914761 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 042843586 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-95962 FILM NUMBER: 97660374 BUSINESS ADDRESS: STREET 1: 777 DEDHAM ST CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 617-828-4900 MAIL ADDRESS: STREET 1: 777 DEDHAM STREET CITY: CANTON STATE: MA ZIP: 02021 10-Q 1 CUMMBERLAND FARMS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [X] SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE [ ] SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to _______ Commission file number 33-95962 CUMBERLAND FARMS, INC. -------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-2843586 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 777 DEDHAM STREET, CANTON, MA 02021 ---------------------------------------- (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 828-4900 Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----- ----- (APPLICABLE ONLY TO CORPORATE REGISTRANTS) As of August 14, 1997, the outstanding shares of each class of the Registrant's common stock was as follows: Class A Stock 8 shares Class B Stock 121,014 shares (Neither class of stock is registered under the Securities Act of 1933, as amended.) 2 INDEX CUMBERLAND FARMS, INC. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Condensed Balance Sheets - June 30, 1997 and September 30, 1996 Condensed Statements of Operations - For the Three Months and Nine Months Ended June 30, 1997 and 1996. Condensed Statements of Retained Earnings - For the Nine Months Ended June 30, 1997 and 1996 Condensed Statements of Cash Flows - For the Nine Months Ended June 30, 1997 and 1996 Notes to Condensed Financial Statements - June 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 5. OTHER INFORMATION SIGNATURES 3 CUMBERLAND FARMS, INC. CONDENSED BALANCE SHEETS (000s OMITTED)
JUNE 30, SEPTEMBER 30, 1997 1996 ---------- ------------- ASSETS (UNAUDITED) (AUDITED) Current Assets: Cash $ 19,532 $ 24,116 Cash escrow 537 793 Short term investments, at cost 3,243 12,200 Accounts receivable, net 22,816 21,476 Inventories, at FIFO cost 60,199 59,042 Less: adjustment to LIFO cost (29,300) (29,100) -------- -------- Net inventories 30,899 29,942 Other current assets 6,412 9,156 -------- -------- Total current assets 83,439 97,683 Net property and equipment 222,773 218,755 Investment in Gulf Oil, L.P. (Note 2) 34,503 36,445 Other assets, net 13,532 13,321 -------- -------- $354,247 $366,204 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 11,371 $ 13,108 Accounts payable 39,773 39,819 Other accrued expenses 26,101 28,329 -------- -------- Total current liabilities 77,245 81,256 Long-term debt 204,169 218,398 Accrued insurance liability 13,241 9,075 Deferred credits and other liabilities 18,051 18,264 -------- -------- Total liabilities 312,706 326,993 Commitments & contingencies Stockholders' equity: Common stock: Class A Voting, $1 par value; 8 shares authorized, issued and outstanding Class B Non-voting, $1 par value; 121,014 shares authorized, issued and outstanding 121 121 Additional paid in capital 8,617 8,617 Retained earnings 32,803 30,473 -------- -------- Total stockholders' equity 41,541 39,211 -------- -------- $354,247 $366,204 ======================
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. 4 CUMBERLAND FARMS, INC. CONDENSED STATEMENT OF OPERATIONS UNAUDITED (000s OMITTED)
QUARTER ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1997 1996 1997 1996 ---------------------- ------------------------- Income: Revenues (see Note below) $368,039 $363,054 $1,087,987 $1,017,781 Equity in earnings of Gulf Oil, L.P. 174 1,962 1,578 3,033 Gains on sales of property and equipment 3,085 3,859 7,774 9,841 --------------------- ------------------------- Total income 371,298 368,875 1,097,339 1,030,655 Costs and expenses: Cost of sales 288,086 280,934 857,571 783,520 LIFO charge 200 750 200 750 Operating expenses 67,807 67,873 201,817 200,850 Depreciation 5,649 5,235 15,535 14,408 --------------------- ------------------------- Total costs & expenses 361,742 354,792 1,075,123 999,528 --------------------- ------------------------- Operating income 9,556 14,083 22,216 31,127 Interest expense 5,656 5,588 17,137 16,972 --------------------- ------------------------- Income before taxes 3,900 8,495 5,079 14,155 State income taxes 40 433 109 792 --------------------- ------------------------- Net income $ 3,860 $ 8,062 $ 4,970 $ 13,363 ===================== =========================
Note: Excise taxes approximating $64,963 and $60,344 collected from customers on retail gasoline and cigarette revenues are included in Sales and Cost of Sales for the three months ended June 30, 1997 and 1996 respectively, while $189,252 and $177,590 was collected for the nine months ended June 30, 1997 and 1996 respectively. See notes to condensed financial statements. 5 CUMBERLAND FARMS, INC. CONDENSED STATEMENT OF RETAINED EARNINGS (UNAUDITED)
Nine months ended June 30, 1997 1996 -------------------------- (000's omitted) Retained earnings beginning of period $30,473 $18,851 Net income 4,970 13,363 Distributions to shareholders (2,640) (8,582) ------- ------- Retained earnings end of period $32,803 $23,632 ======= =======
See notes to condensed financial statements. 6 CUMBERLAND FARMS, INC. CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1997 1996 ----------------------- OPERATING ACTIVITIES (000's omitted) - --------------------------------- Net income $ 4,970 $ 13,363 Changes not affecting cash: Depreciation and amortization 15,536 14,408 Gains on sales of property and equipment (7,774) (9,841) Equity in earnings of Gulf Oil, L.P. (Note 2) (1,578) (3,033) Distribution of earnings by Gulf Oil, L.P. 5,170 1,650 Changes in assets and liabilities (529) 8,336 -------- -------- Net cash provided by operating activities 15,795 24,883 -------- -------- INVESTING ACTIVITIES - --------------------------------- Additions to property and equipment (22,182) (21,709) Proceeds from sales of property and equipment 11,708 17,422 Purchases, sales and maturities of short-term investments, net 8,957 0 -------- -------- Net cash (used) by investing activities (1,517) (4,287) -------- -------- FINANCING ACTIVITIES - --------------------------------- Payments of debt (15,966) (24,429) Change in cash escrow (256) 0 Proceeds from new debt 0 5,000 Distributions to shareholders (2,640) (8,583) -------- -------- Net cash (used) by financing activities (18,862) (28,012) -------- -------- NET (DECREASE) IN CASH (4,584) (7,416) CASH AT BEGINNING OF PERIOD 24,116 30,016 -------- -------- CASH AT END OF PERIOD $ 19,532 $ 22,600 ======== ======== Non-cash investing activity: Increase in equity of Gulf Oil, L.P., offset by accrued liability (Note 2) $ 1,650 ========
See notes to condensed financial statements 7 CUMBERLAND FARMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) June 30, 1997 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited, condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the full year ended September 30, 1997. For further information, refer to the audited financial statements and footnotes thereto for the year ended September 30, 1996. NOTE 2 - JOINT VENTURE INVESTMENT The Company has a 66 2/3% investment in Gulf Oil, L.P. and accounts for its investment using the equity method. As of June 30, 1997, the Company's investment in Gulf Oil, L.P. amounted to $34.5 million which represents the Company's cost plus its equity in the earnings of Gulf Oil, L.P. less cash distributions received from Gulf Oil, L.P. Shown below is unaudited condensed financial information relative to the Joint Venture. The following summarizes the income statements of the Gulf Oil, L.P.:
Quarter Ended Nine Months Ended June 30, June 30, (000's omitted) 1997 1996 1997 1996 --------------------- ---------------------------- Net sales $472,436 $436,510 $1,664,994 $1,333,727 Gross margin 6,664 9,845 23,425 26,795 Operating expenses 5,738 6,190 16,244 19,607 Interest expense 664 715 2,343 2,638 Net income 262 2,940 4,838(a) 4,550 Equity in net income of Gulf Oil, L.P. $ 175 $ 1,962 $ 1,579(a) $ 3,033
(a) - The Company's equity in the net income of the Gulf Oil, L.P. for the nine months ended June 30, 1997 has been reduced by $1.6 million to reflect the Company's share of brand maintenance income earned by the L.P. from the Company, which was included as a reduction of the related costs of $2.5 million in the Company's financial statements for the prior fiscal year. 8 NOTE 3 - INCOME TAXES The Company's Federal income tax returns have been examined by the Internal Revenue Service through the year ended September 30, 1991. The Internal Revenue Service is currently examining the fiscal years ended September 30, 1992 and 1993 and has selected the 1994 return for examination. The Company believes that the Internal Revenue Service will propose changes to the Company's returns, as filed, for the years under examination. Additional federal income taxes, if any, as a result of assessments for years under audit are not the responsibility of the Company because of its S Corporation status. However, the Company, may be required to make significant distributions to shareholders in the future for any assessments for tax years commencing with the year ended September 30, 1992. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the results of operations for the three and nine months ended June 30, 1997 and 1996, which is followed by Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating results for the nine months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the entire year ending September 30, 1997. The financial information set forth below should be read in conjunction with the Company's financial statements, related notes and other financial information included elsewhere herein. 10
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, % INCREASE JUNE 30, % INCREASE 1997 1996 (DECREASE) 1997 1996 (DECREASE) --------------------------------------- ---------------------------------------- (in thousands except ratios and gross profit per gallon information) STATEMENT OF OPERATIONS DATA REVENUES Retail revenues $287,954 $286,373 0.6% $ 850,446 $ 801,287 6.1% Other income 4,706 5,010 (6.1)% 14,587 15,434 (5.5)% -------- -------- ----- ---------- ---------- ----- Total 292,660 291,383 0.4% 865,033 816,721 5.9% Equity in earnings of Gulf Oil L.P. 174 1,962 (91.1)% 1,578 3,033 (48.0)% Gains on sales of property and equipment 3,085 3,858 (20.0)% 7,774 9,841 (21.0)% -------- -------- ----- ---------- ---------- ----- Total 295,919 297,203 (0.4)% 874,385 829,595 5.4% Wholesale revenues 75,379 71,672 5.2% 222,954 201,060 10.9% -------- -------- ----- ---------- ---------- ----- Total income 371,298 368,875 0.7% 1,097,339 1,030,655 6.5% -------- -------- ----- ---------- ---------- ----- Costs and expenses Cost of sales 288,086 280,934 2.5% 857,571 783,520 9.5% LIFO 200 750 (73.3)% 200 750 (73.3)% Operating expenses 67,807 67,873 (0.1)% 201,817 200,850 0.5% Depreciation and amortization 5,649 5,235 7.9% 15,535 14,408 7.8% -------- -------- ----- ---------- ---------- ----- Total 361,742 354,792 2.0% 1,075,123 999,528 7.6% -------- -------- ----- ---------- ---------- ----- Operating income $ 9,556 $ 14,083 (32.1)% $ 22,216 $ 31,127 (28.6)% ======== ======== ===== ========== ========== ===== OTHER OPERATING DATA Merchandise gross profit $ 38,801 $ 37,646 3.1% $ 110,935 $ 108,893 1.9% Merchandise gross profit as a percentage of sales 29.8% 29.5% 29.7% 30.1% Gasoline gallons sold 126,896 121,992 4.0% 373,647 362,531 3.1 % Gasoline gross profit $ 15,323 $ 17,164 (10.7)% $ 43,376 $ 46,653 (7.0)% Gasoline gross profit cents per gallon 12.1 14.1 (14.2)% 11.6 12.9 (10.1)% Operating income before depreciation and amortization as a percentage of total revenues 4.1% 5.2% 3.4% 4.4% Operating income as a percentage of total revenues 2.6% 3.8% 2.0% 3.0% Comparable average store and station data: Merchandise sales growth 2.1% 0.3% 3.1% 0.3% Gasoline gallons sold 4.0% 5.0% 3.1% 5.2%
11 THREE MONTHS ENDED JUNE 30, 1997 VERSUS JUNE 30, 1996 Included in retail revenues are convenience store and retail gasoline sales. Convenience store sales were $129.8 million for the three months ended June 30, 1997 an increase of $2.6 million or 2.1%, from the prior year. Sales gross margin dollars increased slightly. Gross margin, as a percentage of sales, increased slightly from 29.5% to 29.8% Retail gasoline sales were $158.1 million, a decrease of $1.1 million, or .7% over the prior year. Gasoline gallon sales were 126.9 million, an increase of 4.9 million gallons, or 4.0% over the prior year. The level of gallons sold results primarily from expanded facilities, improved dispenser amenities and competitive marketing strategies. The average cents per gallon gross margin of 12.1 cents decreased 2.0 cents or 14.2% from the prior year principally due to an increase in the cost of gasoline. Other income is comprised of rental income from tenants located at retail and gasoline sites and has decreased as a result of sales of properties. The Company owns a 66-2/3% limited partnership interest in Gulf Oil, L.P. Control of the partnership rests with the general partner. The Company accounts for its investment under the equity method. The decrease in equity in earnings from $2.0 million in the quarter ended June 30, 1996 to $.2 million for the 1997 quarter, resulted primarily from lower margins in the current year versus the prior year. Gains on sales of property decreased from the prior year. Ten properties were sold during the three months ended June 30, 1997, compared to thirty-one sold in the prior year. Included in wholesale revenues are plant and wholesale petroleum sales. Plant revenues were $40.2 million, an increase of $4.3 million or 12.0 % over the prior year. The increase is attributable to price increases for wholesale milk and sales to additional wholesale milk customers. Wholesale petroleum revenues were $35.2 million, a decrease of $.6 million, or 1.7% from the prior year. Cost of sales for the quarter ended June 30, 1997 increased over the prior year as a result of increases in product costs and volume sold in the gasoline operations. A LIFO charge was provided to recognize increasing costs of raw materials purchased. Operating expenses were slightly below the prior year. Depreciation and amortization increased as a result of capital expenditures during the prior year. Interest expense increased from the prior year principally due to changes in the effective rate of interest and the addition of a working capital facility in June 1996. 12 NINE MONTHS ENDED JUNE 30, 1997 VERSUS JUNE 30, 1996 Included in retail revenues are convenience store and retail gasoline sales. Convenience store sales were $371.9 million for the nine months ended June 30, 1997 an increase of $11.3 million or 3.1%, from the prior year. Sales gross margin dollars increased slightly. Gross margin, as a percentage of sales, decreased from 30.1% to 29.7% Retail gasoline sales were $478.5 million, an increase of $37.8 million, or 8.6% over the prior year. Gasoline gallon sales were 373.6 million, an increase of 11.1 million gallons, or 3.1% over the prior year. The increase in gallons sold results primarily from expanded facilities, improved dispenser amenities and competitive marketing strategies. The average cents per gallon gross margin of 11.6 cents decreased 1.3 cents or 10.1% from the prior year principally due to an increase in the cost of gasoline. Other income is comprised of rental income from tenants located at retail and gasoline sites and has decreased as a result of sales of properties. The Company owns a 66-2/3% limited partnership interest in Gulf Oil, L.P. Control of the partnership rests with the general partner. The Company accounts for its investment under the equity method. The decrease in equity in earnings from $3.0 million for the nine months ended June 30, 1996 to $1.6 million this year resulted primarily from lower margins. Gains on sales of property decreased from the prior year. Thirty properties were sold during the nine months ended June 30, 1997, compared to sixty-eight sold in the prior year. Included in wholesale revenues are plant and wholesale petroleum sales. Plant revenues were $120.6 million, an increase of $14.6 million or 13.8 % over the prior year. The increase is attributable to price increases and sales to additional wholesale milk customers. Wholesale petroleum revenues were $102.3 million, an increase of $7.2 million, or 7.6% from the prior year. The increase results primarily from increased wholesale selling prices in the previous quarters. Cost of sales for the nine months ended June 30, 1997 increased over the prior year as a result of increases in product costs and volume sold in the gasoline operations. A LIFO charge was provided to recognize increasing costs of raw materials purchased. Operating expenses increased from the prior year as a result of increases in payroll, benefits and repair expenses. Depreciation and amortization increased as a result of capital expenditures during the prior year. Interest expense increased from the prior year principally due to changes in the effective rate of interest and the addition of a 13 working capital facility in June 1996. LIQUIDITY AND CAPITAL RESOURCES The Company annually generates substantial operating cash flow because most of its revenues are received in cash. Based on current projections, the Company believes that the amount of cash generated from operations, together with proceeds from anticipated property sales will be sufficient to meet its current and long-term obligations and future capital expenditure requirements. Notwithstanding its $30 million loan facility and satisfactory operating results since emergence from Reorganization in December 1993, the Company remains highly leveraged. In addition, because $17 million of the availability under the loan facility was utilized for the issuance of letters of credit, the Company remains dependent on its asset disposition program to fund cash shortfalls. Substantially all net proceeds from asset sales are utilized to pay secured debt. There can be no assurance that the Company's business will continue to generate income at or above current projections. Moreover, the Company's ability to generate sufficient funds to meet its obligations is dependent upon future economic conditions, general business and industry performance and other matters, many of which are beyond the control of the Company and which cannot be predicted at this time. If the Company is unable to generate sufficient income from operations and proceeds from property sales to service its debt requirements, including various required Target Payments, and make necessary capital expenditures, the Company may be required to seek additional sources of financing. There can be no assurance that any additional financing could be achieved. Moreover, additional financing may not be a viable option or may be viable only with credit enhancement or overcollateralization. Among those obligations and capital expenditures that now, or in the future may, require significant commitments of the Company's available cash are (i) debt service, including principal repayment, Target Payments under the Company's restructured indebtedness and debt service under the working capital facility, (ii) insurance coverage for worker's compensation and general and automobile liability claims, (iii) costs associated with environmental compliance, (iv) capital expenditures, (v) payments to meet certain tax obligations of the Company's shareholders and (vi) the Company's potential response to the Put or exercise of the Call with respect to its partners' partnership interests in Gulf Oil, L.P. Those items are discussed below. DEBT SERVICE The Company's Plan of Reorganization (the "Plan") became effective on December 30, 1993. The Plan restructured the Company's indebtedness and contemplated improving the Company's operating performance. Nevertheless, the Company has significant interest expense and principal repayment obligations under the Plan. As of 14 December 30, 1993, the Effective Date of the Plan, the Company had total secured debt of approximately $308 million which has been reduced to approximately $216 million as of June 30, 1997. Substantially all of the indebtedness arising under the Plan is secured. Moreover, substantially all of the major debt instruments, contain cross-default provisions. The Company has a $30 million working capital and letter of credit facility with a due date of December 30, 1998. The facility provides a revolving credit line, term loan and a facility for the issuance of letters of credit. As of June 30, 1997, the Company had drawn down $5 million of the revolving credit line and used $17 million to provide letters of credit for its insurance and bond program. Certain of the Company's credit agreements require the Company to make Target Payments of the outstanding principal amount due each year from the sales proceeds of certain designated mortgaged properties. The Company's remaining Target Payments with its Target Payment Lenders aggregated approximately $5.6 million as of June 30, 1997. Remaining Target Payments for the next four fiscal years are estimated to be $1.4, $1.8, $.8 and $.5 million, respectively, and $1.1 million thereafter. Aggregate cash requirements for fiscal 1997 were estimated to be $62.7 million, (debt repayment $13.1 million, interest cost $22.0 million and capital expenditures, $27.6 million), including $2.8 million in Target Payments. The funding for such anticipated cash requirements is expected to be provided from existing cash and short term investments, earnings of the Company and proceeds from asset dispositions. ASSET DISPOSITION PROGRAM During the nine month periods ended June 30, 1997 and 1996, the Company raised $11.7 and $17.4 million, respectively, from its asset disposition program. Proceeds from asset dispositions for the fiscal year ended September 30, 1997 are estimated to be $16.0 million. Substantially all proceeds from asset dispositions have been or will be used to pay down secured debt. To date, the Company has generated adequate cash flow from its asset disposition program and operations to meet its cash flow needs. The properties anticipated to be sold consist of vacant lots, closed locations, underperforming locations based on a profit-per-store analysis, and properties located in market areas where the Company has decided to reduce or eliminate its presence. The objective of the asset disposition program has been to increase capital resources and liquidity and improve operations by retaining the better-performing properties of the Company. The Company's asset disposition program has contemplated disposal, in most instances, of non-performing or under-performing properties and accordingly has not had, nor is the program expected to have an adverse effect on the Company's historical or future results of operations. Although the Company believes that, to date, the asset 15 disposition program has been beneficial and has both accelerated debt repayment and contributed to the improvement in average store sales per week, the asset disposition program could in the future adversely affect the Company's results of operations if, in order to meet its cash flow needs or make required Target Payments, the Company found it necessary to sell properties it did not wish to and would not otherwise sell. INSURANCE PROGRAM The Company assumes a high degree of risk as a result of the high deductibles under its worker's compensation, general liability and automobile liability insurance policies issued by an unrelated insurer. These risks, estimated at $22.9 million, on a present value basis for the years 1992 through 1997, net of cash and reinsurance deposits of $4.7 million, resulted in accrued insurance liabilities of $18.2 million at June 30, 1997. The unrelated insurance company providing these coverages required collateral in the form of a $12 million letter of credit and certain real properties, cash and reinsurance at June 30, 1997. Conven-Petro Insurance Company, (Conven-Petro), a wholly-owned subsidiary of Cumberland Farms of Vermont, Inc., which is related to the Company through common ownership, reinsures the unrelated insurance company for certain Company worker's compensation claims for the policy years 1992, 1993 and 1994 and for any increases in such claims subsequent thereto. In addition to collateral for its insurance program, the Company also provides a $5 million letter of credit to secure a $20 million bond line. Bonds are posted with various regulatory agencies for the purchase of raw milk, to secure tax payments for motor fuel and cigarette taxes and for various municipal planning board requirements. ENVIRONMENTAL COMPLIANCE The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations, particularly the comprehensive regulatory programs governing underground storage tank systems ("USTs") used in its operations. In addition, the Company had operating expenses for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs at the Company's current or former gasoline facilities, a portion of which expenses were reimbursed from state trust fund programs. Due to the nature of releases, the actual costs incurred may vary from the Company's estimates, and the ongoing costs of assessment and remediation activities may vary from year to year. In addition to annual "expense" type environmental costs, federal and state regulatory programs mandate that all existing USTs be upgraded or replaced by December 22, 1998 to meet certain environmental protection requirements. Approximately 90% of the Company's USTs meet the December 22, 1998 environmental protection requirements, and approximately 80 more USTs require upgrading or replacement by December 22, 1998. The Company currently estimates 16 that capital expenditures of approximately $16.7 million will be made, through December 22, 1998, in order to comply with UST regulatory requirements, which expenditures could be reduced for locations which may be closed in lieu of capital costs of compliance or sold. The Company also incurs certain ongoing environmental costs associated with the operations of its plants. Among other things, the large quantities of ammonia used by the fluid milk plants and the wastewater treatment facilities and waste oil burners located at the plants are subject to federal, state and local regulations. In addition, the Company may also, from time to time, incur liability as a result of contamination associated with the operation of the plants. CAPITAL EXPENDITURES Capital expenditures, including those for environmental compliance, amounted to $22.2 and $21.7 million for the nine months ended June 30, 1997 and 1996, respectively. Additional capital expenditures of approximately $5.4 million are anticipated through the Company's year ended September 30, 1997. TAX DISTRIBUTIONS TO SHAREHOLDERS The Company's Federal income tax returns have been examined by the Internal Revenue Service through the year ended September 30, 1991. The Internal Revenue Service is currently examining the fiscal years ended September 30, 1992 and 1993 and has selected the 1994 return for examination. The Company believes that the Internal Revenue Service will propose changes to the Company's returns, as filed, for the years under examination. Additional federal taxes, if any, as a result of assessments for years under audit are not the responsibility of the Company because of its S Corporation status. However, the Company, may be required to make significant distributions to Shareholders in the future for any assessments for tax years commencing with the year ended September 30, 1992. GULF OIL, L.P. In connection with the Plan, a substantial portion of the Company's wholesale petroleum and gasoline operations was transferred to Gulf Oil, L.P. in exchange for a 66-2/3% Class A limited partnership interest in Gulf Oil, L.P. The Company's equity in the earnings of Gulf Oil, L.P. was approximately $1.6 million and $3.0 million for the nine months ended June 30, 1997 and 1996, respectively. Gulf Oil, L.P.'s earnings are dependent upon volumes and margins from wholesale sales of petroleum products, which may fluctuate depending upon economic conditions and other factors that may exist in the future. Accordingly, there can be no assurance that the Company's equity in Gulf Oil, L.P. will generate earnings consistent with prior year's levels. 17 Although the Partnership Agreement provides for certain distributions to partners, such distributions are subject to restrictive covenants in Gulf Oil, L.P.'s agreements with its lenders, which permit distributions only for tax payments and only if no defaults exist. As a result, the Company currently receives distributions of only approximately 40% of the cash attributable to its pro rata share of partnership earnings. The Partnership Agreement provides that at any time on or after January 1, 1999, Catamount Management Corp. and the Class B partners have the right, but not the obligation, to Put their partnership interest to the Company and the Company has the right, but not the obligation, to Call such interests at a formula price equal to a multiple of Gulf Oil, L.P.'s earnings. If the Company is unable or determines it is not in its best interest to purchase upon the exercise of the Put or, if the Company, following the exercise of the Call is unable to complete the purchase, the Partnership Agreement provides that Gulf Oil, L.P. will be sold by an investment banker as a going concern. The Company has agreed to purchase its petroleum products, except for its Florida locations, from Gulf Oil, L.P. with specific minimum purchase and brand maintenance cost requirements for each year of the Supply Agreement which is effective through calendar 1998. The Company, for the calendar year 1996 purchased 525.0 million gallons of branded products from Gulf Oil, L.P.; the minimum requirement was 476.7 million gallons. Future calendar year minimums of branded product for the years 1997 and 1998 are 483.5 and 488.7 million gallons, respectively. The Company expects to meet all minimum purchase requirements. For the six months ended June 30, 1997 and 1996, the Company purchased approximately $196.6 million and $184.0 million, respectively, from Gulf Oil, L.P. Brand maintenance costs, which are based upon quantities purchased and target earnings of Gulf Oil, L.P. were $2.3 million and $1.1 million for the nine months ended June 30, 1997 and 1996, respectively. At June 30, 1997 and 1996, accounts payable due to Gulf Oil, L.P. was approximately $9.5 million and $11.3 million, respectively. Some of the statements contained in this Management Discussion & Analysis are forward-looking statements that involve a number of risks and uncertainties. In addition to the factors listed above, other factors that could cause actual results to differ materially are business conditions, the lack or unavailability of a working capital line of credit, environmental conditions at its properties, the Company's asset disposition program, the results of operations of Gulf Oil L.P., real estate markets where properties are located, gasoline margins and other factors listed herein, as amended from time to time. 18 PART II ITEM 1. LEGAL PROCEEDINGS See description of legal proceedings reported in the Company's 10-Q filed for the quarterly period ended March 31, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT 27. FINANCIAL DATA SCHEDULE 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of August, 1997. CUMBERLAND FARMS, INC. Date: August 14, 1997 By: /s/ Arthur G. Koumantzelis -------------------------------- Name: Arthur G. Koumantzelis Title: Sr. Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 1 20,069 3,243 24,247 1,431 30,899 83,439 353,852 131,079 354,247 77,245 0 0 0 121 41,420 354,247 1,087,987 1,097,339 857,771 1,075,123 0 0 17,137 5,079 109 4,970 0 0 0 4,970 0 0
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