FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 10, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________________
Commission file number: 2-38375
United Petroleum Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3103494
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5800 N.W. 74th Avenue, Miami, Florida 33166
--------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(305) 592-5101
--------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 4,951,601 shares of
voting common stock, par value $.01 per share, and 148,492 shares of preferred
stock, Series A, 9%, $.01 par value, as of June 10, 2001.
2
UNITED PETROLEUM CORPORATION
INDEX
<Table>
<Caption>
PART I FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. Financial Statements
Condensed consolidated balance sheets
June 10, 2001 and September 3, 2000 4-5
Condensed consolidated statements of operations
Twelve and forty weeks ended June 10, 2001 and June 4, 2000 6
Condensed consolidated statements of cash flows
Forty weeks ended June 10, 2001 and June 4, 2000 7-8
Notes to condensed consolidated financial statements 9-11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 6. Exhibits and Reports on Form 8-K 16-17
</Table>
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 10, SEPTEMBER 3,
ASSETS 2001 2000
------ ---------- ------------
(Unaudited) *
Current assets:
Cash and cash equivalents $ 1,212 $ 1,226
Accounts receivable, net of allowances
of $65 in 2001 and 2000 1,376 1,205
Receivable from/(payable to) affiliated company (69) 159
Inventories 3,451 4,685
Prepaid expenses and other current assets 564 481
-------- --------
Total current assets 6,534 7,756
Property and equipment, net 14,829 15,229
Goodwill and other intangible assets 20,131 20,982
Investment in Farm Stores Grocery, Inc. 218 251
Deferred financing costs 899 1,103
Other assets 103 169
-------- --------
$ 42,714 $ 45,490
======== ========
</Table>
(continued on page 5)
4
UNITED PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 10, SEPTEMBER 3,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------------------------------ ----------- ------------
(Unaudited) *
Current liabilities:
Accounts payable $ 10,983 $ 10,592
Accrued expenses 3,390 1,893
Accrued preferred stock dividends 1,205 169
Due to stockholders 3,055 2,177
Current portion of long-term debt 21,869 22,980
-------- --------
Total current liabilities 40,502 37,811
Long-term debt, net of current portion 765 764
Other long-term liabilities 359 353
-------- --------
Total liabilities 41,626 38,928
Stockholders' equity:
Preferred stock, Series A, 9%, $.01 par value, 300,000
shares authorized, 148,492 shares issued and outstanding 2 2
Common stock, $.01 par value, 10,000,000 shares
authorized, 4.951,601 shares issued and outstanding 50 50
Additional paid-in capital 14,183 14,183
Accumulated deficit (13,147) (7,673)
-------- --------
Total stockholders' equity 1,088 6,562
-------- --------
$ 42,714 $ 45,490
======== ========
</Table>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
UNITED PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------ ------------------------
TWELVE WEEKS ENDED FORTY WEEKS ENDED
------------------------ ------------------------
JUNE 10, JUNE 4, JUNE 10, JUNE 4,
2001 2000 2001 2000
Sales $ 29,433 $ 34,067 $ 96,950 $ 99,072
Cost of sales 24,428 27,379 79,594 78,656
-------- -------- -------- --------
Gross profit 5,005 6,688 17,356 20,416
Operating expenses:
Store operating expenses 4,330 5,077 15,164 16,620
Depreciation and amortization 438 491 1,492 1,325
General & administrative expenses(1) 958 1,144 3,995 4,012
-------- -------- -------- --------
Total 5,726 6,712 20,651 21,957
-------- -------- -------- --------
Income (loss) from operations (721) (24) (3,295) (1,541)
Other income (expense):
Interest expense (713) (635) (2,369) (1,557)
Interest income 3 3 12 30
Other income (expense) 86 48 295 97
Equity in earnings (loss) of FSG, Inc. (16) 13 (32) 16
Gain (loss) from disposition of
property and equipment 4 122 951 47
-------- -------- -------- --------
Net income (loss) (1,357) (473) (4,438) (2,908)
Preferred stock dividends (307) (291) (1,036) (703)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders $ (1,664) $ (764) $ (5,474) $ (3,611)
======== ======== ======== ========
Earnings (loss) per share
Basic and diluted earnings (loss)/share $ (0.34) $ (0.15) $ (1.11) $ (0.73)
Weighted average number of shares 4,952 4,952 4,952 4,952
</Table>
See Note 1; the accompanying notes are an integral part of these condensed
consolidated financial statements.
6
UNITED PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
FORTY WEEKS ENDED
------------------------
JUNE 10, JUNE 4,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ (4,438) $ (2,908)
Adjustments for non-cash items:
Depreciation and amortization 1,472 1,325
Amortization of deferred loan costs 204 148
Equity in (earnings) loss of Farm Stores Grocery, Inc. 33 (16)
Loss (gain) on disposition of property and equipment (951) (47)
Change in assets and liabilities:
Accounts receivable (171) (863)
Receivable from affiliated company 228 (204)
Inventories 1,234 (472)
Prepaid expenses and other current assets (83) (172)
Other assets 66 (437)
Accounts payable 391 3,238
Accrued expenses 1,497 (212)
Other long-term liabilities 6 (93)
-------- --------
Cash provided by (used in) operating activities (512) (713)
-------- --------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (19,936)
Purchases of property and equipment (286) (972)
Proceeds from disposition of property and equipment 1,016 197
-------- --------
Net cash used in investing activities 730 (20,711)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of loan costs 21,751
Principal payments on long-term debt (1,110) (297)
Proceeds from short-term borrowings from stockholders 878
-------- --------
Net cash provided by (used in) financing activities (232) 21,454
-------- --------
Net increase (decrease) in cash and cash equivalents (14) 30
Cash and cash equivalents, at beginning of period 1,226 38
-------- --------
Cash and cash equivalents, at end of period $ 1,212 $ 68
-------- --------
</Table>
(continued on page 8)
7
UNITED PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
FORTY WEEKS ENDED
---------------------
JUNE 10, JUNE 4,
2001 2000
-------- -------
Supplemental cash flow information:
Cash paid for interest $ 426 $ 1,361
======= =======
Supplemental schedule of non-cash investing and financing
activities:
Accrued dividends on preferred stock $ 1,036 $ 703
======= =======
Preferred and common stock issued to acquire the net assets of
FSCI $14,950
=======
Net reorganized value of UPC and preferred and common stock
issued to UPC's pre-merger shareholders $15,613
=======
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
8
UNITED PETROLEUM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for
United Petroleum Corporation (the "Company" or "UPC") have been prepared in
accordance with (i) generally accepted accounting principles for interim
financial reporting and (ii) the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included.
This Form 10-Q should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of September 3, 2000, as presented in the Form 10K, filed with
Securities and Exchange Commission on September 28, 2001.
Operating results for the forty weeks ended June 10, 2001 are not necessarily
indicative of operating results that may be expected for the full fiscal year.
Fiscal Year
The Company operates on a fifty-two/fifty-three week fiscal year ending on the
Sunday nearest August 31. The accompanying financial statements include
operations for the first quarter ended December 24, 2000 and December 19, 1999,
each encompassing a total of sixteen weeks and the second and third quarters,
each encompassing a total of twelve weeks.
Segment information
The Company primarily operates in one segment, convenience stores, and in one
geographic area, Florida. Although the Company operates in another segment,
consisting of oil and gas operations, and in other geographic areas (Georgia and
Tennessee), the operations of these segments are insignificant to the operations
of the Company as a whole, and are therefore not reported on separately.
General and Administrative Expense Reporting
General & administrative expenses figures are shown net of the management fees
FSG paid the Company in respect of periods after November 12, 1999 and before
January 16, 2001, when the Management Agreement terminated. These management
fees are not otherwise reflected in the operating statement, as revenues or
otherwise. The Management Agreement was in effect for 29.5 of the 40-week period
ended June 4, 2000 and 19 weeks of the 40-week period ended June 10, 2001. The
Company recorded in a subsequent period approximately $283,000 of General and
Administrative expenses that were attributable to the 40 week period ended June
4, 2000. Giving effect to this $283,000, the Company's G&A expenses declined by
approximately $300,000 in the current 40-week period.
9
2. Significant Events
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 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.
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, Carlos E. Bared resigned as a director of United Petroleum
Corporation. (filed herewith)
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.
On January 31, 2001, Clark K. Hunt resigned as a director of United Petroleum
Corporation. (filed herewith)
From January 23, 2001 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, 2000 to March 1, 2001, due to their low profitability and high
administrative expenses, the Company closed one of its stores in Florida and
reached agreements to lease three of its Calibur store locations to other
operators.
On February 1, 2001, Murphy Oil USA, Inc. dismissed its lawsuit against the
Company without prejudice.
On February 8, 2001, the Company entered into a fuel marketing agreement with a
major fuel retailer to re-brand as many as 23 of its gasoline store locations.
10
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 so secured. The loan is presently in default, and no
payments of principal or interest have been made thereunder.
On May 3, 2001 TransMontaigne Inc, a supplier of gasoline and diesel fuel to the
Company, stopped delivering fuel to the Company because it was unable to provide
financial statements that met their requirements.
On June 28, 2001 the case styled Robert Rankin vs Michael F. Thomas and United
Petroleum was settled and the Company agreed to pay Mr. Rankin $8,000.
On July 25, 2001 Coastal Refining & Marketing, a supplier of gasoline and diesel
fuel to the Company, stopped delivering fuel to the Company claiming that the
Company was unable to provide financial statements that met their requirements.
On August 31, 2001 First Data Company revoked its money order system agreement
because UPG was unable to provide financial statements that met their
requirements. First Data Company provided the Company with the Western Union
brand system of dispensing money orders. The Company is seeking to renew or
replace its agreement with First Data or another supplier of money orders, but
no such arrangements have been concluded.
On September 11, 2001 Pepsi Cola stopped servicing Company locations. Since June
1, 2001 the Company had been purchasing Pepsi branded products under a payment
arrangement to reduce outstanding balances owed to Pepsi Cola.
The Company has a $23 million credit facility with a 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.
Effective October, 2000, the Company went into payment default under these
loans, and in September, 2001, the bank accelerated the maturity of these loans,
and they are therefore classified as short term liabilities on the balance
sheet.
The Company is party to a license agreement with FSG, providing for its use of
the "Farm Stores" trademark on its stores and certain products sold in the
stores. On September 28, 2001, FSG notified the Company of its termination of
the License Agreement, and on October 3, 2001, FSG commenced a lawsuit in
Federal Court to enforce such termination. The Company disputes the termination,
and intends to defend the lawsuit; however, the Company is actively pursuing a
settlement of this matter.
On October 5, 2001, Stuart Chasanoff resigned as a director of United Petroleum
Corporation. (filed herewith)
On October 8, 2001, L. Grant ("Jack") Peeples resigned as a director of United
Petroleum Corporation. (filed herewith)
11
3. Receivable from (Payable to) Affiliated Company
Payable to affiliated company at June 10, 2001 represents the balance due to
FSG, in which the Company has 100,000 shares of common stock. The amount payable
relates to the fee that FSG charged the Company for its share of data management
center expenses.
4. Current Portion of Long-term Debt
Current portion of long-term debt includes a loan to the Company in the amount
of $144,915 which has matured. The loan is secured by a mortgage encumbering a
property located in Georgia which is leased by the Company's subsidiary to an
unrelated third party. The lease requires the tenant to make all payments coming
due under the loan, and upon exercising an option to purchase the property, to
assume the loan. The tenant continues to make monthly payments under the loan
and has advised the Company that it has exercised its option to purchase the
property. The sale is expected to close during the fourth quarter.
5. Contingencies
The Company is a defendant in various legal proceedings arising in the normal
course of business. In the opinion of management, based on the nature of these
proceedings and the amounts of damages claimed, the ultimate resolution of these
legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including without limitation
expectations as to future revenues and profitability, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
and its subsidiaries to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
In the following comparison of the results of operations, the twelve
and forty week periods ended June 10, 2001 and June 4, 2000 are referred to as
2001 and 2000, respectively.
COMPARISON OF THE TWELVE WEEKS ENDED JUNE 10, 2001 AND JUNE 4, 2000
Revenues and gross profit for 2001 were $29.4 million and $5.0 million,
respectively, as compared to $34.1 million and $6.7 million, respectively for
2000. The Company generated a net loss of $1.7 million in 2001, compared to a
net loss of $764,000 in 2000. The effects of the Transactions and their
financing contributed $1.3 million of the loss as follows: (i) interest expense
including amortization of deferred loan costs of $713,000 (ii) amortization of
goodwill and other intangible assets of $252,000, and (iii) accrued preferred
dividends totaling $307,000.
12
Revenues decreased $4.6 million or 13.6% from the prior year mostly due
to the sale of nine under-performing stores and the permanent closing of six
under-performing stores. A summary of revenues by source for the comparative
twelve week period is as follows (in thousands):
<Table>
<Caption>
Twelve Weeks Ended
June 10, June 4,
2001 2000
-------- -------
Grocery $11,886 $13,855
Gasoline 17,326 19,467
Other 221 745
------- -------
Total $29,433 $34,067
======= =======
</Table>
Grocery revenues decreased by $2 million or 14.2% in 2001 as compared
to 2000 due to the sale of nine under-performing stores and the permanent
closing of one under-performing store. Although the closing of the
under-performing 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 11% or $2.1 million in 2001 as compared to
2000. The decrease is due to a $0.06 increase in the average retail price per
gallon from $1.51 per gallon in 2000 to $1.57 per gallon in 2001, coupled with a
decrease of 1.8 million gallons sold from 12.8 million gallons in 2000 to 11
million gallons in 2001. The decline in gasoline volume was also affected by the
reduction in the Company's store count. Of the 10 under-performing stores that
were sold or closed during 2001, two sold gasoline.
Gross profit decreased by $1.7 million in 2001 primarily as a result
the decrease in the grocery gross profit.
Store operating expenses decreased by $747,000 in 2001 primarily due to
the implementation of new expense control packages related to payroll, inventory
shrink, spoilage, and advertising, as well as the sale and closing of
under-performing stores. During the same period, store equipment lease rental
payments increased by $95,000 over the previous year as a result of the new
gasoline dispensing equipment installed at 40 store locations.
Depreciation and amortization expense decreased $53,000 in 2001 mostly
due to the closing of ten stores.
General and administrative expenses decreased by $186,000 primarily due
to various cost-cutting initiatives. The termination of the FSG Management
Agreement also allowed for increased savings in General and Administrative
expenses. The Management Agreement was not in effect during the 12 weeks ended
June 12, 2001 as compared to the 12 weeks during the period ending June 4, 2000.
The Agreement was terminated effective January 16, 2001.
The increase in interest expense of $78,000 resulted from the borrowing
of $23 million used to finance the Transactions and the amortization of related
deferred loan costs and accrued interest on the short-term borrowings from
stockholders of $68,000.
13
COMPARISON OF THE FORTY WEEKS ENDED JUNE 10, 2001 AND JUNE 4, 2000
Revenues and gross profit for 2001 were $97 million and $17.4 million,
respectively, as compared to $99.1 million and $20.4 million, respectively for
2000. The Company generated a net loss of $5.5 million in 2001, compared to net
loss of $3.6 million in 2000. The effects of the Transactions and their
financing contributed $4.3 million of the net loss in 2001 as follows: (i)
interest expense including amortization of deferred loan costs of $2.4 million,
(ii) amortization of goodwill and other intangible assets of $852,000, and (iii)
accrued preferred dividends totaling $1 million
Revenues decreased $2.1 million or 2.1% from the prior year due to
mostly due to the sale of nine under-performing stores and the permanent closing
of one under-performing store. A summary of revenues by source for the
comparative forty week period is as follows (in thousands):
<Table>
<Caption>
Forty Weeks Ended
June 10, June 4,
2001 2000
-------- -------
Grocery $ 40,297 $44,245
Gasoline 55,431 52,775
Other 1,222 2,052
-------- -------
Total $ 96,950 $99,072
======== =======
</Table>
Grocery revenues decreased by $3.9 million or 8.9%, in 2001 as compared
to 2000 due to the sale of nine under-performing stores and the permanent
closing of one under-performing store. Although the sale/closing of the 15
under-performing 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 $2.7 million or 5% in 2001 as compared to
2000. The increase is mostly due to a $0.12 increase in the average retail price
per gallon from $1.41 per gallon in 2000 to $1.53 per gallon in 2001, coupled
with a decrease of approximately 1.1 million gallons sold. The decline in
gasoline volume was also affected by the reduction in the Company's store count.
Of the 10 under-performing stores that were sold or closed during 2001, two sold
gasoline.
Gross profit decreased by $3 million in 2001 due to an 11.3% decrease
in grocery gross profit, as a result of the sale/closing of under-performing
stores, as well as a 19.7% decrease in fuel gross profit. The gross profit
percentage on gasoline sales was 6.3% in 2001 compared to 9.3% in 2000 as a
result of a 10% increase in average fuel costs from $1.30 per gallon in 2000 to
$1.43 per gallon in 2001.
Store operating expenses decreased by $1.5 million in 2001 primarily
due to the implementation of new expense control packages related to payroll,
inventory shrink, spoilage, advertising, as well as the sale and closing of
under-performing stores. During the same period, store equipment lease rental
payments increased by $380,000 over the previous year as a result of the new
gasoline dispensing equipment installed at 40 store locations.
Depreciation and amortization expense increased $167,000 in 2001
primarily due the increase in amortization of goodwill and other intangible
assets of $268,000 and a decrease in depreciation expense due to the closing of
ten under-performing stores.
General & administrative expenses figures are shown net of the
management fees FSG paid the Company in respect of periods after November 12,
1999 and before January 16, 2001, when the
14
Management Agreement terminated. These management fees are not otherwise
reflected in the operating statement, as revenues or otherwise. The Management
Agreement was in effect for 29.5 of the 40-week period ended June 4, 2000 and 19
weeks of the 40-week period ended June 10, 2001. The Company recorded in a
subsequent period approximately $283,000 of General and Administrative expenses
that were attributable to the 40 week period ended June 4, 2000. Giving effect
to this $283,000, the Company's G&A expenses declined by approximately $300,000
in the current 40-week period.
The increase in interest expense of $812,000 resulted from the
borrowing of $23 million used to finance the Transactions and the amortization
of related deferred loan costs and accrued interest on short-term borrowings
from stockholders of $217,000.
CREDIT FACILITIES
The Company has a $23 million credit facility with a 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 twelve months. The $8.3
million mortgage loan bears interest at the 180-day libor rate plus 4%, payable
monthly at approximately $20,000 plus interest. The $4,233,000 revolving loan
bears interest at the 30-day libor rate plus 3.875%, 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 from the Company's inventory and receivables. In addition, the
agreement prohibits the payment of any cash dividends unless approval is
obtained from the lender. At June 10, 2001, the Company had used all $4,233,000
under its revolving credit facility. Effective October, 2000, the Company went
into payment default under these loans, and in September, 2001, the bank
accelerated the maturity of these loans, and they are therefore classified as
short term liabilities on the balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
For the 40 weeks ended June 10, 2001 the Company used $512,000 in its operating
activities, which included $426,000 in interest payments through the end of
October, 2000. The Company faces extreme challenges in its liquidity and cash
flows. The Company's working capital was almost negative $34 million at June 10,
2001. Even excluding the Company's institutional loan in default, its working
capital was almost negative $12 million at that date. At the same date, the
Company's net tangible book value was almost negative $20 million. The Company
also realized negative cash flows (earnings before interest, taxes, depreciation
and amortization) in these periods, including $ 577,000 in the 40 weeks and
$206,000 in the 12 weeks ended June 10, 2001. Because of its deficits in working
capital, net tangible value and cash flow, the Company has been actively seeking
a refinancing or sale transaction, for which it has no commitments at present.
If these efforts do not succeed, the Company may be forced to drastically
curtail its operations or seek protection from creditors.
CAPITAL EXPENDITURES
Capital expenditures $286,000 during the forty weeks ended June 10,
2001 consist mostly of costs associated with leasehold improvements and store
equipment. These capital expenditures were funded primarily by cash generated
from operations. The Company anticipates spending approximately
15
$30,000 during the remainder of the fiscal year to improve and maintain existing
store and gasoline dispensing equipment
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In 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 against Zenith in the Circuit Court for the
Eleventh Judicial Circuit for improperly administering and managing the
Plaintiff's workers compensation insurance plan. Zenith has filed a counterclaim
and the Plaintiff is actively defending the claim. In June of 2000, Zenith filed
a separate action in federal court against the Company's surety, the surety has
tendered the defense to the Company and the Company is actively defending the
lawsuit.
The Company is party to a license agreement with FSG, providing for its use of
the "Farm Stores" trademark on its stores and certain products sold in the
stores. On September 28, 2001, FSG notified the Company of its termination of
the License Agreement, and on October 3, 2001, FSG commenced a lawsuit in
Federal Court to enforce such termination. The Company disputes the termination,
and intends to defend the lawsuit; however, the Company is actively pursuing a
settlement of this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
Exhibit 17.1 On January 17, 2001, Carlos E. Bared resigned as a director of
United Petroleum Corporation (filed herewith)
Exhibit 17.2 On January 31, 2001, Clark K. Hunt resigned as a director of
United Petroleum Corporation. (filed herewith)
Exhibit 17.3 On October 5, 2001, Stuart Chasanoff resigned as a director of
United Petroleum Corporation. (filed herewith)
Exhibit 17.4 On October 8, 2001, L. Grant ("Jack") Peeples resigned as a
director of United Petroleum Corporation. (filed herewith)
Exhibit 10.13 Pledge Agreement and Promissory Note dated March 30, 2001,
among F.S. Non-Gas Subsidiary, Inc., United Petroleum
Corporation, United Petroleum Group, Inc. and Jose P. Bared
and Miriam Bared (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K filed September 28, 2001 , and
incorporated herein by reference)
Exhibit 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
16
8-K (Amendment 1) dated November 12, 1999 and filed on
December 1, 1999, and incorporated herein by reference)
Exhibit 10.1 Licence Agreement dated as of November 12, 1999 among Farm
Stores Grocery, Inc., United Petroleum Corporation, 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)
(b) Reports on Form 8-K.
On September 12, 2001, the Company filed a current report on Form 8-K
dated September 7, 2001 as notice that the company received notice
from Hamilton Bank, the holder of the Company's $23 million
institutional loan, that the bank had accelerated the maturity of
that loan.
SIGNATURES
Pursuant to the requirements of the Securities 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)
Date: October 11, 2001 /s/ JOSE P. BARED
----------------------------------------
Jose P. Bared
Chief Executive Officer and Chairman of
the Board of Directors
17
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Exhibit 17.1 On January 17, 2001, Carlos E. Bared resigned as a director of
United Petroleum Corporation (filed herewith)
Exhibit 17.2 On January 31, 2001, Clark K. Hunt resigned as a director of
United Petroleum Corporation. (filed herewith)
Exhibit 17.3 On October 5, 2001, Stuart Chasanoff resigned as a director of
United Petroleum Corporation. (filed herewith)
Exhibit 17.4 On October 8, 2001, L. Grant ("Jack") Peeples resigned as a
director of United Petroleum Corporation. (filed herewith)
Exhibit 10.13 Pledge Agreement and Promissory Note dated March 30, 2001,
among F.S. Non-Gas Subsidiary, Inc., United Petroleum
Corporation, United Petroleum Group, Inc. and Jose P. Bared
and Miriam Bared (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K filed September 28, 2001 , and
incorporated herein by reference)
Exhibit 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)
Exhibit 10.1 License Agreement dated as of November 12, 1999 among Farm
Stores Grocery, Inc., United Petroleum Corporation, 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).
</Table>
18