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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 3, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 2-38375
United Petroleum Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-3103494
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5800 N.W. 74th Avenue, Miami, Florida 33166
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(Address of principal executive offices)
(Zip Code)
(305) 592-5101
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) 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
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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 [ ] No [X]
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
APPLICABLE ONLY TO ISSUERS 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 Sections 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 ISSUERS
As of September 18, 2001, there were 4,951,601 shares of common stock,
par value $.01 per share, outstanding. The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant was
approximately $5,791.38 as of the second quarter of fiscal year 2000, which is
the last available date for which the Company was able to locate a price.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include information about possible or
assumed future results of the Company's operations or the performance of the
Company in the future. 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 the
forward-looking statements. Such factors and uncertainties include, but are not
limited to: the availability of financing and additional capital to fund the
Company's business strategy on acceptable terms, if at all; the future
profitability of the Company; competition and pricing in the Company's market
area; volatility in the wholesale and retail gasoline markets due to supply
interruptions, market factors, and otherwise; modifications of environmental
regulatory requirements; detection of unanticipated environmental conditions;
the Company's ability to manage its indebtedness and in particular, its primary
institutional indebtedness; weather conditions; the favorable resolution of
certain pending and future litigation; and general economic conditions. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. BUSINESS
GENERAL
United Petroleum Corporation ("UPC") is a holding company that has 3 operating
subsidiaries: United Petroleum Group, Inc. ("UPG"); Calibur Systems, Inc.
("Calibur"); and Jackson-United Petroleum Corporation ("Jackson"). UPC together
with its subsidiaries is referred to as the "Company". As of September 3, 2000,
UPG operated 83 stores in Florida under the "Farm Stores" name, Calibur operated
6 retail car wash facilities located in Tennessee and Georgia under the
"Calibur" name, and Jackson was engaged in activities related to the exploration
and development of oil and natural gas. The operations of Calibur and Jackson
are considered other segments of the business but are insignificant to the
operations of the Company as a whole, and are therefore not reported on
separately. Reference to these subsidiaries is made throughout this Form 10-K in
order to facilitate management's discussion and analysis since these
subsidiaries were acquired in the current fiscal year (see Recent History of the
Company).
The stores in Florida are typical walk-in convenience stores offering a wide
range of products and services, including milk, ice cream, groceries, beverages,
snack foods, candy, deli products, publications, health and beauty care aids,
tobacco products, lottery tickets and money orders. As of September 3, 2000,
sixty-five of these locations also sold gasoline. The stores in Tennessee and
Georgia offer car wash services and convenience store items. As of September 3,
2000, three of the car wash facilities also sold gasoline and one also offered
quick lube services (see "Subsequent Developments" below).
HISTORY OF THE COMPANY
UPC is a reporting company under the Securities and Exchange Act of 1934,
incorporated under the laws of the State of Delaware in 1970. UPC was a listed
company, trading on the NASDAQ SmallCap Market, until December 1997. On January
14, 1999, UPC filed a petition for relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On July 23, 1999, UPC filed with
the Bankruptcy Court its second amended plan of reorganization (the "Plan"). On
September 29, 1999, as contemplated by the Plan and subject to, among other
things, its confirmation, UPC, UPG, and F.S. Convenience Stores, Inc. ("FSCI")
entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which FSCI agreed to merge with and into UPG, with UPG as the surviving
entity (the "Merger"). Pursuant to the Plan and the Merger
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Agreement, among other things: (i) all of UPC's securities in existence
immediately prior to the Effective Date (as defined in the following paragraph),
including but not limited to, shares of UPC's issued and outstanding classes of
common stock ("Old Common Stock"), preferred stock ("Old Preferred Stock"),
debentures ("Debentures"), stock options and warrants would be canceled, (ii)
the shareholders of FSCI would receive 48% of the newly issued and outstanding
shares of New Common Stock (as defined below) of the reorganized company, 50% of
the newly issued and outstanding shares of New Preferred Stock (as defined
below) of the reorganized Company, and $3 million in cash, (iii) UPC would issue
shares of New Common Stock the existing holders of Old Common Stock, Old
Preferred Stock, and Debentures, and (iv) UPC would issue 50% of its newly
issued and outstanding shares of New Preferred Stock to the holders of certain
secured indebtedness of the Company.
On October 7, 1999, the Bankruptcy Court entered an order (the "Confirmation
Order") confirming the Plan. The transactions contemplated by the Plan, as
modified by the Confirmation Order and set forth in the Merger Agreement (the
"Transactions"), were substantially consummated and the Plan became effective on
November 12, 1999 (the "Effective Date").
On the Effective Date, pursuant to the Plan, the Confirmation Order, and the
Merger Agreement, the following Transactions and other events occurred:
1) FSCI merged with and into UPG. As a result, UPG and UPG's
wholly owned subsidiary, F.S. Non-Gas Subsidiary, Inc.,
acquired FSCI's walk-in convenience store business, and a 10%
interest in a separate Delaware company, Farm Stores Grocery,
Inc. ("FSG"). FSG operates approximately 112 double drive-thru
specialty retail stores in Florida, and owns and licenses to
UPC and UPG the trade name "Farm Stores."
2) All of UPC's issued and outstanding securities, including all
Old Common Stock, Old Preferred Stock, Debentures, options,
warrants and other rights to acquire securities of any class,
were canceled.
3) UPC amended and restated its Certificate of Incorporation to
(i) authorize 10 million shares of common stock, $.01 par
value per share ("New Common Stock") and 300,000 shares of
Class A 9% preferred stock, $.01 par value per share ("New
Preferred Stock"); (ii) prohibit UPC's issuance of non-voting
equity securities (as required by the Bankruptcy Code), (iii)
opt out of Section 203 of the Delaware General Corporation Law
(restricting certain business combinations with interested
stockholders), and (iv) restrict the beneficial owners of 5%
or more of the total fair market value of UPC's securities
from making certain transactions in UPC's securities for a
period of two years from the Effective Date. Pursuant to UPC's
Certificate of Designation authorizing the New Preferred
Stock, these securities are subordinate to all of UPC's debts.
Each share of New Preferred Stock has a liquidation preference
over UPC's New Common Stock in the amount of $100 (plus
cumulative unpaid dividends thereon), payable out of net
proceeds (after payments to all creditors but before payments
in respect of UPC's New Common Stock) from any liquidation or
sale of UPC's assets. Each share of New Preferred Stock
carries a dividend rate of 9%. The dividends are cumulative
and payable in cash or, at UPC's option, in additional shares
of New Preferred Stock. In addition, UPC amended and restated
its By-laws on the Effective Date.
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4) UPC agreed to issue a total of 5,000,000 shares of New Common
Stock and 140,000 shares of New Preferred Stock. Holders of
the following debt and equity securities of UPC received the
following aggregate amounts of New Common Stock in exchange
for their pre-Merger holdings of UPC's securities:
<Table>
<Caption>
Percent of Shares
Number of Shares of of New Common Stock
Holdings Exchanged New Common Stock Issued Issued and Outstanding
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Debentures 1,750,000 shares 35.00%(1)
Old Preferred Stock 650,000 shares 13.00%(1)
Old Common Stock 200,000 shares 4.00%
</Table>
5) The shareholders of FSCI, consisting of Mr. Joe Bared and
Miriam Bared, his wife, were issued (i) 2,400,000 shares of
New Common Stock, representing 48% of the issued and
outstanding shares of New Common Stock, (ii) 70,000 shares of
New Preferred Stock, representing 50% of the issued and
outstanding shares of New Preferred Stock, and (iii) $3
million in cash.
6) Infinity Investors Limited, a Nevis, West Indies corporation
("Infinity") and its wholly-owned subsidiaries (collectively,
the "Infinity Parties") were issued an aggregate of 1,486,324
shares of New Common Stock, representing approximately 29.7%
of the issued and outstanding shares of New Common Stock
(which amount is included in the table set forth in Paragraph
4, above) in exchange for the Debentures and Old Preferred
Stock held by them. In addition, Infinity was issued 70,000
shares of New Preferred Stock, representing 50% of the issued
and outstanding shares of New Preferred Stock, in satisfaction
of UPC's secured notes in the original principal amounts of
$4,200,000 and $2,800,000 and related agreements. Upon
resolution of the disputed claims described in footnote 1 to
the table set forth in Paragraph 4, above, the Company expects
Infinity to be issued an additional 334,538 shares of New
Common Stock, which would increase the Infinity Parties'
aggregate ownership of New Common Stock to 1,820,862 shares,
representing approximately 36% of the issued and outstanding
shares of New Common Stock. The Company also anticipates that
200,000 additional shares of New Common Stock which would have
been issued to Infinity, but instead were used to fund a trust
into which claims relating to certain securities, as
identified in the Confirmation Order, were channeled, will
ultimately be issued to Infinity, thereby increasing the
Infinity Parties' ownership of New Common Stock to
approximately 40% of the issued and outstanding shares.
7) UPC reconstituted its Board of Directors to consist of Mr. Joe
P. Bared, Chairman, Mr. Carlos E. Bared, Mr. Clark K. Hunt,
Mr. Stuart J. Chasanoff, and Mr. L. Grant (Jack) Peeples.
8) The Company entered into employment agreements with Mr. Jose
Bared and Mr. Carlos Bared (Mr. Joe Bared's son), each for a
term of three years. The employment agreements include
provisions for severance pay upon termination without cause
(as defined in the agreements), and confidentiality and
non-compete arrangements that are binding after certain
terminations of the agreements. The employment agreements
provide for base annual salary, minimum annual salary
increases, additional salary increases, and bonuses in the
discretion of the Board of Directors, reimbursement of
business expenses and executive
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(1) Certain holders of UPC's securities have asserted a right to receive
distributions as the holders of Debentures, even though such holders previously
exchanged their Debentures for Old Preferred Stock. UPC has disputed such
claims. Pending their resolution, UPC has reserved 365,273 shares of New Common
Stock that would otherwise be available for distribution to the holders of
Debentures.
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benefits. The employment agreements do not provide for
compensation in the form of additional stock, or options to
buy stock, of UPC. However, these executives are eligible to
participate in any stock option or similar plan that the
Company may adopt. Carlos Bared's Employment Agreement was
terminated in January, 2001.
9) UPC, the Infinity Parties, and Joe P. and Miriam Bared (the
"Bareds") entered into a Stockholders Agreement pursuant to
which, among other things, the Bareds, on the one hand, and
the Infinity Parties, on the other hand, agreed to vote their
shares of New Common Stock so that the Board of Directors of
UPC will continue to consist of two representatives selected
by the Bareds (the "Bared Directors"), two representatives
selected by the Infinity Parties (the "Infinity Directors"),
and an independent director initially designated as Mr. L.
Grant Peeples. Currently, the Bared Directors are Joe P.
Bared and Carlos E. Bared, his son, and the Infinity Directors
are Clark K. Hunt and Stuart J. Chasanoff. The Stockholders
Agreement also provides that the Board can be expanded and/or
the independent director changed by majority vote of UPC's
stockholders at a duly called meeting of stockholders. The
Stockholders Agreement also restricts certain dispositions of
New Common Stock by the Bareds and the Infinity Parties
(absent consent of the other party) during a two year period
commencing on the Effective Date, and grants certain
registration and other rights relating to the New Common
Stock.
10) UPG and FSG entered into a Management Agreement pursuant to
which UPG manages and provides all general and administrative
services for FSG's business and operations, in exchange for
management fees FSG pays to UPG based on the number of stores
FSG operates. This Management Agreement was terminated on
January 16, 2001.
Prior to the Merger, UPC, UPG, FSCI, and certain related entities (collectively,
the "Borrowers") entered into a Loan Agreement providing for a $23 million
secured loan from Hamilton Bank, N.A. FSCI borrowed $17 million of this loan and
used these proceeds to purchase the interest of its former partner (and
affiliated entities) in the walk-in convenience stores (including stores with
and without gas operations) and a 10% interest in FSG. UPC and UPG assumed this
debt in connection with the Merger.
GOING CONCERN
The Company has incurred substantial operating losses and cash flow deficiencies
subsequent to the Merger, due to, among other things, persistently high gasoline
prices, the interest burden of substantial Merger-related financing with
variable rates that increased during the year, high general and administrative
expenses relating to its own operations as well as the operations of FSG, and
difficulties encountered in implementing the Company's expansion by acquisition,
gas branding and other growth strategies. As a result of these financial
difficulties, the Company cannot comply with the covenants and other provisions
of its principal institutional financing arrangement, and therefore the entire
amount outstanding under this debt of approximately $23 million is classified as
a current obligation on the Company's balance sheet at September 3, 2000. The
Company plans to address these circumstances by seeking additional financing and
substantially retrenching its operations, including selling certain stores and
reducing its general and administrative expenses. This reduction in general and
administrative expenses left the Company unable to perform under its management
agreement with FSG, and therefore the Company terminated its management
agreement with FSG effective January 15, 2001. The Company's future success will
depend on its ability to raise additional capital, restructure its operations,
and improve its cash flow, and there can be no assurance that the measures the
Company takes will adequately address the Company's financial difficulties. The
Company's auditors' report on the Company's consolidated financial statements as
of September 3, 2000 contains an uncertainty paragraph concerning the ability of
the Company to continue as a going concern. If the Company is unable to reach
satisfactory arrangements regarding its primary institutional financing and
substantially increase its cash flow, the Company may be forced to sell or cease
its operations or reorganize.
STORE OPERATIONS
As of September 3, 2000, the Company operated 83 retail convenience stores in
Florida and 6 car wash locations in Tennessee and Georgia. Sixty-eight of these
locations also sell gasoline. The stores in Tennessee and Georgia offer car wash
services and convenience store items and one also offers quick lube services
(See "Subsequent Developments" below).
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The following table shows the number of stores that were acquired, reopened and
closed or sold during the last three fiscal years:
<Table>
<Caption>
September 3, 2000 August 29, 1999 August 30, 1998
----------------------------- --------------- ---------------
Convenience & Car wash/Gas Convenience & Convenience &
Gas Stores & Lube Stores Gas Stores Gas Stores
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At beginning of period 88 -- 92 96
Opened or acquired -- 9 -- --
Reopened 3 -- -- --
Closed or sold (8) (3) (4) (4)
----- ----- ----- -----
End of period 83 6 88 92
===== ===== ===== =====
</Table>
The 9 stores acquired in fiscal 2000 represent the locations operated by Calibur
(three of which were closed in fiscal year 2000). The 3 reopened stores suffered
casualties due to fire or tornado prior to fiscal year 2000, and were rebuilt
and reopened for business in fiscal year 2000.
Convenience Store/Gas Operations - United Petroleum Group, Inc.
Convenience stores
As of September 3, 2000, the Company's full-service convenience store operations
consisted of 83 operational convenience stores. The stores are located in
central and south Florida. Of the 83 stores, 65 sold gasoline as well as
standard convenience store merchandise. Of the 65 stores providing gasoline, 12
sold branded gasoline such as Shell and Texaco, and the balance sold unbranded
gas. These convenience stores are typically freestanding stores with high
visibility and convenient locations to address the needs of its customers. A
majority of these stores are open 24 hours and the balance is open for extended
hours.
The average store is approximately 2,300 square feet and carries an average of
2,500 to 3,500 SKU's. The average merchandise sale per transaction is $2.50. The
majority of merchandise sales are derived from sales of tobacco, non-alcoholic
drinks, beer and dairy products. In addition, the stores generally offer snack
foods, candy, publications and health and beauty care aids. Six of the Company's
stores offer deli services, which are a growth area for sales, and two stores
offer branded fast food as Blimpie franchisees. All of the Company's stores sell
hot dogs. The Company's growth opportunities include seeking to establish
additional in-store, brand name, fast-food services in order to increase
revenues and attract customers. The stores offer a number of private label
products such as milk, bakery products, and ice cream that generally carry
higher gross profit margins compared to non-private label products. In addition
to food and merchandise, most of the stores offer money orders, pay phone cards
and lottery and lotto tickets, and earn commissions for sales of these products.
All of the stores accept food stamps.
Gasoline operations
Gasoline sales by the UPC stores accounted for approximately 54% of total
revenues in fiscal year 2000, 44% in fiscal year 1999, and 46% in fiscal year
1998. As of September 3, 2000, 65 stores sold gasoline. Three of these stores
sold gasoline under commission agreements pursuant to which the Company's
revenues include only part of the gross profit realized from gasoline sales.
Gasoline prices and profit margins significantly impact the Company's revenues
and profits. These prices and profit margins are largely determined by factors
beyond the Company's control, including market factors driving the price of
crude and refined petroleum products and volatility in the wholesale gasoline
market due to supply interruptions. In addition, competition in each local
market area continually
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influences gasoline profit margins. In general, retail gas margins decline when
wholesale prices rise, because competitive factors prevent retailers from
passing along the full price increases to customers. In fiscal year 2000,
persistently high wholesale gasoline prices have adversely affected the
Company's operating results.
Retail Car Wash Operations - Calibur Systems, Inc.
As of September 3, 2000, the Company operated 6 car wash locations under the
Calibur name and leased two additional facilities to an independent operator in
Georgia. All of these facilities have on site convenience stores that offer a
limited variety of automotive products and snack foods, beverages and sundries
to customers. Three of the facilities also sell gasoline, diesel fuel and other
petroleum products and one also provides express lubrication services.
Oil and Gas Operations - Jackson-United Petroleum Corporation
The Company is engaged in activities related to the exploration and development
of oil and natural gas. This energy products division has all of its assets in
the United States. Jackson owns a seventy-five percent (75%) working interest in
sixteen oil and gas wells located in Pennsylvania. Jackson also has an oil and
gas lease covering approximately 26,000 acres of real property located in
central Kentucky. There is currently no activity related to the Kentucky
property. An unrelated third party manages the 16 oil and gas wells, which
produce revenues to the company totaling approximately $12,500 per month.
Upgrading and Remodeling of Existing Store Base and Closing of Underperforming
Stores
The Company has an ongoing program to upgrade and remodel the Company's retail
and gasoline locations to cater to the always-changing convenience needs of
today's customer. The program includes modernizing and re-imaging the stores'
appearance, upgrading the gasoline facilities and installing modern
environmental protection equipment. As of September 3, 2000, the Company had
upgraded the fuel dispensing equipment at 40 locations to allow the customer to
pay-at-the-pump with their credit card.
The Company evaluates each store's performance in order to determine its
contribution to the Company's overall profitability and to prioritize its
capital expenditures. Management requires certain minimum performance criteria
(economic and non-economic) to support on-going capital expenditures and/or
lease option renewal or renegotiation. Accordingly, in fiscal year 2000, the
Company closed 11 of its stores because they failed to meet the Company's
criteria for long-term stability and growth. Based on its operating results in
fiscal 2000, the Company recognizes the immediate necessity of decreasing its
general and administrative expenses and increasing its cash flow. During fiscal
year 2001, therefore, management plans to accelerate the sale or closure of
stores that fail to meet minimum performance standards, in order to increase
profitability and reduce administrative expenses.
Licensed Trade Name
The Company uses the trade name "Farm Stores" pursuant to the terms of a License
Agreement with FSG. All of the Company's Florida stores operate under the "Farm
Stores" name, and all of these stores sell Farm Stores private label products.
The license is royalty free and renews for successive yearly periods unless
terminated in accordance with the terms of the agreement. However, the license
cannot be transferred or assigned without the consent of FSG, which consent FSG
can withhold in its discretion. Accordingly, the Company will be evaluating the
License Agreement in light of its plans to downsize its operations, which could
include the sales of stores.
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Seasonality
The Company generally experiences higher revenues during the spring months,
which fall within the Company's third quarter, due mostly to increased tourism
and agricultural workers during this harvesting season. Three holidays, Easter,
Mother's Day and Memorial Day, also fall within this quarter.
Merchandise Supply Agreements
H.T. Hackney, a direct store delivery vendor, supplies most of the Company's
inside store general merchandise under a contract that expires in August 2001.
The Company purchases its requirements of branded dairy and fruit juice products
from Velda Farms, Inc., a subsidiary of Suiza Foods, pursuant to a Private
Labeling and Supply Agreement that expires in October 2008.
Competition
The convenience store and retail gasoline industries are highly competitive. The
number and type of competitors vary by location. The Company presently competes
with other convenience stores, large integrated gasoline service station
operators, supermarket chains, neighborhood grocery stores, independent gasoline
service stations, fast food operations and other similar retail outlets, some of
which are well recognized national or regional chains. Some of these competitors
have greater financial resources than the Company. Key competitive factors
include, among others, location, ease of access, store management, product
selection, pricing, hours of operation, store safety, cleanliness, product
promotions and marketing.
Employees
During the third quarter of the fiscal year ended September 3, 2000, the Company
entered into a Client Service Agreement with Oasis Outsourcing, Inc. ("Oasis"),
a subsidiary of The Wackenhut Corporation. Pursuant to that agreement, Oasis
provided professional employment services to the Company, including serving as
the co-employer and paying (subject to the Company's reimbursement obligations)
the total compensation for all executive and non-executive personnel working for
the Company, and maintaining and administering workers' compensation and
unemployment insurance and employee benefit plans, including group health
insurance and a 401(k) plan. On January 8, 2001 Oasis terminated the Client
Service Agreement and the Company entered into an Administrative Service
Agreement with Oasis. Pursuant to the Administrative Service Agreement Oasis is
no longer a co-employer but continues to administer workers' compensation and
employee benefit plans for the Company. As of September 3, 2000, the Company
co-employed, on a full-time or part-time basis, approximately 850 employees. The
Company's retrenchment plans include substantial personnel reductions. The
Company has not experienced any work stoppages. There are no collective
bargaining agreements between the Company and any of its employees (See
"Subsequent Developments below).
Environmental Compliance
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases of gasoline or other regulated substances; (iv) closing USTs to prevent
future releases; (v) keeping appropriate records; and (vi) maintaining evidence
of financial responsibility for taking corrective action and compensating third
parties for bodily injury and property damage resulting from releases. The
Company has retained an outside third party to perform testing and remediation
services.
In the ordinary course of business, the Company may detect releases of gasoline
or other regulated substances from USTs it owns or operates. As part of its
program to manage USTs, the Company conducts environmental assessment and
remediation activities with respect to releases of regulated substances from
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its retail gasoline facilities. Under current federal and state regulatory
programs, the Company was obligated to either upgrade or replace most existing
USTs it owned or operated or close them by December 22, 1998 to meet certain
corrosion, overfill- and spill-protection and leak-detection requirements. The
Company has met this obligation for all operating locations. The Company does
not anticipate any additional material capital expenditures for environmental
control facilities for the remainder of the current fiscal year or the
succeeding fiscal year.
SUBSEQUENT DEVELOPMENTS
In October, 2000, following the Company's unsuccessful attempts to expand its
business through acquisitions, and in recognition that the Company's cash flow
could no longer support its debt service obligations, the Company ceased making
scheduled payments on its primary institutional loan, and that loan went into
default.
On February 11, 2000 the Company's Board of Directors approved a Stock Option
Plan which provides for the granting of options to purchase an aggregate of up
to 650,000 shares of common stock.
In late 2000 and early 2001, the Company made various personnel reductions in an
attempt to improve its cash flow. By January 16, 2001, these reductions had left
the Company unable to fulfill its responsibilities under the Management
Agreement with FSG. Additionally, the Company's studies of the issue had
revealed that the Management Agreement was at best cash flow neutral, and more
likely, a cash flow drain on the Company. Therefore, on January 16, 2001, the
Company and FSG terminated the Management Agreement and the Consignment
Agreement also terminated in accordance with its terms.
On January 1, 2001 the Company's leased employee agreement was terminated by the
co-employer in response to the Company's inability to secure a bond the
co-employer requested. As a result, the Company presently employs its work force
directly. As of August 31, 2001, the Company employed approximately 700 persons,
of which approximately 180 are part-time and 520 are full time employees.
On January 17, 2001 the Company granted two of its executives options to
purchase 350,000 shares of common stock at an exercise price of $0.05 per share.
Fifty percent (50%) of the aggregate shares shall vest and become exercisable on
January 18, 2001 and fifty percent (50%) on January 18, 2002 with an expiration
of five years from January 18, 2001 or the expiration of 180 days from the date
of any termination.
On January 17, 2001, the Company issued to L. Grant Peeples, a Director, stock
options to purchase 150,000 shares of the Company's common stock at $0.05 per
share.
From January 23 to March 9, 2001 the Company sold nine of its under-performing
store locations (8 non-gas and one gas store) in a series of transactions, to
Valencia Food Stores. The total sale proceeds, approximately $1,020,000 were
paid to reduce the Company's primary institutional indebtedness. Although these
stores' aggregate annual sales amounted to approximately $5,000,000, they did
not make a significant contribution to the Company's operating profits or cash
flow. Additionally, during the period from October 1 to March 1, 2001, due to
their low profitability and high administrative expenses, the Company reached
agreements to lease three of its Calibur store locations to other operators.
Additionally, the Company closed two other Calibur store locations in August
2001. As of August 31, 2001, therefore, the Company operated 74 stores, of which
64 are gas stores and 10 are non gas stores.
On February 1, 2001, Murphy Oil USA, Inc. dismissed its lawsuit against the
Company without prejudice (see Note 9).
On February 8th, 2001, the Company entered into a fuel marketing agreement with
a major fuel retailer to rebrand as many as 23 of its gasoline store locations.
In March, 2001, the Company's real and personal property tax obligations came
due. Certain of these payments are due under the Company's store leases and
their non-payment could default those leases and terminate the Company's
operations at the stores. To prevent this catastrophic result, the Company
sought financing from its primary institutional lender, and then following that
lender's denial, from its principal stockholders, Infinity and Mr. and Mrs.
Bared. Ultimately, only Mr. and Mrs. Bared elected to provide this financing, in
the form of a loan of up to $600,000 (of which $583,000 was funded), secured by
a first lien on the Company's 100,000 shares of common stock of FSG. The
Company's primary institutional lender released its pledge on these shares in
order to permit this loan to be secured. The loan is presently in default, and
no payments of principal or interest have been made thereunder.
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ITEM 2. PROPERTIES
The Company operates its businesses from its Miami offices located at 5800 N.W.
74th Avenue, Miami, Florida. The headquarters location houses the management
group as well as information systems, accounting, marketing and human resources
for all the operations. The headquarters location and its improvements,
furniture, fixtures and equipment are all owned by a partnership and its
subsidiary which are beneficially owned by Mr. Joe Bared, UPC's President,
Chairman and largest shareholder. The Company bears all of the expenses relating
to the operation of the headquarters, and pays its real property taxes. The
partnership's subsidiary consigns the headquarters' furniture, fixtures and
equipment to the Company under a Consignment Agreement that terminates upon the
termination of the Company's Management Agreement with FSG.
Of the 89 operating stores as of September 3, 2000, the Company owned 15 store
locations and leased the remainder. The Florida stores are largely clustered in
key Florida counties, including Miami-Dade, Broward, Hillsborough, Highlands,
Polk, Pasco, and Sarasota. In these counties, there are 5 to 17 stores and the
stores, on average, are located only 2 miles apart. All of the 6 operating
Calibur stores are located on property that Calibur owns; 5 are located in
Tennessee, and 1 is located in Georgia.
The Company's oil and natural gas subsidiary, Jackson, owns a seventy-five
percent (75%) working interest in sixteen oil and gas wells located in
Pennsylvania. Jackson also has an oil and gas lease covering approximately
26,000 acres of real property located in central Kentucky.
ITEM 3. LEGAL PROCEEDINGS
In early 1999, Mr. Robert Rankin filed a lawsuit in the United States District
Court for the Eastern District of Tennessee, styled Robert Rankin vs. Michael F.
Thomas, seeking damages against Mr. Thomas, the Company's former President and
Chief Executive Officer, for allegedly breaching an agreement to pay Mr. Rankin
a commission for locating capital investors or lenders for the Company in 1994.
Mr. Rankin also filed a Proof of Claim against the Company in the U.S.
Bankruptcy Court for the District of Delaware in the approximate amount of
$483,000, asserting the Company's alleged breach of the same agreement. The
Company filed an objection to Mr. Rankin's claim. Upon Mr. Rankin's motion, the
Bankruptcy Court entered an order abstaining from hearing the Company's
objection, and permitting Mr. Rankin to proceed against the Company in his
lawsuit pending against Mr. Thomas in Tennessee. The U.S. District Court for the
Eastern District of Tennessee granted Mr. Rankin's motion to permit him to add
the Company as a defendant and to amend his complaint. The amended complaint
alleges damages against the Company and Mr. Thomas, jointly and severally, in
the approximate amount of $483,000, and against Mr. Thomas, individually, in the
additional amount of approximately $433,000. On June 22, 2001 this case was
settled and the Company agreed to pay Mr. Rankin $8,000.
In late 1999, an affiliate of F.S. Convenience Stores, Inc. (the company with
which United Petroleum Group, Inc., the Company's wholly owned subsidiary,
merged in November 1999) filed a lawsuit in the Circuit Court for the Eleventh
Judicial Circuit in and for Miami-Dade County, Florida styled REWJB Dairy Plant
Associates vs. Zenith Insurance Company. That lawsuit seeks an unspecified
amount of damages against Zenith, the successor in interest to Riscorp Insurance
Company, for improperly administering and
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managing the plaintiff's workers' compensation insurance plan. Zenith moved to
dismiss the complaint, contending that the matter was subject to arbitration,
which motion was denied. Zenith has filed a subsequent motion to dismiss. In
response, the Company amended its complaint. Zenith's response to the Company's
amended complaint has not been served. Zenith has asserted in a demand letter to
the plaintiff and the plaintiff's surety that the plaintiff is indebted to it
for approximately $1.8 million of unpaid premiums, and, in June 2000, filed a
separate action against the Company's surety in the United States District Court
for the Middle District of Florida titled Zenith Insurance Company vs. St. Paul
Fire and Marine Insurance Company. That action seeks recovery under a $750,000
surety bond. The surety has tendered the defense of that action to the Company.
The Company has filed an answer to the complaint and discovery is ongoing. The
Company in the state case, and the surety in the federal case, have served
various discovery requests upon Zenith which remain outstanding. The Company
compensation liability in connection with the merger of F.S. Convenience Stores,
Inc. and United Petroleum Group, Inc., and has recorded a liability in its
consolidated financial statements. The Company's payment of its allocated
portion of any ultimate liability to Zenith will reduce or eliminate that
liability, and the Company may have to increase or adjust its recorded liability
for this matter depending on the progress and outcome of this case.
In May 2000, Murphy Oil USA, Inc. filed a lawsuit in the Circuit Court of the
Nineteenth Judicial Circuit in and for Okeechobee County, Florida styled Murphy
Oil USA, Inc. vs. Farm Stores Grocery, Inc. and Shell Oil Company. The complaint
seeks injunctive and declaratory relief for allegedly selling, offering to sell,
or advertising the sale of gasoline at two of the Company's stores in Okeechobee
County, Florida in alleged violation of the Florida Motor Fuel Marketing
Practices Act (the "MFMPA"). Murphy Oil alleges that the gasoline price offered
at these locations, when paid for with the Shell MasterCard credit card (which
offers a five percent discount on Shell branded gasoline purchases) violates the
MFMPA's prohibition against selling gasoline below cost. The Company has filed a
motion to dismiss the complaint. Sales of gasoline paid for with a Shell
MasterCard credit card at these locations account for approximately 6% of the
Company's gasoline sales at these locations. Although the Company, doing
business under the fictitious name "Farm Stores", owns and/or operates the two
Okeechobee stores, the plaintiff has named Farm Stores Grocery, Inc., and not
the Company, as a defendant in the lawsuit. On February 1, 2001, Murphy Oil
dismissed its lawsuit described above without prejudice.
The Company is unable to reach conclusion as to the outcomes of the other matter
mentioned above because of the early stages of such matter. In the ordinary
course of business, the Company is party to various other actions that the
Company believes are routine in nature and incidental to the operation of its
business. The Company believes that the outcome of those proceedings will not
have a material adverse effect upon its future results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 3, 2000 or thereafter through August
31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to December 1997, UPC's common stock was listed on the NASDAQ SmallCap
Market. The common stock was delisted effective as of the close of business on
December 8, 1997. Since that time, there has been no established public trading
market for UPC's common stock, and UPC's common stock has traded in the "pink
sheets" under the symbol UPET. There has been no significant trading in UPC's
common stock since UPC filed bankruptcy in January 1999 or thereafter through
August 31, 2001.
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Pursuant to the Plan, effective November 12, 1999, each share of Old Common
Stock was canceled and the holders of shares of Old Common Stock had the right
to receive an aggregate of 200,000 shares of New Common Stock, representing 4%
of the issued and outstanding shares of New Common Stock, at an exchange ratio
of approximately 1:.00654 (that is, for each one share of Old Common Stock, a
holder had the right to receive approximately .00654 share of New Common Stock).
There were approximately 4,951,601 shares of New Common Stock as of December 15,
2000.
The following table sets forth the high and low bid quotations for UPC's common
stock, as reported by Dow Jones & Company, Inc. No quotes for the third or
fourth quarters of the fiscal year ended September 3, 2000 were located.
<Table>
<Caption>
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 3, 2000:
First Quarter............................................... $.01 $.01
Second Quarter.............................................. $.01 $.01
Third Quarter............................................... N/A N/A
Fourth Quarter.............................................. N/A N/A
FISCAL YEAR ENDED AUGUST 29, 1999:
First Quarter............................................... $.01 $.01
Second Quarter.............................................. $.01 $.01
Third Quarter............................................... $.01 $.01
Fourth Quarter.............................................. $.01 $.01
</Table>
N/A - Not available
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions. The above data remains applicable to all periods through August
31, 2001.
UPC has not declared dividends on its common stock during the last two fiscal
years. The Company's loan covenants prohibit the Company from paying dividends
on any class of stock, except for dividends paid exclusively in shares of stock
or dividends paid by one borrower under the loan agreement to another such
borrower. UPC does not anticipate paying dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE FISCAL YEARS ENDED SEPTEMBER 3, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
53 Weeks 52 Weeks 52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended Ended Ended
Sept. 3, 2000 Aug. 29, 1999 Aug. 30, 1998 Aug. 31, 1997 Sept. 1, 1996
------------- ------------- ------------- ------------- -------------
OPERATING RESULTS:
Revenues ................................ $ 132,806 $ 108,514 $ 117,369 $ 132,338 $ 130,520
Interest expense ........................ 2,283 23 33 45 132
Net income (loss) ....................... (7,015) (475) 1,142 1,597 2,168
Net income (loss) attributable to
common stockholders ................... (8,033) N/A N/A N/A N/A
Earnings (loss) per share - basic
and diluted ........................... $ (1.61) N/A N/A N/A N/A
BALANCE SHEET DATA:
Net property and equipment .............. $ 15,229 $ 3,794 $ 3,168 $ 3,574 $ 3,860
Total assets ............................ $ 45,490 $ 9,003 $ 9,055 $ 9,462 $ 9,742
Long-term obligations (a) ............... $ 23,744 $ 200 $ 311 $ 464 $ 609
Stockholders' or division equity ........ $ 6,562 $ 1,933 $ 2,408 $ 1,266 $ 101
Other Data:
Earnings (loss) before interest expense,
income taxes, depreciation and
amortization (EBITDA) (b) ............. $ (2,876) $ 38 $ 1,669 $ 2,073 $ 2,734
Net cash provided by (used in)
operating activities................... $ (1,252) $ 1,251 $ 195 $ 728 N/A
Net cash provided by (used in)
investing activities................... $ (21,106) $ (1,144) $ (39) $ 151 N/A
Net cash provided by (used in)
financing activities................... $ 23,546 $ (110) $ (154) $ 577 N/A
</Table>
----------
(a) The Company does not comply with the covenants and other provisions of
its principal institutional financing arrangement, and therefore the
entire amount outstanding under this arrangement of approximately $23
million is classified as a current obligation on the Company's balance
sheet at September 3, 2000.
(b) EBITDA is significant to the Company's calculations of its financial
covenants and is defined as earnings before interest expense, income
taxes, depreciation and amortization. EBITDA should not be viewed as a
substitute for generally accepted accounting principles (GAAP)
measurements such as net income (loss) or cash flow from operations.
This calculation of EBITDA may not be comparable to other companies.
N/A Not applicable as the operations for which the data is presented were
held in partnership form.
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FINANCIAL HIGHLIGHTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 3, 2000, AUGUST 29, 1999
AND AUGUST 30, 1998
(IN THOUSANDS, EXCEPT NUMBER OF STORES AND
GROSS PROFIT PER GALLON DATA)
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
FINANCIAL DATA:
Revenues:
Grocery sales .................................. $ 58,090 $ 60,767 $ 63,014
Gasoline sales ................................. 72,051 47,435 53,866
Other .......................................... 2,665 312 489
--------- --------- ---------
Total revenues ................................. $ 132,806 $ 108,514 $ 117,369
========= ========= =========
Net income (loss) ...................................... $ (7,015) $ (475) $ 1,142
========= ========= =========
STORE DATA:
Comparative Stores (1):
Gross profit on grocery sales .................. $ 18,579 $ 18,812 $ 19,684
Average grocery sales per store ................ $ 687 $ 689 $ 690
Average grocery gross profit per store ......... $ 232 $ 235 $ 246
Number of stores at year end ................... 80 80 80
Total Stores:
Gross profit on grocery sales .................. $ 19,658 $ 20,771 $ 22,475
Average grocery sales per store ................ $ 1,158 $ 2,092 $ 2,647
Average grocery gross profit per store ......... $ 221 $ 247 $ 268
Number of stores at year end ................... 89 84 84
GASOLINE DATA (2):
Gallons sold ................................... 47,301 41,027 43,540
Gross profit ................................... $ 5,608 $ 5,278 $ 5,871
Average gallons sold per location .............. 739 654 675
Average gross profit per gallon ................ $ 0.119 $ 0.129 $ 0.135
Number of gasoline locations at year end ....... 63 61 63
</Table>
----------
(1) Comparative stores represents stores that were open throughout the
three fiscal years presented.
(2) Gasoline data presented does not include information pertaining to the
five stores that sell gas under the fuel marketing agreements whereby
the Company receives a commission based on the gross profit realized on
fuel sales.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
In the following comparison of the results of operations, the fifty-three week
period ended September 3, 2000 and the fifty-two week periods ended August 29,
1999 and August 30, 1998 are referred to as 2000, 1999 and 1998, respectively.
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The Company's results of operations for 2000 reflect the operations of Calibur
and Jackson (the "Calibur Companies") and UPG from November 12, 1999, the date
of UPG's merger with FSCI. The results for 1999 and 1998 reflect the operations
of FSCI, successor to the Farm Stores Walk-in Division ("FSWD"), which were
previously included in the combined financial statements of the Farm Stores
Partnerships. This division was segregated and reported on separately as a
result of the Transactions.
FISCAL YEAR 2000 RESULTS COMPARED TO FISCAL YEAR 1999 RESULTS
Revenues and gross profit for 2000 were $132.8 million and $26.6 million,
respectively, as compared to $108.5 million and $26.2 million, respectively, for
1999. The Company generated a net loss of $7.0 million in 2000, compared to a
net loss of $475,000 in 1999, primarily due to the effects of the Transactions
and their financing totaling $3.2 million as follows: (i) interest expense,
including interest rate increases in the period and amortization of deferred
loan costs of $2.3 million; (ii) amortization of goodwill and other intangible
assets of $880,000; and (iii) depreciation expense on the write-up of assets to
fair value of $59,000. The net loss in 2000 also reflects the loss on impairment
of certain Calibur fixed assets totaling $1.4 million, losses of $630,000 the
Calibur Companies incurred subsequent to the Merger, losses of $330,000 realized
by three casualty stores that reopened during the year, $574,000 in additional
costs incurred to install new fuel dispensing equipment at 40 store locations,
$258,000 incurred in legal and consulting fees related to acquisitions that
did not materialize and an increase in the general and administrative expenses
absorbed by the Company in 2000.
Revenues increased $24.3 million, or 22.4%, from the prior year mostly due to
the significant increase in gasoline prices and revenues, the inclusion of $3.5
million of revenues generated by the Calibur Companies subsequent to the Merger,
and the additional week in fiscal 2000. A summary of revenues by source for the
comparative period is as follows (in thousands):
<Table>
<Caption>
2000 1999
---------- ----------
Grocery $ 58,090 $ 60,767
Gasoline 72,051 47,435
Other 2,665 312
---------- ----------
Total $ 132,806 $ 108,514
========== ==========
</Table>
Grocery revenues decreased by $2.7 million, or 4.4%, in 2000 as compared to 1999
due to temporarily closing 40 locations for replacement of gasoline dispensing
equipment and permanently closing 8 underperforming stores that were open
throughout 1999. Although the closing of the underperforming stores reduces
revenues, it does not have a material impact on the results of operations
because these stores had been operating at a loss.
Gasoline revenues increased $24.6 million or 51.9% in 2000. The increase
primarily reflects a $0.35 increase in the average retail price per gallon from
$1.09 per gallon in 1999 to $1.44 per gallon in 2000, coupled with an increase
of 6.6 million gallons sold - from 43.3 million gallons in 1999 to 49.9 million
gallons in 2000. The increase in gallons sold resulted from the installation of
new fuel dispensing equipment in 40 stores as of the end of the year, the
inclusion of Calibur's 3 gas stores, which sold approximately 709,000 gallons
during the period subsequent to the Merger, and 916,000 gallons sold during the
additional week in fiscal 2000. These increases were partially offset by a
decrease in gallons sold by the stores that were temporarily and permanently
closed as mentioned above.
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Other revenue in 2000 consists primarily of car wash and lube sales by Calibur
subsequent to the Merger. In 1999, other revenue consisted of commissions
received under agreements providing for the Company to receive part of the gross
profit realized from gas sales at three locations. Commissions received under
such agreements in 2000 and 1999 were $289,000 and $313,000, respectively.
Gross profit increased by $447,000 in 2000 due to gross profit of $1.2 million
contributed by the Calibur Companies subsequent to the Merger and an increase of
$272,000 in the fuel gross profits, partially offset by a $1 million net
decrease in gross profit earned on grocery sales. The net decrease in grocery
gross profit reflects lower sales in part resulting from temporary store
closures to upgrade gas equipment, as well as a reduction in the number of
stores. The Company's increased gross fuel profits reflect a $660,000 increase
from higher sales volume, partially offset by a $388,000 (approximately $.01 per
gallon) decrease in the gross margin earned. Increases in crude oil and
wholesale gasoline costs negatively impacted the Company's fuel gross profit
margins in 2000 (particularly in the second quarter). Competitive factors
prevented the Company from passing along the full effect of these cost increases
while maintaining the same gross profit margins.
Store operating expenses increased by $881,000 in 2000 due to the inclusion of
Calibur's store operating expenses of approximately $1.1 million since the
Merger, an increase in operating expenses of $213,000 related to 3 stores that
reopened in 2000, and increases in costs of $574,000 related to the newly
installed fuel dispensing equipment. Such costs include operating lease payments
on the equipment and higher credit card fees because customers can now use their
credit cards to pay at the pump. These increases were partially offset by
temporary and permanent store closings resulting in reduced payroll and
payroll-related costs and store occupancy costs of approximately $1 million.
Depreciation and amortization expense increased by $1.4 million in 2000, mostly
due to the amortization of goodwill and other intangible assets of $880,000. The
remaining increase is due to the inclusion of the Calibur Companies'
depreciation expense of $331,000, depreciation on capital expenditures and
depreciation on the write-up of assets to fair value of $59,000.
General and administrative expenses increased by $1.2 million, mostly due to the
inclusion of $437,000 in 2000 relating to the Calibur Companies subsequent to
the Merger, and $258,000 in legal and consulting fees related to acquisitions
that did not materialize. The remaining increase is mostly due to an increase in
the general and administrative expenses absorbed by the Company in 2000. In 1999
total corporate overhead expenses such as finance, information systems,
marketing and senior management were allocated to FSCI, FSG, and the dairy plant
operations based on various factors including sales volume, inventory levels and
personnel and store counts. The allocation of corporate overhead expenses to
FSCI in 1999 was lower as a percentage of the total than in 2000. The dairy
plant ceased operations in 1999. FSG was charged a management fee based on the
number of stores it operated in 2000 in accordance with the management agreement
between the Company and FSG. FSG is now charged a management fee based on the
number of stores in accordance with the management agreement between the Company
and FSG. During the fourth quarter of 2000, the Company closed the Calibur
Companies' office in Tennessee, eliminating substantially all of the
administrative costs incurred by these subsidiaries in 2000.
Loss on impairment of fixed assets in 2000 resulted from the Company's review
of its long-lived assets for impairment. The Company determined that a charge
of $1.4 million was required for the Calibur operating equipment in its six
owned locations.
The increase in interest expense of $2.3 million resulted from the borrowing of
$23 million used to finance the Transactions, the amortization of related
deferred loan costs of $215,000, and the borrowing of $2.2 million from
stockholders.
FISCAL YEAR 1999 RESULTS COMPARED TO FISCAL YEAR 1998 RESULTS
Revenues and gross profit for 1999 were $108.5 million and $26.2 million,
respectively, as compared to $117.4 million and $27.5 million, respectively, for
1998. The Company generated a net loss of $475,000 in 1999, compared to net
income of $1.1 million in 1998, primarily due to the decrease in grocery and
fuel sales coupled with an increase in personnel-related expenses.
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Revenues decreased $8.9 million, or 7.5%, from the prior year, mostly due to the
significant decline in gasoline gallons sold, coupled with a decrease in the
average retail price per gallon of $.05. A summary of revenues by source for the
comparative period is as follows (in thousands):
<Table>
<Caption>
1999 1998
-------- --------
Grocery $ 60,767 $ 63,014
Gasoline 47,435 53,866
Other 312 489
-------- --------
Total $108,514 $117,369
======== ========
</Table>
Grocery revenues decreased by $2.2 million, or 3.6%, in 1999 as compared to 1998
primarily due to closing 4 underperforming store locations in 1999. Although the
closing of the 4 underperforming stores reduces revenues, it does not have a
material impact on the results of operations because these stores had been
operating at a loss.
Gasoline revenues decreased $6.4 million, or 11.9%, in 1999 compared to 1998 as
a result of a decrease in total gallons sold of 3.9 million coupled with a $.05
decrease in the average retail price per gallon from $1.14 in 1998 to $1.09 per
gallon in 1999. The decrease in the average selling price was a result of a
highly competitive retail environment experienced by the Company throughout
1999. The decline in gallons sold is primarily due to temporary store closures
throughout 1999 for EPA mandated upgrades.
Gross profit decreased by $1.3 million in 1999, mainly due to the $593,000
decrease in gasoline gross profit and the $557,000 decrease in the grocery gross
profit as a result of lower grocery sales. The gross profit dollars realized on
gasoline sales decreased as a result of the lower sales volume coupled with a
slight decrease in the average gross margin earned per gallon.
Store operating expenses increased by $114,000 in 1999, despite permanently
closing 4 stores, mainly due to adjustments recorded in 1998 to reduce the
accrued workers compensation reserve and the accrued vacation balance at the end
of the year. Excluding the effects of these adjustments, store operating
expenses for comparable stores remained consistent with the 1998 level.
General and administrative expenses increased $103,000 from 1998, mostly due to
consulting costs incurred by the Company in 1999, primarily to make the
Company's computer systems Year 2000 compliant.
CREDIT FACILITIES
The Company has a $23 million credit facility from Hamilton Bank. This facility
provides credit in the form of a $10,467,000 term loan, an $8,300,000 mortgage
loan and a $4,233,000 revolving line of credit, and matures on October 30, 2004.
The term loan bears interest at prime plus 3%, payable monthly, with monthly
principal payments of $121,146 beginning after the first thirteen months. The
bank has agreed to defer principal payments on the term loan for twelve months.
The $8.3 million mortgage loan bears interest at the 180-day LIBOR rate plus 4%
or prime plus 1.125%, payable monthly in the amount of approximately $20,000
plus interest. The $4,233,000 revolving credit loan bears interest at the 30-day
LIBOR rate plus 3.875% or prime plus 1%, payable monthly, and is advanced
against the Company's inventory and receivables. The Company is required to
comply with various covenants in connection with this facility and borrowings on
the revolving line of credit are subject to a borrowing base calculated with
reference to the Company's eligible inventory and receivables. The bank has
agreed to waive the requirement that the Company reduce the principal
outstanding under its revolving line of credit as a result of an adjustment to
the borrowing base on the first anniversary of the loan. In addition, the
agreement prohibits the payment of any cash dividends unless approval is
obtained from the lender. At September 3, 2000, the Company had used all
$4,233,000 under its revolving credit facility. The Company cannot comply with
other covenants and provision of this facility; therefore the entire amount
outstanding under these loans has been classified as a current obligation on the
Company's balance sheet at September 3, 2000. The Company is discussing various
alternatives to address this situation with its lender; however, there can be no
assurance that any of these discussions will produce a satisfactory resolution
of this matter. If the Company is unable to reach satisfactory arrangements with
its lender and substantially increase its cash flow, it may become unable to
continue operations.
In August 2000, UPG borrowed $2.5 million from its two largest shareholders, of
which $2 million was funded prior to the end of fiscal 2000, and the remainder
of which was funded thereafter. The loan bears interest at the same rate of
interest as the revolving credit loan in favor of Hamilton Bank, and provides
for payment
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of all accrued interest and principal on November 30, 2000. The entire amount
outstanding under this promissory note has been classified as current. The loan
is secured by a lien on inventory, junior to the lien of Hamilton Bank. In
addition, the Company collected $173,000 from the rental of a portion of the
headquarters property to an unrelated third party and from the operation of the
scale located on the headquarters property. These amounts are owed to the
property owner, which is an entity beneficially owned by the Company's Chief
Executive Officer and Chairman of the Board, and are recorded as due to
stockholder. These amounts bear interest at the same rate of interest as the
revolving credit loan in favor of Hamilton Bank.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred substantial operating losses and cash flow deficiencies
subsequent to the Merger, due to, among other things, persistently high gasoline
prices, the interest burden of substantial Merger-related financing with
variable rates that increased during the year, high general and administrative
expenses relating to its own operations as well as the operations of FSG, and
difficulties encountered in implementing the Company's expansion by acquisition,
gas branding and other growth strategies. The Company's strategy to address
these financial difficulties focused upon growth by acquisitions and improving
gasoline operations by branding. The Company actively pursued two major
acquisitions in fiscal 2000, involving purchases of oil refineries and
substantial convenience and gas store assets. The Company has not been able to
consummate these transactions due to, among other things, its inability to reach
satisfactory accommodations with its institutional lender. The Company has also
actively pursued opportunities to brand its gas stores that presently sell
unbranded gas. However, due to uncertainties regarding the Exxon-Mobil merger,
the Company's inability to finalize an agreement with a former UPC principal
regarding assignment of a gas distributorship, the Company's difficulties in
financing substantial capital outlays required to commence a branding program,
and other factors, the Company has been unable to secure a branding arrangement
for its gas stores. As a result of these financial and other difficulties, the
Company cannot comply with the covenants and other provisions of its principal
institutional financing arrangement, and therefore the entire outstanding amount
of this debt of approximately $23 million is classified as current in the
Company's balance sheet at September 3, 2000. The Company plans to address these
circumstances by seeking additional financing and substantially retrenching its
operations, including selling certain stores and reducing its general and
administrative expenses. This reduction in general and administrative expenses
left the Company unable to perform under its management agreement with FSG, and
therefore the Company terminated the agreement effective January 15, 2001. There
can, however, be no assurance that these measures will adequately address the
Company's financial difficulties. The Company's auditors' report on its
consolidated financial statements as of September 3, 2000 contains an
uncertainty paragraph concerning the ability of the Company to continue as a
going concern. If the Company is unable to reach satisfactory arrangements
regarding its primary institutional financing and substantially increase its
cash flow, the Company may be forced to sell or cease its operations or
reorganize.
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
During fiscal year 2000, net cash used in operating activities was $1.3 million,
compared to cash provided by operations of $1.3 million in fiscal year 1999. The
decrease in cash provided by operating activities for fiscal year 2000 was
mainly due to interest payments of $2 million made on the debt incurred to
finance the Transactions, a decrease in operating profits, an increase in
accounts receivable and an increase in inventories, partially offset by an
increase in accounts payable. The increase in inventories is the result of
higher wholesale cigarette and gasoline costs when compared to 1999 costs.
Accounts receivable increased mostly due to the significant increase in credit
card sales as a result of the newly-installed pay-at-the-pump gasoline
dispensers. The increase in accounts payable is due to increased inventories and
increased gasoline excise taxes payable as a result of higher gasoline gallons
sold, an increase in the money orders payable as money order sales are typically
higher at the beginning of the month, and extended terms with the Company's
primary grocery vendor.
CASH USED FOR INVESTING ACTIVITIES
Net cash used in investing activities was $21.1 million and $1.1 million for
fiscal years 2000 and 1999, respectively. The increase in cash used in investing
activities during fiscal year 2000 was mainly due to the acquisition of FSCI
(see "Recent History of the Company" section of Item 1. Business for discussion
of the Transactions).
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $23.5 million in fiscal year as a
result of borrowing $21.8 million, net of loan costs, to finance the
Transactions, and borrowing $2.2 million from two stockholders for working
capital.
CAPITAL EXPENDITURES
Capital expenditures during the fifty-three weeks ended September 3, 2000
consist mostly of costs incurred for gasoline dispensing equipment and building
improvements as noted above. The Company anticipates spending approximately
$500,000 during the next fiscal year to improve and maintain existing store and
gasoline dispensing equipment. The Company will fund these expenditures by cash
from operations, long-term lease obligations and other forms of equipment
financing.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK
The Company does not have any market risk sensitive instruments that it believes
would be materially affected by any future rate or price changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its Subsidiaries and
notes thereto, appear on pages F-1 through F-17 of this Form 10-K. The required
Supplementary Data appears on page F-18 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In the third quarter of fiscal year 2000, the Company engaged Deloitte & Touche
LLP as the Company's independent auditors for the fiscal year ended September 3,
2000. Deloitte & Touche LLP were the independent auditors for FSCI prior to the
Merger, and replaced J.H. Cohn LLP, who were the independent auditors for UPC
and its subsidiaries prior to the Merger. The Company previously reported this
change in auditors in its Current Report on Form 8-K dated April 12, 2000 and
filed on April 17, 2000.
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PART III
Information required by Part III of Form 10-K is incorporated herein by
reference from the Company's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the end of the Company's fiscal year ended
September 3, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is certain information regarding the Directors and Executive Officers
of UPC as of September 3, 2000 and as present:
Mr. Joe P. Bared, 60, has been a director and Chief Executive Officer of UPC
since November 1999. Mr. Bared also served as UPC's president from November 1999
until he resigned from that position January 2001. In 1967 Mr. Bared founded The
Bared and Company, Inc., which grew to become one of the top 50 mechanical
construction companies in the United States. In 1992, Mr. Bared led an investor
group that purchased the assets of Farms Stores out of bankruptcy. Mr. Bared was
a director of Republic Banking Corporation of Florida from 1970 until 1999, the
year that bank was sold, where he served on various board committees, including
the executive committee and audit committee. Mr. Bared has been a trustee of the
University of Miami since 1978, and is a member of the Board of Governors of the
Sylvester Comprehensive Cancer Center of the University of Miami. Together with
his wife, Miriam Bared, Mr. Joe Bared owns approximately 47.6% of the issued and
outstanding Common Stock of UPC and 50% of the issued and outstanding Preferred
Stock of UPC. Mr. Joe Bared is the father of Mr. Carlos Bared and Mr. Maurice
Bared. Pursuant to a Stockholders Agreement among UPC, Infinity Investors
Limited, and Joe and Miriam Bared, the Bareds, on the one hand, and Infinity
Investors Limited, on the other hand, agreed to vote their shares of Common
Stock so that the Board of Directors of UPC will continue to consist of two
representatives selected by the Bareds and two representatives selected by
Infinity Investors Limited.
Mr. Carlos E. Bared, 33, served as a Director of UPC and UPC's Senior Vice
President, Chief Financial Officer and Secretary from November 1999 until his
resignation from those positions in January 2001. Mr. Bared joined Farm Stores
in 1997, as Chief Financial Officer from 1992 to 1997, he was the President and
Chief Financial Officer for The Bared and Company, Inc. Mr. Bared was the
President of the Construction Financial Management Association from 1994 to 1997
and was a Director from 1993 to 1997. Mr. Bared is Director and Treasurer of the
not-for-profit Miami Children's Museum and a founder of the not-for-profit
Network Miami, Inc. Mr. Carlos Bared is the son of Mr. Joe Bared, and the
brother of Maurice Bared. Mr. Carlos Bared was initially selected by the Bareds
to serve on UPC's Board of Directors.
Mr. Clark K. Hunt, 36, was a Director of UPC from November 1999 until his
resignation in January 2001. Mr. Hunt is a Manager of HW Capital, L.P. and
related investment advisory companies. Prior to co-founding these entities, Mr.
Hunt was an analyst at Goldman, Sachs & Co. in New York and Los Angeles. Mr.
Hunt was initially selected by Infinity Investors Limited to serve on UPS's
Board of Directors.
Mr. Stuart J. Chasanoff, 36, has served as a Director of UPC since November
1999. He is a 1990 cum laude graduate of the Fordham University School of Law
and a 1987 graduate of the University of Virginia. Mr. Chasanoff currently
serves as Senior Vice President and General Counsel of Novo Networks, formerly
known as eVentures Group. Mr. Chasanoff previously served as Vice President of
Business Development, General Counsel and Secretary of eVentures Group, Inc., a
communications company in the business of using "next generation" technology to
transmit voice, data and video over the same transmission lines. Additionally,
since 1996, Mr. Chasanoff has served as Senior Vice President and in-house
corporate counsel to H.W. Partners, L.P., a Texas limited partnership that
serves as advisor to Infinity. Between 1994 and 1996, Mr. Chasanoff served as
in-house counsel at PepsiCo, Inc., effecting mergers and acquisitions, and
between 1990 and 1994 he was an associate corporate attorney with the New York
office of White & Case, dealing with mergers/acquisitions, corporate
reorganizations and financial services. Mr. Chasanoff was initially selected by
Infinity Investors Limited to serve on UPC's Board of Directors.
L. Grant ("Jack") Peeples, 70, has served as a Director of UPC since November
1999 and is the independent director initially designated by the Bareds and
Infinity Investors Limited to serve on the Board. Mr. Peeples has been of
counsel to the law firm of White & Case in Miami, Florida since 1994. Prior to
that time, he was a partner at Peeples, Earl & Blank, specializing in
legislative and administrative practice. After graduating from the University of
Florida College of law in 1957, and before returning to private practice 1961,
Mr. Peeples worked at the law firm of former Florida Governor Collins in
Tallahassee, was Legislative Counsel to Governor Collins in 1958 and was
appointed to the cabinet office of the State Beverage Director in 1959. From
1969 until 1975, Mr. Peeples served as Senior Vice President, Director and
General Counsel of the Deltona Corporation. From 1976 until 1980, he served as
Chairman of the Board
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and Chief Financial Officer of the Roma Corporation. He was General Counsel to
Alandco, a wholly owned subsidiary of Florida Power & Light Company, and served
as counsel to various Murchison Family interests from 1975 until 1981. Mr.
Peeples was the Campaign Chairman and Chairman of Transition Team for Florida
Governor Lawton Chiles and Legislative and Senior Counsel to the Governor,
Vice-Chairman of the Governor's Commission on Governance, Vice-Chairman of the
Governor's Commission on the Homeless, Chairman of the Florida Aviation
Commission, Co-Chairman of the Dade County Homeless Trust, and representative of
the Governor and Cabinet on the Downtown Development Authority.
Mr. Steve Loglisci, 38 has served on UPC's Board of Directors since September
2001, and was appointed to fill the vacancy created by the resignation of Mr.
Clark Hunt. Mr. Loglisci was the former Chief Executive Officer of eVolve.
Mr. Maurice Bared 32, served as the Company's Executive Vice President from
November 1999 until January 2001, when he resigned from those positions. Mr.
Maurice Bared is the son of Mr. Joe Bared and the brother of Mr. Carlos Bared.
Mr. Bared served as Executive Vice President of UPC from November 1999 until his
resignation from that position in January 2001. Mr. Bared joined Farm Stores in
1993, as Director of Special Projects and Vice President of Operations. Mr.
Bared received a degree in finance from the University of Miami in 1991.
Ms. Jacqueline Frost, 40, served as the Company's Vice President of
Merchandising and Marketing from November 1999 until her resignation in January
2000. Ms. Frost also served as Vice President of Farm Stores and held various
management positions at Burdines department stores from 1980 to 1997. Ms.
Jacqueline Frost received her degree in business administration in 1980 from the
University of Florida
Mr. Jorge Cano, 48, has served as a Director of UPC since January 2001, when he
was appointed to fill the vacancy created by the resignation of Mr. Carlos
Bared. He was appointed as President of the Company in January 2001, replacing
Mr. Joe Bared in that position. Mr. Cano graduated from the University of Miami
in 1976 with a B.S. degree in civil engineering and received a M.S. degree in
environmental and urban studies in 1985 from Florida International University.
Mr. Cano has been a registered professional engineer since 1980, and worked in
consulting engineering from 1976 to 1981. From 1981 to 1995, he held management
positions at Florida Power & Light, including customer service and sales manager
of the Miami District, Dade County area manager, and corporate marketing manager
for commercial/industrial programs. He joined Farm Stores in 1995 as vice
president of special projects and subsequently served as vice president of the
dairy division, and as Sr. Vice President and Chief Administrative Officer
supporting administrative and strategic business projects. He serves on the
Board of Trustees of the Historical Museum of Southern Florida, and has
previously served as director of the United Cerebral Palsy Assoc. of Miami.
Mr. John MacDonald, 57, joined the Company in December 1999 as Vice President of
Retail Operations, and since January 2001 serves as Vice President and Chief
Operating Officer. Mr. MacDonald graduated with a B.A. in Business
Administration from St. Francis College in Biddeford, Maine and completed
advanced business courses at Harvard Business School. From 1998 to 1999, Mr.
MacDonald held the title of Vice President, Retail Operations, New England and
New York for D. B. Marketing. Inc., d/b/a D/B/Mart and Dairy Mart. From 1985 to
1997, Mr. MacDonald served as Senior Vice President of Retail Operations &
Marketing for Christy's Market, Inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Federal securities laws require executive officers, directors and persons owning
ten percent or more of the Company's common stock to file reports (Forms 3, 4
and 5) with the Securities and Exchange Commission relating to the number of
shares of common stock that they own and any changes in their ownership. Based
on a review of the forms submitted to the registrant during and with respect to
its fiscal year ending September 3, 2000, and to date, the Company is not aware
that Ms. Jacqueline Frost, Mr. Carlos Bared, Mr. Maurice Bared or Mr. Clark Hunt
filed a Form 5 to report that they were no longer subject to the reporting
requirements as an officer of director of UPC, that Mr. MacDonald or Mr.
Loglisci filed a Form 3 to indicate their appointments as an officer and
director, respectively, of UPC. Further, the registrant is aware of gifts of
20,000 shares of Common Stock made by Mr. Joe Bared to each of Mr. Carlos Bared
and Mr. Maurice Bared in calendar year 2000 with respect to which the registrant
has not received a reporting form.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of all compensation awarded to, earned
by or paid to, the Company's Chief Executive Officer and all other executive
officers who were paid or accrued compensation in excess of $100,000 per annum
for such fiscal year (the "Named Executive Officers") for services rendered in
all capacities to the Company and its subsidiaries during the fiscal year ended
September 3, 2000.
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Summary Compensation Table
<Table>
<Caption>
Annual Compensation Long Term Compensation
------------------------------------ ----------------------------------------
Awards Payouts
------------------------------ -------
Securities
Other Annual Restricted Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Stock Award(s) Options/SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
------------------------ ---- -------- ----- ------------ --------------- ------------- ------- ------------
Joe P. Bared, Chairman
of the Board, Chief 2000* $300,462 $0 $17,348(1) -- -- -- --
Executive Officer and
President
Carlos Bared, Sr. Vice
President, Chief 2000* $121,154 $0 $14,879(2) -- -- -- --
Financial Officer and
Director
Maurice Bared,
Executive Vice President 2000* $121,154 $0 $13,553(3) -- -- -- --
Jorge Cano, Sr. Vice
President and Chief 2000* $100,962 $0 $ 7,008(4) -- -- -- --
Administrative Officer
John MacDonald,
Vice President Retail 2000* $ 61,539 $0 $ 4,503(5) -- -- -- --
Operations
</Table>
* Includes compensation from Nov. 12, 1999, the date of the Merger to
September 3, 2000.
(1) Represents Company-paid rental car totaling $11,828 & medical, dental,
life and long-term disability insurances totaling $5,520.
(2) Represents Company-paid auto allowance totaling $6,750 & medical, dental,
life and long-term disability insurances totaling $8,129.
(3) Represents Company-paid rental car totaling $5,753 & medical, dental, life
and long-term disability insurances totaling $7,800.
(4) Represents Company-paid auto allowance totaling approx. $5,250 & medical,
dental, life and long-term disability insurances totaling $1,758.
(5) Represents Company-paid rental car totaling $3,278 & medical, dental, life
and long-term disability insurances totaling $1,225.
EMPLOYMENT AGREEMENTS
In November 1999, the Company entered into Employment Agreements with
both its Chief Executive Officer and Chief Financial Officer. Compensation under
these agreements aggregated approximately $422,000 in fiscal year 2000,
including payments of approximately $300,342 to the Company's Chief Executive
Officer and $121,154 to its Chief Financial Officer. On January 17, 2001 Carlos
Bared resigned his position as Director, Sr. Vice President, and Chief Financial
Officer and terminated his Employment Agreement with the Company. Compensation
for the Chief Executive Officer will be approximately $372,000 annually.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND BENEFICIAL OWNERSHIP BY PRINCIPAL STOCKHOLDERS,
DIRECTORS AND OFFICERS
The following table sets forth, as of August 31, 2001, the beneficial ownership
of the Company's Common Stock by Directors, by each of the executive officers
named in the Summary Compensation Table and all executive officers and directors
as a group, and by each person known by the Company to be the beneficial owner
of five percent or more of each class of Common Stock. Unless otherwise
indicated, the Company believes that the beneficial owner has sole voting and
investment power over such shares. All of the shares described below are shares
of Common Stock.
<Table>
<Caption>
NAME OF OFFICERS AND DIRECTORS AND NAME AND AMOUNT AND NATURES OF BENEFICIAL
ADDRESS OF BENEFICIAL OWNERS OWNERSHIP(1) PERCENT OF CLASS(1)(2)(3)
------------------------------------------- -------------------------------- -------------------------
Joe Bared 2,360,000 shares(5) 47.6%
Chairman and Chief Executive Officer(4)
Jorge Cano 200,000 shares(6) 4.0%
President and Director
John MacDonald 150,000 shares(7) 3.0%
Vice President and Chief Operating Officer
Steven Logliscu 0 shares 0
Director
Stuart Chasanoff 0 shares 0
Director
L. Grant Peeples 150,000 shares(8) 3.0%
Director
All Executive Officers and Directors as a group 2,860,000 shares 57.7%
(6 persons)
Infinity Investors Limited 2,020,862 shares(9) 40.8%
Murkins Waterfront Plaza
Main Street
P.O. Box 556, Charlestown
Nevis, West Indies
=============================================================================================================================
</Table>
(1) Includes the amount of shares the beneficial owner has the right to acquire
within 60 days from options, warrants or similar rights.
(2) Calculation of total number of shares of outstanding Common Stock of the
Company is made on the basis of an assumed conversion or exercise of all
instruments exercisable to purchase or convertible into Common Stock within
60 days that are held by the Company's directors, officers, and holders of
10% or more of the outstanding Common Stock.
(3) Assumes the issuance of 334,538 shares of Common Stock that, pursuant to
the Plan of Reorganization, the Company has reserved pending resolution of
a dispute with previous holders of the Company's Debentures, and 200,000
shares of Common Stock that was the subject of a trust to be established
pursuant to the Plan of Reorganization.
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(4) All of these shares are owned by Joe Bared and Miriam Bared,
his wife, as tenants by the entireties.
(5) Does not include 40,000 shares of Common Stock owned by Mr.
Bared's sons, Carlos Bared (as at 20,000 shares) and Maurice
Bared (as to 20,000 shares), as to which Mr. Joe Bared
disclaims beneficial ownership.
(6) Consists of shares issuable upon exercise of options granted
on January 17, 2001 at $0.05 per share, none of which have
been exercised.
(7) Consists of shares issuable upon exercise of options granted
on January 17, 2001 at $0.05 per share, none of which have
been exercised.
(8) Consists of shares issuable upon exercise of options granted
on January 17, 2001 at $0.05 per share, none of which have
been exercised.
(9) Includes (i) 62,731 shares owned by Seacrest Capital Limited,
as subsidiary of Infinity Investors Limited, (ii) 62,731
shares owned by Fairway Capital Limited, a subsidiary of
Infinity Investors Limited, (iii) 334,538 shares that are
reserved pending resolution of a dispute and may be issued to
Infinity Investors Limited, and (iv) 200,000 shares that were
designated to be held in trust in connection with UPC's Plan
of Reorganization, that have not been distributed, and to
which Infinity Investors claims entitlement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2000, Mr. Joe Bared, UPC's Chairman and largest stockholder,
and Infinity Investors Limited, UPC's second largest stockholder, made a loan
in the principal amount of $2,500,000 to UPG for working capital needs. The note
bears interest at the same rate of interest as the Company's revolving line of
credit with Hamilton Bank, N.A. The note is secured by a lien on the Company's
inventory, and subordinated to the Hamilton Bank loan. The principal amount,
including accrued interest, was due and payable on November 30, 2000, and is
therefore in default at present. No payments of principal or interest have been
made under this loan
In March 2001, Mr. Joe Bared UPC's Chairman and largest stockholder,
made a loan in the principal amount of up to $600,000 (of which $583,000 has
been advanced and remains outstanding) to the Company to facilitate timely
payment of taxes relating to the Company's owned and leased properties. The
Company's failure to pay certain of these taxes would create a default under its
tenant leases. The loan bears interest at 10% per annum, and is secured by a
first lien and pledge upon the Company's interest in shares of stock of Farm
Stores Grocery, Inc. ("FSG"), a company in which Mr. Joe Bared beneficially owns
a majority of the outstanding stock. Hamilton Bank released these shares from
its prior pledge for this purpose. No payments of principal or interest have
been made under such note, and it is past due and in default.
Prior to January 16, 2001 UPG was obligated to provide management
services to FSG under a Management Agreement between UPG and FSG dated November
12, 1999. Mr. Joe Bared, UPC's Chairman and largest stockholder, beneficially
owns a majority of the outstanding stock of FSG. UPC and FSG terminated the
Management Agreement effective January 16, 2001. The agreement provided for a
fixed management fee per store, based on the total number of stores FSG operated
within the fiscal year. The management fee income recorded in fiscal year 2000
approximated $2,620,000, of which $146,602 had not been paid as of year-end.
When the Management Agreement terminated, the management fee had been paid in
full.
The Company entered into a License Agreement dated October 29, 1999
with FSG, pursuant to which the Company uses FSG's trade name "Farm Stores" on
its walk-in convenience stores and on certain private label products such as
milk, bread, eggnog and ice cream. The license is royalty free and automatically
renews for successive one-year terms, until terminated by a party in accordance
with the terms of the agreement. Mr. Joe Bared, UPC's Chairman and largest
stockholder, beneficially owns a majority of the outstanding stock of FSG.
The Company entered into a Consignment Agreement dated November 3, 1999
with FS Management, LLC, pursuant to which the Company accepted a consignment of
the computer and telecommunications equipment and the furniture, fixtures and
improvements located at the Company's corporate headquarters for the term of the
Management Agreement. This agreement terminated on January 16, 2001, upon
termination of the Management Agreement, as set forth above. Mr. Joe Bared,
UPC's Chairman and largest stockholder, beneficially owns the outstanding stock
of FS Management, LLC.
The Company's corporate headquarters in Miami, Florida is located on
property beneficially owned by Mr. Joe Bared, UPC's Chairman and largest
stockholder. Prior to termination of the Management Agreement, as described
above, the Company paid all operating expenses relating to the facility,
including real property taxes, insurance, security and utilities. Subsequent to
termination of the Management Agreement, the Company and FSG (each of which
occupies approximately one-half of the facility) leased the facility from the
affiliated entity, and each pays 50% of the expenses relating to the facility (a
total of approximately $210,000 is paid annually by UPC as occupancy cost). No
rental is payable in addition to these expenses. Mr. Joe Bared, UPC's Chairman
and largest stockholder, beneficially owns a majority of the outstanding stock
of FSG.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 3, 2000 and
August 29, 1999
Consolidated Statements of Operations for the fifty-three week
period ended September 3, 2000 and the fifty-two week periods
ended August 29, 1999 and August 30, 1998
Consolidated Statement of Stockholders' or Division Equity for the
fifty-three week period ended September 3, 2000 and the fifty-two
week periods ended August 29, 1999 and August 30, 1998
Consolidated Statements of Cash Flows for the fifty-three week
period ended September 3, 2000 and the fifty-two week periods
ended August 29, 1999 and August 30, 1998
Notes to consolidated financial statements
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27
(a)(2) Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the fifty-three
week period ended September 3, 2000 and the fifty-two week periods
ended August 29, 1999, and August 30, 1998
List of Schedules.
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are omitted because they are
not applicable, or the information is included in the financial
statements included herein.
(a)(3) Exhibits.
2.1 Second Amended Plan of Reorganization of United Petroleum
Corporation dated July 23, 1999 (filed as Exhibit 99.1 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
2.2 Second Amended Disclosure Statement of United Petroleum
Corporation dated July 23, 1999 (filed as Exhibit 99.2 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
2.3 Findings of Fact, Conclusions of Law and Order Confirming
Amended Plan of Reorganization dated October 7, 1999 (filed as
Exhibit 99.4 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
2.4 Agreement and Plan of Merger dated September 29, 1999 (filed
as Exhibit 99.3 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation of United
Petroleum Corporation (filed as Exhibit 3(i) to the Company's
Current Report on Form 8-K (Amendment 1) dated November 12,
1999 and filed on December 1, 1999, and incorporated herein by
reference)
3.2 Amended and Restated Bylaws of United Petroleum Corporation
(filed as Exhibit 3(ii) to the Company's Current Report on
Form 8-K (Amendment 1) dated November 12, 1999 and filed on
December 1, 1999, and incorporated herein by reference)
4 Certificate of Designation - Class A 9% Preferred Stock (filed
as Exhibit 4 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
10.1 License Agreement dated as of November 12, 1999 among Farm
Stores Grocery, Inc., United Petroleum Corporation and United
Petroleum Group, Inc. (filed as Exhibit 99.5 to the Company's
Current Report on Form 8-K (Amendment 1) dated November 12,
1999 and filed on December 1, 1999, and incorporated herein by
reference)
10.2 Employment Agreement dated as of November 3, 1999 between
United Petroleum Corporation and Joe P. Bared (filed as
Exhibit 99.6 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
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28
10.3 Employment Agreement dated as of November 3, 1999 between
United Petroleum Corporation and Carlos Bared (filed as
Exhibit 99.7 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
10.4 Stockholders' Agreement dated as of November 3, 1999 by and
among United Petroleum Corporation, Infinity Investors
Limited, Fairway Capital Limited, Seacrest Capital Limited,
and Joe Bared and Miriam Bared (filed as Exhibit 99.8 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
10.5 Management Agreement dated as of November 12, 1999 between
United Petroleum Group, Inc. and Farm Stores Grocery, Inc.
(filed as Exhibit 99.9 to the Company's Current Report on Form
8-K (Amendment 1) dated November 12, 1999 and filed on
December 1, 1999, and incorporated herein by reference)
10.6 Consignment Agreement dated as of November 3, 1999 between
F.S. Management, LLC and United Petroleum Group, Inc. (filed
herewith)
10.7 Loan Agreement dated November 9, 1999 among United Petroleum
Corporation, United Petroleum Group, Inc., F.S. Convenience
Stores, Inc., et al., as Borrowers, and Hamilton Bank, N.A.,
as Lender (filed as Exhibit 99.10 to the Company's Current
Report on Form 8-K (Amendment 1) dated November 12, 1999 and
filed on December 1, 1999, and incorporated herein by
reference)
10.8 Client Service Agreement dated May 5, 2000 between the Company
and Oasis Outsourcing, Inc. (filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the Quarter Ended
June 4, 2000 filed on July 19, 2000, and incorporated herein
by reference)
10.9 Secured Promissory Note dated August 11, 2000 made by United
Petroleum Group, Inc. in favor of Jose P. Bared and Infinity
Investors Limited (filed herewith)
10.10 Security Agreement dated August 11, 2000 made by United
Petroleum Group, Inc. in favor of Jose P. Bared and Infinity
Investors Limited (filed herewith)
10.11 Inter-creditor Agreement dated August 11, 2001 between
Hamilton Bank, N.A., Jose P. Bored and Infinity Infinity
Investors Limited (filed herewith)
10.12 2001 stock option plan of United Petroleum Corporation (filed
herewith)
10.13 Non-Qualified stock option agreement dated January 18, 2001
between United Petroleum Corporation and Jorge Cano. (filed
herewith)
10.14 Non-qualified stock option agreement dated January 18, 2001
between United Petroleum Corporation and John MacDonald.
(filed herewith)
10.15 Pledge Agreement dated March 30, 2001 among F.S. Non-Gas
Subsidiary, United Petroleum Corporation, United Petroleum
Group Inc. and Jose P. Bared and Miriam Bared (filed herewith)
10.16 Secured Demand Promissory Note dated March 30, 2001 made by
United Petroleum Corporation and F.S. Non-Gas Subsidiary, Inc.
in favor of Jose P. Bared and Miriam Bared (filed herewith)
10.17 Termination of Management Agreement dated Jan 14, 2001 between
United Petroleum Group, Inc. and Farm Stores Grocery, Inc.
(filed herewith)
10.18 Administrative Services Agreement dated January 8, 2001
between Oasis Outsourcing, Inc. and United Petroleum Group,
Inc. (filed herewith)
10.19 Administrative Services Agreement dated January 8, 2001
between Oasis Outsourcing Inc. and Caliber Systems, Inc.
(filed herewith)
10.20 Distributor Sales Agreement (Branded) dated February 1, 2001
between Exxon Mobil Fuels Marketing Company, a division of
Exxon Mobil Corporation and United Petroleum Group, Inc.
(filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED PETROLEUM CORPORATION
---------------------------------
(Registrant)
By: /s/ Joe P. Bared
------------------------------
Joe P. Bared
Chief Executive Officer and
Chairman of the Board of
Directors
By: /s/ Janet Wallace
------------------------------
Principal Accounting Officer
Date: September 27, 2001
----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: September 27, 2001 /s/ Joe P. Bared
------------------------ ------------------------------------
Chief Executive Officer and
Chairman Of the Board of Directors
Date: September 27, 2001 /s/ Jorge Cano
------------------------ ------------------------------------
President and Director
Date: /s/ Steve Loglisci
------------------------ ------------------------------------
Director
Date: /s/ Stuart J. Chasanoff
------------------------ ------------------------------------
Director
Date: September 27, 2001 /s/ L. Grant Peeples
------------------------ ------------------------------------
Director
29
30
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
Page
----
Independent Auditors' Report..................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 3, 2000 and August 29, 1999....................... F-3
Consolidated Statements of Operations for the fiscal years ended
September 3, 2000, August 29, 1999, and August 30, 1998..................................... F-4
Consolidated Statement of Stockholders' or Division Equity for the fiscal
years ended September 3, 2000, August 29, 1999, and August 30, 1998......................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
September 3, 2000, August 29, 1999 and August 30, 1998...................................... F-6
Notes to consolidated financial statements.................................................... F-8
</Table>
F - 1
31
INDEPENDENT AUDITORS' REPORT
To the Owners of United Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of United Petroleum
Corporation and subsidiaries (the "Company") as of September 3, 2000 and August
29, 1999 and the related consolidated statements of operations, stockholders' or
division equity and cash flows for the fifty-three week period ended September
3, 2000 and the fifty-two week periods ended August 29, 1999 and August 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 3, 2000
and August 29, 1999 and the results of its operations and its cash flows for the
fifty-three week period ended September 3, 2000, and the fifty-two week periods
ended August 29, 1999 and August 30, 1998 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's difficulties in
meeting its loan agreement covenants and financing needs, its recurring losses
from operations and its working capital deficiency discussed in Note 3 raise
substantial doubt about the Company's ability to continue as a going concern.
Managements plans concerning these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
December 18, 2000
(February 1, 2001 as to Note 13)
F - 2
32
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 3, 2000 AND AUGUST 29, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------------------------------------
<Table>
<Caption>
ASSETS 2000 1999
-------- --------
Cash and cash equivalents $ 1,226 $ 38
Accounts receivable - net of allowance
for doubtful accounts of $65 in 2000 and 1999 1,205 762
Receivable from affiliated company 159 --
Inventories 4,685 3,826
Other current assets 481 483
-------- --------
Total current assets 7,756 5,109
Property, plant and equipment, net 15,229 3,794
Goodwill and other intangible assets 20,982 --
Investment in Farm Stores Grocery, Inc. 251 11
Deferred loan costs, net 1,103 54
Other assets 169 35
-------- --------
$ 45,490 $ 9,003
======== ========
LIABILITIES AND EQUITY
Accounts payable $ 10,592 $ 4,972
Accrued expenses 1,893 1,674
Accrued preferred stock dividends 169 --
Due to stockholders 2,177 --
Current portion of long-term debt 22,980 94
-------- --------
Total current liabilities 37,811 6,740
Long-term debt, net of current portion 764 106
Other long-term liabilities 353 224
-------- --------
Total liabilities 38,928 7,070
-------- --------
Commitments and contingencies (Notes 8 and 9)
Stockholders' or division equity
Preferred stock, Series A, 9%, $.01 par value, 300,000
shares authorized, 148,492 shares issued and outstanding 2 --
(liquidation value of $14,849,200)
Common stock, $.01 par value, 10,000,000 shares authorized
5,000,000 shares issued and outstanding 50 --
Additional paid-in capital 14,183 --
Accumulated deficit (7,673) --
Division equity -- 1,933
-------- --------
Total stockholders' or division equity 6,562 1,933
-------- --------
$ 45,490 $ 9,003
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F - 3
33
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FIFTY-THREE WEEK PERIOD ENDED SEPTEMBER 3, 2000, AND FIFTY-TWO WEEK
PERIODS ENDED AUGUST 29, 1999 AND AUGUST 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
--------- --------- ---------
Sales $ 132,806 $ 108,514 $ 117,369
Cost of Sales 106,196 82,351 89,879
--------- --------- ---------
Gross profit 26,610 26,163 27,490
--------- --------- ---------
Store operating expenses 22,119 21,238 21,124
General and administrative expenses, net 6,212 4,984 4,881
Depreciation and amortization expense 1,856 490 494
Loss on impairment of fixed assets 1,400 -- --
--------- --------- ---------
Total 31,587 26,712 26,499
--------- --------- ---------
Operating profit (loss) (4,977) (549) 991
Interest expense, including amortization of
deferred loan costs of $215 in 2000 (2,283) (23) (33)
Interest income 34 15 66
Other income, net 142 113 63
Equity in earnings (loss) of FSG 23 (32) 7
Gain (loss) on disposal of fixed assets 46 1 48
--------- --------- ---------
Net income (loss) (7,015) $ (475) $ 1,142
========= =========
Preferred stock dividends (1,018)
---------
Net loss attributable to common stockholders $ (8,033)
=========
Earnings (loss) per share
Basic and diluted earnings (loss) per share $ (1.61)
Weighted average number of shares -
basic and diluted 5,000
Proforma income taxes for predecessor businesses
held in partnership from (unaudited):
Net income (loss) above -- $ (475) $ 1,142
Income taxes (benefit) -- (181) 434
--------- --------- ---------
Net income (loss), proforma -- $ (294) 708
========= ========= =========
</Table>
The accompanying notes are an integral part of these financial statements.
F - 4
34
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' OR DIVISION EQUITY
FIFTY-THREE WEEK PERIOD ENDED SEPTEMBER 3, 2000 AND FIFTY-TWO WEEK PERIODS ENDED
AUGUST 29, 1999 AND AUGUST 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<Table>
<Caption>
Series A Preferred Stock Common Stock
-------------------------- ---------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Balance at August 31, 1997 $ -- $ -- $ -- $ --
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance at August 30, 1998 -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at August 29, 1999 -- -- -- --
Net loss from August 30, 1999
to November 11, 1999 -- -- -- --
Reorganization of FSCI prior to merger with UPG -- -- 10,000 10
---------- ---------- ---------- ----------
Balance at November 11, 1999 prior to merger with UPG -- -- 10,000 10
Cash distribution to FSCI owner -- -- (10,000) (10)
Issuance of stocks to FSCI owner 70,000 1 2,400,000 24
Issuance of stocks to UPC owners and creditors 70,000 1 2,600,000 26
Dividends declared: Series A preferred stock at 9% -- -- -- --
Dividends paid in kind: Series A preferred stock at 9% 8,492 0 -- --
Net loss from November 12, 1999 to September 3, 2000 -- -- -- --
---------- ---------- ---------- ----------
Balance at September 3, 2000 148,492 $ 2 5,000,000 $ 50
========== ========== ========== ==========
</Table>
<Table>
<Caption>
Additional Total
Paid-in Accumulated Division Stockholders'
Capital Deficit Equity Equity
---------- ----------- ---------- -------------
Balance at August 31,1997 $ -- $ -- $ 1,266 $ 1,266
Net income -- -- 1,142 1,142
---------- ---------- ---------- ----------
Balance at August 30, 1998 -- -- 2,408 2,408
Net loss -- -- (475) (475)
---------- ---------- ---------- ----------
Balance at August 29, 1999 -- -- 1,933 1,933
Net loss from August 30, 1999
to November 11, 1999 -- -- (600) (600)
Reorganization of FSCI prior to merger with UPG 763 (240) (1,333) (800)
---------- ---------- ---------- ----------
Balance at November 11, 1999 prior to merger with UPG 763 (240) -- 533
Cash distribution to FSCI owner (2,990) -- -- (3,000)
Issuance of stocks to FSCI owner (25) -- -- --
Issuance of stocks to UPC owners and creditors 15,586 -- -- 15,613
Dividends declared: Series A preferred stock at 9% -- (1,018) -- (1,018)
Dividends paid in kind: Series A preferred stock at 9% 849 -- -- 849
Net loss from November 12, 1999 to September 3, 2000 -- (6,415) -- (6,415)
---------- ---------- ---------- ----------
Balance at September 3, 2000 $ 14,183 $ (7,673) $ -- $ 6,562
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
F - 5
35
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIFTY-THREE WEEK PERIOD ENDED SEPTEMBER 3, 2000 AND FIFTY-TWO WEEK
PERIODS ENDED AUGUST 29, 1999 AND AUGUST 30, 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,015) $ (475) $ 1,142
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,856 490 494
Impairment charge related to
Calibur equipment 1,400 -- --
Amortization of deferred loan costs 215 -- --
Equity in (earnings) loss of FSG (23) 32 (7)
(Gain) loss on disposal of fixed assets (46) (1) (48)
Provision for doubtful accounts -- 65 --
Change in assets and liabilities:
Accounts receivable (475) 142 (254)
Receivable from affiliated company (159) -- --
Inventories (710) 533 350
Other current assets (483) (67) (87)
Accounts payable 4,673 817 (881)
Accrued expenses (614) (135) (255)
Other long-term liabilities 129 (150) (259)
-------- -------- --------
Net cash provided by (used in) operating activities (1,252) 1,251 195
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired (19,935) -- --
Purchases of property, plant and equipment (1,367) (1,182) (93)
Proceeds from disposal of fixed assets 196 38 54
-------- -------- --------
Net cash provided by (used in) investing activities (21,106) (1,144) (39)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 23,000 -- --
Loan costs (1,249)
Principal payments on long-term debt (382) (110) (154)
Proceeds from short-term borrowings from stockholders 2,177 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 23,546 (110) (154)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,188 (3) 2
CASH AND CASH EQUIVALENTS, BEGINNING 38 41 39
-------- -------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 1,226 $ 38 $ 41
======== ======== ========
</Table>
F - 6
36
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FIFTY-THREE WEEK PERIOD ENDED SEPTEMBER 3, 2000 AND FIFTY-TWO WEEK
PERIODS ENDED AUGUST 29, 1999 AND AUGUST 30, 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<Table>
<Caption>
2000 1999 1998
---- ---- ----
Supplemental cash flow information:
Cash paid for interest $ 2,004 $ 23 $ 33
======= ======= =======
Supplemental schedule of non-cash investing and financing
activities:
Accrued dividends on preferred stock $ 169
=======
Payment in kind of dividends on preferred stock $ 849
=======
Preferred and common stocks issued to UPC's pre-merger
creditors and shareholders $15,613
=======
</Table>
The accompanying notes are an integral part of these financial statements.
F - 7
37
UNITED PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FIFTY-THREE WEEK PERIOD ENDED SEPTEMBER 3, 2000 AND FIFTY-TWO WEEK PERIODS
ENDED AUGUST 29, 1999 AND AUGUST 30, 1998
--------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
On November 12, 1999, United Petroleum Corporation ("UPC") acquired F.S.
Convenience Stores, Inc. ("FSCI") by merging FSCI and United Petroleum
Group, Inc. ("UPG"), one of UPC's wholly-owned subsidiaries, with UPG
being the surviving entity. Even though UPC and its subsidiaries are the
surviving entities after this merger, the owner of FSCI received the
largest individual common stock ownership percentage of 48%. Accordingly,
this transaction is accounted for as a reverse acquisition with UPC and
its subsidiaries being the legal acquirer and FSCI being the accounting
acquirer. As a result, the accompanying consolidated financial statements
for the period from November 12, 1999 to September 3, 2000, include the
operations of UPC and its wholly-owned subsidiaries - UPG (including
FSCI), Calibur Systems, Inc. ("Calibur") and Jackson-United Petroleum
Corporation ("Jackson") - and for periods prior to November 12, 1999, only
the operations of FSCI and its predecessor businesses. If this transaction
had occurred on August 29, 1999 revenues and net loss would not have been
substantially different. Therefore, proforma financial information from
August 30, 1999 to November 11, 1999 is not disclosed.
As of September 3, 2000 the Company primarily operated 83 convenience
retail stores located in Florida, a majority of which sold gasoline. The
stores offer a wide range of products including groceries, dairy products,
tobacco products, beverages, general merchandise, health and beauty aids,
lottery tickets, money orders and deli products. The Company also operated
6 stores in Tennessee and Georgia that offered car wash services and some
convenience store items. Three of the car wash facilities also sold
gasoline and one also offered quick lube services.
The Company is also engaged in activities related to the exploration and
development of oil and gas. This energy products division has all of its
assets in the United States. The Company owns a seventy-five percent (75%)
working interest in sixteen oil and gas wells located in Pennsylvania and
also has an oil and gas lease covering approximately 26,000 acres of real
property located in central Kentucky. There is currently no activity
related to the Kentucky property. The 16 oil and gas wells are tended by
an unrelated third party for a monthly fee and produce revenues totaling
approximately $12,500 per month.
2. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
To effect the reverse acquisition described in Note 1, UPC's pre-merger
creditors and shareholders were entitled to receive 2,600,000 shares of
UPC common stock, representing a 52% ownership interest, and 70,000 shares
of UPC preferred stock, representing a 50% interest, with a total fair
market value of $15,613,000, and UPC issued 2,400,000 shares of UPC common
stock, representing a 48% ownership interest, and 70,000 shares of UPC
preferred stock, representing a 50% interest, to the owner of FSCI. In
addition, UPC distributed cash of $3,000,000 to the owner of FSCI, which
amount has been treated as a dividend distribution in the accompanying
statement of stockholders' equity. Since FSCI is the accounting acquirer,
the issuance of the common and preferred stocks to FSCI had no impact on
UPC's stockholders' equity because the assets and liabilities of FSCI were
recorded at historical cost. The assets and liabilities of UPC and its
wholly-owned subsidiaries, the legal acquirer, were recorded at the fair
market value of the common and preferred stocks issued under the purchase
method of accounting. Accordingly, as of November 12, 1999, the purchase
price was allocated to the assets and liabilities of UPC and its
wholly-owned subsidiaries as follows (in thousands):
<Table>
Working capital deficiency $ (994)
Property, plant and equipment 11,503
Long-term assets 11
Goodwill 6,440
Long-term liabilities (756)
--------
Total 16,204
Professional fees incurred
by the Company in connection
with the merger (591)
--------
Purchase price allocated as of
November 12, 1999 15,613
========
</Table>
The predecessor businesses to FSCI were the Farm Stores Walk-In Division
("FSWD"), which consisted of the assets including $15,411,000,000 of
goodwill, liabilities and operations of the traditional walk-in
convenience stores owned and operated by two partnerships having common
ownership. In addition, prior to the reverse acquisition, FSCI's
subsidiary owned a 10% interest in Farm Stores Grocery, Inc., a Delaware
corporation which operates a drive-thru specialty retail business in
Florida. In the accompanying consolidated financial statements, the net
worth of FSWD prior to the formation of FSCI is shown as division equity.
F - 8
38
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE CONSOLIDATION - The accompanying financial statements include
the accounts of United Petroleum Corporation and its subsidiaries (the
"Company"). All intercompany transactions and balances have been
eliminated.
GOING CONCERN - The accompanying 2000 financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, during the year ended
September 3, 2000, the Company incurred a net loss of approximately $7.1
million and, as of that date, the Company's current liabilities exceeded
its current assets by approximately $30.1 million. As described in Note 6,
the Company was not in compliance with several provisions of its term loan
and revolving line of credit agreements; therefore the entire outstanding
amount of this debt of approximately $23 million is classified as current
in the Company's balance sheet at September 3, 2000. The Company plans to
address these circumstances by seeking additional financing and
substantially retrenching its operations, including selling certain stores
and reducing its general and administrative expenses. This reduction in
general and administrative expenses has left the Company unable to perform
under its management agreement with FSG and therefore the Company will
seek to terminate this agreement (see Notes 13). The Company's future
success will depend on its ability to raise additional capital,
restructure its operations, and improve its cash flow, and there can be no
assurance that the measures the Company takes will adequately address the
Company's financial difficulties. If the Company is unable to reach
satisfactory arrangements regarding its primary institutional financing
and substantially increase its cash flow, the Company may be forced to
sell or cease its operations or reorganize.
FISCAL YEAR - The Company operates on a fifty-two/fifty-three week period
ending on the Sunday nearest August 31. There were 53 weeks included in
the fiscal year ended September 3, 2000 and 52 weeks included in the
fiscal years ended August 29, 1999 and August 30, 1998.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
GOODWILL - Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized on a straight-line basis over 20
years. Accumulated amortization of goodwill amounted to $868,685 at
September 3, 2000.
PREFERRED STOCK - Each share of preferred stock carries a dividend rate of
9%. The dividends are cumulative and payable quarterly in cash or, at
UPC's option, in additional shares of preferred stock. Each share of
preferred stock has a liquidation preference over UPC's common stock in
the amount of $100 (plus cumulative unpaid dividends thereon), payable out
of net proceeds (after payments to all creditors but before payments in
respect of UPC's common stock) from any liquidation or sale of the
Company's assets. The holders of preferred stock have no voting rights,
except in the event that dividends remain unpaid and in arrears for a
total of eight consecutive quarters, in which event the holders of
preferred stock, as a class, have the right to elect two additional
directors to UPC's Board.
REVENUE RECOGNITION - Revenues are recognized when earned, which is at the
time of sale. In December 1999, the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements. SAB No. 101 summarizes the SEC's
views on the application of generally accepted accounting principles to
revenue recognition. The Company has reviewed SAB No. 101 and believes
that it is in compliance with the SEC's interpretation of revenue
recognition.
EXPENSES - Store operating expenses include expenses such as personnel and
occupancy costs directly related to the stores. General and administrative
expenses include retail supervision expenses and are shown net of the
management fee charged to Farm Stores Grocery, Inc. ("FSG") (see Note 4).
For fiscal years ended August 29, 1999 and August 30, 1998, general and
administrative expenses include retail supervision specifically attributed
to FSCI as well as an allocation of the Farm Stores Partnerships' combined
corporate overhead expenses such as finance, information systems,
marketing and senior management. The allocation was based on various
factors including sales volume, inventory levels and personnel and store
counts. In the opinion of management, the allocations are reasonable and
reflect all costs of doing business. However, such allocated expenses are
not necessarily indicative of the level of expenses that might have been
incurred if FSCI had been operating as a separate entity.
INCOME TAXES - The Company accounts for income taxes pursuant to the asset
and liability method which requires that deferred income tax assets and
liabilities be computed annually for differences between the financial
statement carrying values and the tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to
F-9
39
reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period, plus or minus
the change during the period in deferred tax assets and liabilities.
For fiscal years ended August 29, 1999 and August 30, 1998, the operations
for which the data is presented were held in partnership form. The
proforma income tax effects related to the operations of the predecessor
business while held in partnership form are presented on the face of the
consolidated statement of operations.
EARNINGS (LOSS) PER SHARE - The Company has adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" ("SFAS") which requires
the presentation of "basic" and, if appropriate, "diluted" earnings per
common share. Earnings per share for the fiscal years ended August 29,
1999 and August 30, 1998 were not presented in the accompanying
consolidated statements of operations because the operations for which the
data is presented were held in partnership form.
CASH AND CASH EQUIVALENTS - Highly liquid interest-bearing investments
with original maturities of three months or less are considered cash and
cash equivalents. In fiscal years ended August 29, 1999 and August 30,
1998, FSCI was part of a centralized cash management system and the
interest income generated by such system was allocated to FSCI on a
prorata basis.
INVENTORIES - Inventories, which consist solely of finished goods, are
stated at the lower of cost, as determined on an average cost basis, or
market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost less accumulated depreciation expense. Depreciation expense is
calculated using the straight-line method over the estimated useful lives
of the related assets. A summary of the assets' estimated useful lives is
as follows:
<Table>
<Caption>
ESTIMATED
USEFUL LIFE
-----------
Buildings and improvements 7 - 40 years
Leasehold improvements 3 - 10 years
Gas and store equipment 3 - 7 years
Signs 7 years
Other 3 - 7 years
</Table>
F-10
40
INVESTMENT IN FARM STORES GROCERY, INC. - Investment in Farm Stores
Grocery, Inc., commonly referred to as the drive-thru stores, represents a
10% equity interest. The investment is recorded under the equity method.
LONG-LIVED ASSETS - The Company reviews long-lived assets for impairment
whenever events or circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment is recognized when the sum of
the undiscounted cash flows estimated to be generated by those assets is
less than their carrying value. The Company has reviewed its long-lived
assets for recoverability and determined that an impairment charge of $1.4
million was required for the Calibur operating equipment in its six owned
locations. This impairment charge for the fiscal year ended September 3,
2000, is included in the accompanying consolidated statement of
operations.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to recognize all derivative
contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to
match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133, as amended by SFAS No. 137,
is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on
September 3, 2000 to affect its financial statements.
SEGMENT INFORMATION - The Company primarily operates in one segment,
convenience stores, and in one geographic area, Florida. Although the
Company operates in other segments, consisting of automotive related
services and oil and gas operations, and in other geographic areas
(Tennessee and Georgia), the operations of these segments are
insignificant to the operations of the Company as a whole, and are
therefore not reported on separately.
RECLASSIFICATIONS - Certain prior year amounts in the Consolidated
Financial Statements have been reclassified to conform to the presentation
used for the current year.
4. RECEIVABLE FROM AFFILIATED COMPANY
Receivable from affiliated company at September 3, 2000 represents the
balance due from FSG, in which the Company has a 10% equity interest. The
amount receivable relates to the management fee that the Company charged
FSG for providing general and administrative services to FSG. The fee is
based on the number of stores FSG operates in accordance with the
management agreement between the Company and FSG. The receivable balance
also includes charges by the Company's maintenance department for work
performed on FSG's stores, also pursuant to the terms of the management
agreement and charges for fuel purchased by UPC on behalf of FSG. See Note
13 for the termination of this management agreement.
F-11
41
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following (in
thousands):
<Table>
<Caption>
2000 1999
-------- --------
Land $ 4,120 $ 956
Gas and oil properties 2,750 --
Buildings and improvements 5,870 963
Leasehold improvements 1,433 1,058
Gas and store equipment 4,635 2,909
Other assets 588 73
-------- --------
19,396 5,959
Less accumulated depreciation (4,167) (2,165)
-------- --------
$ 15,229 $ 3,794
======== ========
</Table>
Depreciation expense for the fiscal years ended September 3, 2000, August
29, 1999 and August 30, 1998 was $986,723, $489,981 and $493,656,
respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
2000 1999
-------- --------
(in thousands)
Credit Facility with a Bank:
Mortgage loan of $8,300,000 payable in monthly installments of
approximately $20,000 plus interest through October 2004
based on a 15-year amortization schedule with a balloon
payment in 2004, bearing interest at prime plus 1.125% or 4%
plus LIBOR, 10.65% at September 3, 2000 $ 8,062 $ --
Term loan payable monthly with payments of $121,146 beginning
May 2001 based on a 6-year amortization schedule with a balloon
payment in 2004, bearing interest at the prime rate plus 3%,
12.5% at September 3, 2000 10,467 --
Revolving credit loan payable on or before October 2004, bearing
interest at prime plus 1% or 3.875% plus LIBOR, 10.5% at
September 3, 2000 4,233 --
U.S. Small Business Administration note payable in monthly
installments of $6,369 including interest at 8% through July 2019 779 --
U.S. Small Business Administration note payable in monthly
installments of $1,863 including interest at 8% through July 1999 151 --
Various notes payable in installments through 2005, bearing interest
at rates ranging from 8% to 8.96% 52 200
-------- --------
23,744 200
Less: current portion (22,980) (94)
-------- --------
Long-term portion $ 764 $ 106
======== ========
</Table>
F-12
42
The mortgage payable, term loan payable and revolving credit facility are
with one U.S. financial institution and are secured by substantially all
of the Company's assets. As a result of the Company's financial
difficulties, the Company cannot comply with the covenants and other
provisions of its term loan and revolving line of credit agreements and
therefore the entire amount outstanding under this debt is classified as a
current obligation on the Company's balance sheet at September 3, 2000.
See "Subsequent Developments."
The U.S. Small Business Administration ("SBA") loans payable are secured
by the related property which is leased by a Company subsidiary to an
unrelated third party. One of the SBA loans matured in July 1999. The
Company expects to be released from these loans by the end of the third
quarter of fiscal 2001 in connection with the sale of the related property
located in Georgia to the current tenant.
The mortgage note payable of $99,241 outstanding at August 30, 1999 was
satisfied on November 11, 1999 from the proceeds of the loans incurred to
finance the Transactions.
Aggregate maturities of long-term debt for the indicated fiscal years
ended are as follows (in thousands):
<Table>
2001 $22,980
2002 16
2003 17
2004 19
2005 20
Thereafter 692
-------
Total $23,744
=======
</Table>
Interest expense during the fiscal years ended September 3, 2000, August
29, 1999, and August 30, 1998 was $2,283,000, $23,000 and $33,000
including amortization of deferred loan costs of $215,000, $23,000, and
$33,000, respectively.
7. FEDERAL AND STATE INCOME TAXES
The Company incurred a taxable loss for the period from November 12, 1999, to
September 3, 2000. For the period from August 30, 1999 to November 11, 1999 and
for fiscal years ended August 29, 1999, and August 30, 1998, the accounting
acquirer (see Notes 1 and 2) operated in the form of a partnership, which
resulted in the taxable income or loss being allocated to its shareholders. As
a result, the accompanying consolidated statements of operations do not reflect
any income tax provision or benefit.
The reconciliation of the Company's statutory federal tax rate to the effective
tax rate for the year ended September 3, 2000, is comprised of the following
items (amounts in thousands):
<Table>
<Caption>
Rates Amounts
----- -------
Net loss (34.0)% $ (2,386)
State income taxes, net of federal benefit (3.9)% (274)
Change in valuation allowance 37.0% 2,602
Nondeductible goodwill 0.8% 54
Other nondeductible permanent items 0.1% 4
-------- --------
0.0% $ 0
======== ========
</Table>
F-13
43
The temporary differences and loss carryforwards that result in deferred tax
assets and liabilities are as follows (in thousands):
<Table>
Assets:
Net operating loss $ 6,271
Other 5
-------
Total deferred tax assets 6,276
-------
Liabilities:
Property and equipment 9
Undistributed earnings of domestic
affiliates 9
Intangible assets 72
-------
Total deferred tax liabilities 90
-------
Excess deferred tax assets 6,186
Valuation allowance (6,186)
-------
Net deferred tax asset $ 0
=======
</Table>
The potential deferred tax asset of $6,186,000 has been fully reserved because
management cannot conclude that it is more likely than not that the Company
will generate sufficient taxable income to utilize all or a portion of such
asset. The Company's net operating loss carryforwards at September 3, 2000,
amount to approximately $16.5 million and will fully expire in 2020.
8. COMMITMENTS
LEASES
The Company leases the majority of its retail store locations as well as
certain other properties and equipment under operating leases. Future
minimum lease payments under such non-cancelable agreements are as follows
(in thousands):
<Table>
2001 $ 4,138
2002 3,761
2003 3,230
2004 2,663
2005 613
Thereafter 938
-------
Total $15,343
=======
</Table>
Rent expense for the fiscal years ended September 3, 2000, August 29,
1999, and August 30, 1998 approximated $4,392,309, $4,084,000 and
$4,154,000, respectively, including $72,564, $67,000, and $53,000,
respectively, of contingent rentals based on sales.
EMPLOYMENT AGREEMENTS
The Company has employment and compensation agreements with two key
officers of the Company. The agreements provide for terms ending November
2, 2002, aggregate base annual pay of $528,000 (with annual increases of
at least the greater of 6% or the previous year's increase in the Consumer
Price Index), and performance bonuses. The agreements also call for
severance payments, under certain circumstances, of 24 months of base
annual pay, plus the continuation of certain benefits. Subsequent to
year-end, one of the key officers resigned from his position with the
Company.
VELDA AGREEMENT
The Company entered into a Private Labeling and Supply Agreement with
Velda Farms, Inc. dated October 16, 1998, pursuant to which the Company
agreed to purchase its requirements for fluid milk, fruit drinks, orange
juice, and ice cream from Velda for a term of ten years.
9. CONTINGENCIES
In early 1999, Mr. Robert Rankin filed a lawsuit in the United States
District Court for the Eastern District of Tennessee, styled Robert Rankin
vs. Michael F. Thomas, seeking damages against Mr. Thomas, the Company's
former President and Chief Executive Officer, for allegedly breaching an
agreement to pay Mr. Rankin a commission for locating capital investors or
lenders to the Company in 1994. Mr. Rankin also filed a Proof of Claim
against the Company in the U.S. Bankruptcy Court for the District of
Delaware in the approximate amount of $483,000, asserting the Company's
alleged breach of the same agreement. The Company filed an objection to
Mr. Rankin's claim. Upon Mr. Rankin's motion, the Bankruptcy Court entered
an order abstaining from hearing the Company's objection, and permitting
Mr. Rankin to proceed against the Company in his lawsuit pending against
Mr. Thomas in Tennessee. The U.S. District Court for the Eastern District
of Tennessee granted Mr. Rankin's motion to permit him to add the Company
as a defendant and to amend his complaint. The amended complaint alleges
damages against the Company and Mr. Thomas, jointly and severally, in the
approximate amount of $483,000, and against Mr. Thomas, individually, in
the additional amount of approximately $433,000. On June 28, 2001 this
case was settled and the company agreed to pay Mr. Rankin $8,000.
In late 1999, an affiliate of F.S. Convenience Stores, Inc. (the company
with which United Petroleum Group, Inc., the Company's wholly owned
subsidiary, merged in November 1999) filed a lawsuit in the Circuit Court
for the Eleventh Judicial Circuit in and for Miami-Dade County, Florida
styled REWJB Dairy Plant Associates vs. Zenith Insurance Company. That
lawsuit seeks an unspecified amount of damages against Zenith, the
successor in interest to Riscorp Insurance Company, for improperly
administering and managing the plaintiff's workers' compensation insurance
plan. Zenith moved to dismiss the complaint, contending that the matter
was subject to arbitration, which motion was denied. Zenith has also
asserted in a demand letter to the plaintiff and the plaintiff's surety
that the plaintiff is indebted to it for approximately $1.8 million of
unpaid premiums, and, in June 2000, filed a separate action against the
Company's surety in the United States District Court for the Middle
District of Florida titled Zenith Insurance Company vs. St. Paul Fire and
Marine Insurance Company. That action seeks recovery under a $750,000
surety bond. The surety has tendered the defense of that action to the
Company. The Company has filed an answer to the complaint and discovery is
ongoing. The Company in the state case, and the surety in the federal case
have served various discovery requests upon Zenith which remain
outstanding. The Company assumed its allocated portion of this potential
workers' compensation liability in connection with the merger of F.S.
Convenience Stores, Inc. and United Petroleum Group, Inc., and has
recorded a $305,000 liability for it on its books. The Company's payment
of its shared portion of any ultimate liability to Zenith will reduce or
eliminate that liability, and the liability may have to be increased or
adjusted depending on the progress and outcome of this case.
F-14
44
In May 2000, Murphy Oil USA, Inc. filed a lawsuit in the Circuit Court of the
Nineteenth Judicial Circuit in and for Okeechobee County, Florida styled
Murphy Oil USA, Inc. vs. Farm Stores Grocery, Inc. and Shell Oil Company.
The complaint seeks injunctive and declaratory relief for allegedly
selling, offering to sell, or advertising the sale of gasoline at two of
the Company's stores in Okeechobee County, Florida in alleged violation of
the Florida Motor Fuel Marketing Practices Act (the "MFMPA"). Murphy Oil
alleges that the gasoline price offered at these locations, when paid for
with the Shell MasterCard credit card (which offers a five percent
discount on Shell branded gasoline purchases) violates the MFMPA's
prohibition against selling gasoline below cost. The Company has filed a
motion to dismiss the complaint. Sales of gasoline paid for with a Shell
MasterCard credit card at these locations account for approximately 6% of
the Company's gasoline sales at these locations. Although the Company,
doing business under the fictitious name "Farm Stores", owns and/or
operates the two Okeechobee stores, the plaintiff has named Farm Stores
Grocery, Inc., and not the Company, as a defendant in the lawsuit. See
Note 13 for dismissal of this lawsuit.
The Company is unable to reach a conclusion as to the outcomes of the
other two matters mentioned above because of the early stages of such
matters. In the ordinary course of business the Company is party to
various other actions that the Company believes are routine in nature and
incidental to the operation of its business. The Company believes that the
outcome of those proceedings will not have a material adverse effect upon
its future results of operations or financial condition.
10. RELATED PARTY TRANSACTIONS
DUE TO STOCKHOLDERS
At September 3, 2000, Due to Stockholders primarily represents amounts
payable to two stockholders under a promissory note dated August 11, 2000.
The principal amount including accrued interest is due and payable on
November 30, 2000. The entire amount outstanding under this promissory
note has been classified as current. The note payable bears interest at
the rate selected by the Company on the Company's revolving line of
credit. Related interest expense and accrued interest totaling $12,316 is
included in accrued expenses in the accompanying consolidated financial
statements. Subsequent to year end, the Company received an additional
$491,192 from one of the stockholders under the same promissory note. The
note is secured by a junior lien on the Company's inventories. Due to
Stockholders also includes $173,000 due to one of the stockholders
representing income received by the Company for the rental of a portion of
the headquarters property to an unrelated third party as well as income
received from the operation of the scale located on the headquarters
property. As the headquarters property is beneficially owned by the
Company's Chief Executive Officer and Chairman of the Board, all income
generated on the property is recorded as due to the stockholder. Interest
expense is accrued on this amount at the same rate as on the amount due
under the promissory note and is included in accrued expenses in the
accompanying consolidated financial statements.
MANAGEMENT AGREEMENT
The Company is obligated to provide management services to FSG under a
Management Agreement between UPG and FSG dated November 12, 1999. The
agreement provided for a fixed management fee per store, based on the
total number of stores FSG operated within the fiscal year. The management
fee income recorded in fiscal 2000 approximated $2,620,000. The balance in
the receivable from affiliate at September 3, 2000 relates to fuel
purchased by UPC on behalf of FSG. See Note 13 for termination of this
agreement.
LICENSE AGREEMENT
The Company entered into a License Agreement with FSG dated October 29,
1999, pursuant to which FSG licenses to the Company, on a royalty-free
basis, the right to use the trademark "Farm Stores" on its walk-in
convenience stores. The term of the license was initially one year, and
automatically renews for successive one year terms, until terminated by a
party in accordance with the terms of the agreement.
F-15
45
CONSIGNMENT AGREEMENT
The Company entered into a Consignment Agreement dated November 3, 1999
with FS Manager's Assets, LLC, pursuant to which the Company accepted a
consignment of the computer and telecommunications equipment and the
furniture, fixtures and improvements located at the Company's corporate
headquarters for the term of the Management Agreement. The Company is
currently leasing this equipment from FS Manager's Assets, LLC for $1 per
month on a month-to-month basis. FS Manager's Assets, LLC is beneficially
owned by the Company's President and Chairman of the Board.
CORPORATE HEADQUARTERS
The Company's corporate headquarters in Miami, Florida is located on
property beneficially owned by the Company's President and Chairman of the
Board. The Company pays all operating expenses relating to the facility,
including real property taxes, insurance and utilities totalling
approximately $350,000 per year.
11. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The initial recording of the reverse acquisition as of November 12, 1999
described in Notes 1 and 2, overstated goodwill and stockholders' equity
by $14,868,000. This incorrect accounting was detected and corrected in
the fourth quarter ended September 3, 2000. As a result, the amortization
of goodwill and the net loss was overstated by $70,000, $173,000 and
$173,000, for each of the quarters ended December 19, 1999, March 12, 2000
and June 4, 2000, respectively. The amounts as originally reported in the
interim quarterly financial information and the restated amounts for each
of the three quarters are shown below as part of the quarterly financial
information for the fiscal year ended September 3, 2000, as follows:
<Table>
<Caption>
16 Weeks Ended 12 Weeks Ended 12 Weeks Ended Fiscal
December 19, 1999 March 12, 2000 June 4, 2000 13 Weeks Year
--------------------- --------------------- -------------------- Ended Ended
Statement of Previously As Previously As Previously As September 3, September 3,
Operations Data Reported Restated Reported Restated Reported Restated 2000 2000
---------- --------- ---------- --------- ---------- --------- ----------- -----------
Sales $ 33,708 $ 33,708 $ 31,297 $ 31,297 $ 34,067 $ 34,067 $ 33,734 $132,806
Gross Profit $ 7,481 $ 7,481 $ 6,247 $ 6,247 $ 6,688 $ 6,688 $ 6,194 $ 26,610
Operating Profit (Loss) $ (741) (671) $ (1,019) $ (846) $ (197) $ (24) $ (3,436) $ (4,977)
Net Income (Loss) $ (985) $ (915) $ (1,693) $ (1,520) $ (646) $ (473) $ (4,107) $ (7,015)
Net Income (Loss) Attributable
to Common Stockholders $ (1,106) $ (1,036) $ (1,984) $ (1,811) $ (937) $ (764) $ (4,422) $ (8,033)
Basic and Diluted Earnings
(Loss) per Share $ (0.22) $ (0.21) $ (0.40) $ (0.36) $ (0.19) $ (0.15) $ (0.88) $ (1.61)
</Table>
Goodwill and other intangible assets as well as stockholders' equity were also
overstated as a result of the above incorrect accounting. The amounts for
goodwill and other intangible assets and for stockholders' equity as of the
balance sheet dates for the first three quarters above were reduced by the
cumulative effects of the errors, as follows:
<Table>
<Caption>
December 19, 1999 March 12, 2000 June 4, 2000
-------------------- ------------------- --------------------
Previously As Previously As Previously As
Reported Restated Reported Restated Reported Restated
--------- --------- --------- -------- ----------- ---------
Goodwill and other intangible assets $36,543 $21,748 $36,120 $21,500 $35,696 $21,252
Stockholders' equity $27,301 $12,710 $25,317 $10,899 $24,380 $10,135
</Table>
F-16
46
The interim quarterly information for the fiscal year ended August 29,
1999, is summarized as follows:
<Table>
<Caption>
December 20, March 14, June 6, August 29,
Fiscal year ended August 29, 1999 1998 (a) 1999 (b) 1999 (b) 1999 (b)
-----------------------------------------------------------------------------------------------------
Sales $ 32,828 $ 24,736 $ 26,514 $ 24,437 108,515
Gross Profit 8,170 6,356 6,058 (11) 20,573
Operating Profit (Loss) 36 98 (95) 4,945 4,984
Net Income (Loss) 99 61 (9) (183) (32)
</Table>
(a) The first quarter of fiscal 1999 encompasses 16 weeks.
(b) Quarter encompasses 12 weeks.
12 INVESTMENT IN FARM STORES GROCERY, INC. - The following represents
condensed financial information of Farm Stores Grocery, Inc. ("FSG") which
is 10% owned by the Company (in thousands):
Balance Sheet Information:
<Table>
<Caption>
(Predecessor)
September 3, 2000 August 29, 1999
----------------- ---------------
Current assets $ 4,282 $ 2,802
Other assets 5,983 2,530
--------------- ---------------
Total assets $ 10,265 $ 5,332
=============== ===============
Current liabilities $ 6,959 $ 4,454
Other liabilities 800 270
Shareholders' or division equity 2,506 607
--------------- ---------------
Total liabilities and shareholders' or division equity $ 10,265 $ 5,332
=============== ===============
</Table>
Statement of Operations Information:
<Table>
<Caption>
(Predecessor)
-------------------------------------------------------------------
Period from Period from Fifty-two Weeks Fifty-two Weeks
November 12, 1999 August 30, 1999 Ended Ended
to September 3, 2000 to November 11, 1999 August 29, 1999 August 30, 1998
-------------------- -------------------- ------------------ ------------------
Net sales $ 57,962 $ 16,157 $ 69,274 $ 68,396
Net income (loss) $ 227 $ 94 $ (865) $ 159
</Table>
13 SUBSEQUENT EVENTS
Subsequent to year-end, the Company assigned the leases and sold the store
equipment of nine convenience stores for a total of $1,020,000. The
Company recorded a gain on the sale of these assets in the second quarter
of fiscal 2001 totalling $942,606.
As a result of the financial and other difficulties described in Note 3
under the caption "GOING CONCERN", the Company terminated its management
agreement with FSG, effective January 15, 2001.
On February 1, 2001, Murphy Oil USA, Inc. dismissed its lawsuit against
the Company without prejudice (see Note 9).
F-17
47
UNITED PETROLEUM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<Table>
<Caption>
Balance at Charged to Balance at
beginning of costs and end of
Description year expenses Deductions year
----------- ------------ --------- ---------- --------
Fiscal year ended September 3, 2000
Accounts receivable allowances $ 65 $ -- $ -- $ 65
========= ========= ========= =========
Fiscal year ended August 29, 1999
Accounts receivable allowances $ -- $ 65 $ -- $ 65
========= ========= ========= =========
Fiscal year ended August 30, 1998
Accounts receivable allowances $ -- $ -- $ -- $ --
========= ========= ========= =========
</Table>
F-18
48
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
2.1 Second Amended Plan of Reorganization of United Petroleum
Corporation dated July 23, 1999 (filed as Exhibit 99.1 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
2.2 Second Amended Disclosure Statement of United Petroleum
Corporation dated July 23, 1999 (filed as Exhibit 99.2 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
2.3 Findings of Fact, Conclusions of Law and Order Confirming
Amended Plan of Reorganization dated October 7, 1999 (filed as
Exhibit 99.4 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
2.4 Agreement and Plan of Merger dated September 29, 1999 (filed
as Exhibit 99.3 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
3.1 Amended and Restated Certificate of Incorporation of United
Petroleum Corporation (filed as Exhibit 3(i) to the Company's
Current Report on Form 8-K (Amendment 1) dated November 12,
1999 and filed on December 1, 1999, and incorporated herein by
reference)
3.2 Amended and Restated Bylaws of United Petroleum Corporation
(filed as Exhibit 3(ii) to the Company's Current Report on
Form 8-K (Amendment 1) dated November 12, 1999 and filed on
December 1, 1999, and incorporated herein by reference)
4 Certificate of Designation - Class A 9% Preferred Stock (filed
as Exhibit 4 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
10.1 License Agreement dated as of November 12, 1999 among Farm
Stores Grocery, Inc., United Petroleum Corporation and United
Petroleum Group, Inc. (filed as Exhibit 99.5 to the Company's
Current Report on Form 8-K (Amendment 1) dated November 12,
1999 and filed on December 1, 1999, and incorporated herein by
reference)
10.2 Employment Agreement dated as of November 3, 1999 between
United Petroleum Corporation and Joe P. Bared (filed as
Exhibit 99.6 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
</Table>
49
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.3 Employment Agreement dated as of November 3, 1999 between
United Petroleum Corporation and Carlos Bared (filed as
Exhibit 99.7 to the Company's Current Report on Form 8-K
(Amendment 1) dated November 12, 1999 and filed on December 1,
1999, and incorporated herein by reference)
10.4 Stockholders' Agreement dated as of November 3, 1999 by and
among United Petroleum Corporation, Infinity Investors
Limited, Fairway Capital Limited, Seacrest Capital Limited,
and Joe Bared and Miriam Bared (filed as Exhibit 99.8 to the
Company's Current Report on Form 8-K (Amendment 1) dated
November 12, 1999 and filed on December 1, 1999, and
incorporated herein by reference)
10.5 Management Agreement dated as of November 12, 1999 between
United Petroleum Group, Inc. and Farm Stores Grocery, Inc.
(filed as Exhibit 99.9 to the Company's Current Report on Form
8-K (Amendment 1) dated November 12, 1999 and filed on
December 1, 1999, and incorporated herein by reference)
10.6 Consignment Agreement dated as of November 3, 1999 between
F.S. Management, LLC and United Petroleum Group, Inc. (filed
herewith)
10.7 Loan Agreement dated November 9, 1999 among United Petroleum
Corporation, United Petroleum Group, Inc., F.S. Convenience
Stores, Inc., et al., as Borrowers, and Hamilton Bank, N.A.,
as Lender (filed as Exhibit 99.10 to the Company's Current
Report on Form 8-K (Amendment 1) dated November 12, 1999 and
filed on December 1, 1999, and incorporated herein by
reference)
10.8 Client Service Agreement dated May 5, 2000 between the Company
and Oasis Outsourcing, Inc. (filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the Quarter Ended
June 4, 2000 filed on July 19, 2000, and incorporated herein
by reference)
10.9 Secured Promissory Note dated August 11, 2000 made by United
Petroleum Group, Inc. in favor of Jose P. Bared and Infinity
Investors Limited (filed herewith)
10.10 Security Agreement dated August 11, 2000 made by United
Petroleum Group, Inc. in favor of Jose P. Bared and Infinity
Investors Limited (filed herewith)
10.11 Inter-creditor agreement dated August 11, 2001 between Hamilton Bank,
N.A., Jose P. Bared and Infinity Infinity Investors Limited (Filed
herewith)
10.12 2001 stock option plan of United Petroleum Corporation (filed
herewith)
</Table>
50
<Table>
10.13 Pledge Agreement and Promissory Note dated March 30, 2001 among
F.S. non-group subsidiary, United Petroleum Corporation, United
Petroleum Group Inc. and Jose P. Bared and Miriam Bared (filed
herewith)
10.14 Termination of Management Agreement dated January 14, 2001 between
United Petroleum Group, Inc. and Farm Stores Grocery, Inc. (filed
herewith)
10.15 Administrative Services Agreement dated January 8, 2001 between
Oasis Outsourcing, Inc. and United Petroleum Group, Inc. (filed
herewith)
10.16 Administrative Services Agreement dated January 8, 2001 between Oasis
Outsourcing Inc. and Calibur Systems, Inc. (filed herewith)
10.17 Distributor Sales Agreement (Branded) dated February 1, 2001 between
Exxon Mobil Fuels Marketing Company, a division of Exxon Mobil
Corporation and United Petroleum Group, Inc. (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
</Table>