1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 33-95962 CUMBERLAND FARMS, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER 777 DEDHAM STREET, CANTON, MA 02021 IDENTIFICATION NO.) - ---------------------------------------- ------------------- (Address of principal executive offices) 04-2843586 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (781) 828-4900 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None - -------------------------------- ----------------------------------------- - -------------------------------- ----------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None - --------------------------------------------------- (Title of class) - --------------------------------------------------- (Title of class) Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 2 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K of any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- As of December 22, 1997, the outstanding shares of each class of the registrant's common stock* was as follows: Class A Stock 8 shares Class B Stock 121,014 shares *Neither class of stock is registered under the Securities Act of 1933, as amended. -2- 3 TABLE OF CONTENTS Item Page - ---- ---- PART I Item 1. Business 4 Item 2. Properties 12 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 16 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23 PART III Item 10. Directors and Executive Officers 24 Item 11. Executive Compensation 28 Item 12. Security Ownership 31 Item 13. Certain Relationships and Related Transactions 32 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 35 -3- 4 PART I ITEM 1. BUSINESS GENERAL Cumberland Farms, Inc. (the "Company" or "Cumberland") is a closely held family-owned business that operates or leases to third parties convenience stores and/or gas stations throughout New England, the Mid- Atlantic states and Florida. As of September 30, 1997, Cumberland operated 788 convenience stores, of which 600 sold gas, operated 33 gas stations and leased 260 gas stations to independent dealers who also have arrangements to purchase petroleum products and sublicense the "Gulf" trade name from Cumberland ("Lessee Dealers"). Most of Cumberland's gas stations, as well as all of the Lessee Dealers, sell "Gulf" branded petroleum products. As part of its convenience store operations, Cumberland conducts dairy, bakery and beverage operations and owns and operates a grocery and warehouse distribution center. While the beverage operations are exclusively for the benefit of Cumberland's convenience stores, approximately 75% of the total fluid production of the dairy operations and approximately 68% of the manufactured bakery products are sold to a limited number of unaffiliated third parties. Cumberland also owns a 66 2/3% limited partnership interest in Gulf Oil Limited Partnership, a Delaware limited partnership ("Gulf Oil L.P."), the entity that succeeded to a substantial portion of the assets and business of the Gulf Division of Cumberland, including the ownership and operation of 15 active petroleum storage terminals and the exclusive rights to use and license the various "Gulf" trademarks and trade names in the six New England states, New York, New Jersey, Delaware, Pennsylvania and most of Ohio. Finally, Cumberland leases retail and restaurant space in buildings in which certain of the convenience stores are located to approximately 400 independent operators. The business was founded more than 50 years ago by Vasilios and Aphrodite Haseotes, the parents of the current shareholders and incorporated in Delaware in 1984. Its principal executive offices are located at 777 Dedham Street, Canton, Massachusetts 02021. The fiscal year ended September 30, 1997 represents the fourth fiscal year following the Company's emergence from reorganization under Chapter 11 of the United States Bankruptcy Code. The Company's plan of reorganization (the "Plan") became effective on December 30, 1993. Although the Company has emerged from bankruptcy, the Company's management and operations remain subject to the provisions of the Plan. The Company continues to have significant interest expense and principal repayment obligations, as well as substantial capital expenditure requirements in order to comply with federal and state underground storage tank system requirements by December 22, 1998. The ability of the Company to satisfy its obligations will depend upon, among other things, prevailing economic conditions and financial, business and other factors, beyond the control of the Company. One such factor is the results of operation of Gulf Oil L.P., which is a limited partnership controlled and managed by an unaffiliated general partner Catamount Management Corporation ("CMC"). The Company derives a portion of its operating income (approximately 23% for the fiscal year ended September 30, 1997) from its equity in the earnings of Gulf Oil L.P. Therefore, the performance of Gulf Oil L.P., an entity where the Company does not have direct control over management, will affect the Company's overall results of operations. The partnership agreement of Gulf Oil L.P. provides for certain distributions to partners, however, such distributions are subject to restrictive covenants imposed by Gulf Oil L.P.'s lenders, which only permit distributions for tax payments, provided that there is no event of default or unless otherwise consented to by the lenders. The Company received aggregate distributions from Gulf Oil L.P. of $5.5 million during the fiscal year ended September 30, 1997. Subsequent to September 30, 1997, the Company received from Gulf Oil L.P. a distribution in the amount of $13.3 million that was consented to by the lenders. See "Item 1 -- Business - Gulf Oil L.P.". Aggregate cash requirements for the year ended September 30, 1997 for principal payments under its credit agreements, debt service and capital expenditures were approximately $71 million. Aggregate cash requirements for fiscal year 1998 are estimated to be $65.1 million. The funding for such anticipated cash requirements is expected to be provided from earnings of the Company and proceeds from asset dispositions. -4- 5 BUSINESS STRATEGY The Company's primary strategy is to increase its retail gasoline presence which, in turn, is expected to increase retail food sales. This strategy is designed to capitalize on the continued growth of gasoline sales by convenience stores. Consistent with that strategy, almost all of the stores opened by the Company since 1980 include the sale of gasoline. The Company continues to operate in its post-reorganization phase which contemplates a conservative financial plan to implement its growth strategy. The Plan requires, among other things, significant periodic repayments of the Company's restructured debt obligations. In addition to these repayment obligations, the Company is required to make significant capital expenditures in order to comply with federal and state underground storage tank system upgrade requirements by December 22, 1998. The Company's financial plan also contemplates capital expenditures for the upgrading and modernization of its stores. These upgrades may consist of (i) conversion of existing gas stations to combination units; (ii) major remodels of existing sites; (iii) addition of stores to sites which presently are gas only with small kiosks; (iv) razing of stores and rebuilding existing sites; or (v) addition of gas stations to existing convenience stores. The Company may also pursue additional remodeling or rehabilitation projects through the use of operating leases. As part of the Company's business strategy, the Company continues an aggressive program to market and dispose of certain underperforming, non-core business properties. The Company evaluates, on an ongoing basis, the performance of each of its stores in order to identify those stores which are non-contributors. As part of that process, the Company considers various factors in deciding whether to continue to operate a store or dispose of the property, including location, rent contribution and overall profitability. During the year ended September 30, 1997, the Company sold 40 properties, for a total of approximately $15.1 million. As of September 30, 1997, the Company was actively marketing approximately 110 properties, 47 of which were either under agreement or subject to negotiation with prospective buyers. There can be no assurance that the Company will be able to close sales of properties under agreement or conclude satisfactory agreements for properties under negotiation. See Note 6 of Notes to the Company's Financial Statements for information concerning the annual debt service requirements, including requirements to pay down debt from the proceeds of the sale of certain designated mortgaged properties (hereinafter "Target Payments"). In addition to the Company's strategy to increase its retail presence and the asset disposition program, the Company continues to pursue the manufacturing and distribution of private label products for third-party customers. CUMBERLAND OPERATIONS RETAIL OPERATIONS. The Company's typical convenience store is approximately 2,400 square feet. The stores are concentrated by geographic area in order to maximize the advantages provided by vertical integration with the dairy, beverage and bakery product lines. The stores are generally located in residential areas, on main thoroughfares, in small centers or on other sites selected for easy accessibility and customer convenience. The stores' exteriors are of a similar design and color, making them easily recognizable. The Company emphasizes high-quality service for its customers as well as convenience by offering a large array of food products, services and gasoline at competitive prices. New products are continually introduced on a selected basis to expand the Company's product and service offerings to its customers. All stores offer well-known brand name products, and products that bear various "Cumberland" and other private labels, including milk, bakery products, deli sandwiches, juices and carbonated and non-carbonated beverages, ice cream and other dairy products such as dips and cheeses. Most of these items would typically be offered in supermarkets. The wide range of food items includes canned foods and groceries, dairy products, beverages, snack items, candy, baked goods and food service items, such as fountain soft drinks, coffee, deli meats and deli sandwiches and similar foods. Non-food products and services include, in addition to gasoline, cigarettes including privately labeled cigarettes, health and beauty aids, publications, lottery tickets, money orders and pre-paid phone cards. In addition, approximately 199 stores are equipped with automated teller -5- 6 machines and 252 stores are open 24 hours. Most of the Company's private label products are manufactured or packaged at the Company's facilities. MANUFACTURING OPERATIONS. The Company, through its manufacturing division, operates three fluid milk plants, an ice cream plant, a bakery, a beverage plant and a grocery warehouse and distribution center. The Company believes that operation of these plants offers the Company high quality products and services at a price that allows for competitive advantage. Dairy Operations -- The Company's dairy operations consist of two fluid milk processing facilities located in Florence, New Jersey (89,600 square feet) and East Greenbush, New York (28,777 square feet) and a fluid milk and ice cream processing facility, located in Canton, Massachusetts (68,810 square feet). These plants supply fluid dairy products to all of the Company's convenience stores, with the exception of Florida, and frozen products to all stores, including Florida. The plants provide the convenience stores with consistent delivery of high-quality dairy products. By integrating these operations, the Company has attempted to insulate its convenience stores from arbitrary third party treatment relative to pricing, quality and service. In recent years, however, there has been a decrease in the sales of fluid milk, ice cream and bakery products at the Company's convenience stores. The Company attributes this decrease to several factors, including consumers' shifts to lower fat diets and a reduction in the number of its convenience stores. In part as a result of this decrease, the Company has aggressively solicited third-party private label business. The Company also sells fluid dairy products to third party customers which are primarily large supermarket chains and distributors. The fluid milk business is extremely competitive. The Company competes with regional dairy operations and numerous smaller dairies. The Company does not have a strong regional brand for fluid milk product and, therefore, its pricing must be competitive with that of private labels. During the fiscal year ended September 30, 1997, total fluid volume sold to third party customers was approximately 75% of total fluid manufactured gallons; one customer, which has an "at will" relationship with the Company, accounted for 25% of total fluid manufactured gallons sold to third parties and a second customer, which also has an "at will" relationship and is a customer of the Company's bakery operations, accounted for 22% of dairy product sales to third parties. Although the Company believes its relations with these customers to be good, loss of either customer could have a material adverse effect on dairy operations and because of one customer's bakery purchases, bakery operations as well. Bakery Operations -- The bakery operation, which is located in a 120,000 square foot portion of the Company's Westborough, Massachusetts facility, provides high quality bakery products, including a limited variety of breads, donuts and deli style sandwiches both to the Company's convenience stores and to third party customers, primarily consisting of large supermarket chains. During the fiscal year ended September 30, 1997, total sales of bakery products to third-party customers were approximately 68% of total bakery product sales; two customers, which have "at will" relationships with the Company, accounted for more than 75% of such sales. Although the Company believes its relations with these customers to be good, loss of either customer could have a material adverse effect on bakery operations and, because of one customer's dairy purchases, dairy operations as well. Beverage and Plastic Operations -- The beverage and plastic operations are located in a 70,000 square foot portion of the Company's Westborough, Massachusetts facility. The beverage operation manufactures a high quality beverage product in 15 flavors under the "Newport" label which is sold exclusively in the Company's convenience stores. The plastic operation manufactures plastic bottles for use in the Company's beverage operation as well as sales to third party customers. Grocery and Warehouse Distribution -- The grocery warehouse and distribution center is located in a 377,000 square foot portion of the Company's Westborough, Massachusetts facility. It distributes grocery, tobacco, candy and miscellaneous other products to all of the Company's -6- 7 convenience stores, except those in Florida, through a weekly order/delivery system. Management believes that the grocery warehouse and distribution operation offers the Company certain advantages in the extremely competitive convenience store environment including favorable pricing from vendors due to volume and centralized purchasing, maximum allowance earnings, product selection and availability of seasonal lines, as well as producing freight income, if feasible, on return trips from the stores. Distribution Fleet -- The Company owns and operates a fleet of 192 tractors, 182 trailers (including "low-temp" trailers, "mid-temp" trailers and dry box trailers), 33 straight trucks, 24 milk transport tankers and 62 gasoline transport tankers and numerous other support vehicles. The average age of its tractor fleet is six years; the average age of its trailer fleet is nine years; and the average age of its gasoline transport fleet is nine years. The Company plans to continue upgrading its fleet operations over the next few years. GULF OIL L.P. As part of the Plan, the Company entered into an arrangement with Gulf Oil L.P. (formerly known as Catamount Petroleum Limited Partnership, a Delaware limited partnership) and Catamount Management Corporation, a Massachusetts corporation ("CMC"), pursuant to which the Company transferred a substantial portion of the assets comprising its Gulf Oil Division to Gulf Oil L.P. in exchange for a 66 2/3% limited partnership interest in Gulf Oil L.P. These assets included certain supply contracts/franchises for Gulf branded gasoline retailers in the New England states, New York, New Jersey, Pennsylvania, Delaware and Ohio, certain petroleum storage terminals and the right to use and license the various "Gulf trademarks" and tradenames in those market areas. Cumberland retained the remaining Gulf division assets which primarily consist of the contracts with the Lessee Dealers. The Company is a Class A limited partner in Gulf Oil L.P. and, as a limited partner, does not have any control over the day to day operations of Gulf Oil L.P. John Kaneb, the chief executive officer of CMC, was for approximately 25 years an officer or chief executive officer of Northeast Petroleum Corporation, a company engaged in the wholesaling and retailing of petroleum products which was sold in 1983. Mr. Kaneb reentered the petroleum business in 1986 with the founding of Catamount Petroleum Limited Partnership. The beneficial interests of Gulf Oil L.P. are held as follows: (i) 1% general partnership interest is held by CMC, (ii) a 66 2/3% Class A limited partnership interest is held by the Company, and (iii) a 32 1/3% Class B limited partnership interest is held by members of John Kaneb's family and their nominees (the "Kaneb Partners"). The partnership agreement of Gulf Oil L.P. (the "Partnership Agreement") provides for mandatory distributions to partners in amounts equal to the income tax payable on their portion of the earnings of Gulf Oil L.P. and for other distributions as well. Distributions by Gulf Oil L.P. are, however, subject to restrictive covenants in Gulf Oil L.P.'s agreements with its lenders, which permit distributions only for tax payments, provided that there is no event of default or unless otherwise consented to by the lenders. As a result, the Company currently receives quarterly distributions of approximately 40% of its pro rata share of partnership earnings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of Gulf Oil L.P.'s results of operations. The Partnership Agreement provides that at any time on or after January 1, 1999, the Kaneb Partners and CMC have the right, but not the obligation, to put their partnership interests to the Company (the "Put") and the Company has the right, but not the obligation, to call such interests (the "Call") at a formula price equal to a multiple of Gulf Oil L.P.'s earnings. If the Company is unable or determines it is not in its best interests to purchase upon exercise of the Put or, if the Company, following the exercise of the Call is unable to complete the purchase, the Partnership Agreement provides that Gulf Oil L.P. will be sold by an investment banker as a going concern. Therefore, there is a possibility that, at any time after 1998, the Company's entire limited partnership interest in Gulf Oil L.P. could be purchased or that Gulf Oil L.P. would be sold as a going concern. In such event, the Company would, unless the purchaser of Gulf Oil L.P. otherwise agreed, lose the right to use the "Gulf" trademarks and trade names and would, therefore, be required to make arrangements with another major oil company for licensing and petroleum product supply for its Lessee Dealer operations. There can be no assurance that any such arrangement could be negotiated on terms satisfactory to the Company. -7- 8 Under the Partnership Agreement, the Company also has an early call right in the event that (a) a successor chief executive officer of CMC is appointed prior to January 1, 1999 and (b) Gulf Oil L.P., in the 12 calendar months following such appointment, fails to achieve a certain level of profitability, at a purchase price determined by a formula set forth in the Partnership Agreement. The Company is also required to purchase all of its requirements for petroleum products (except in Florida) from Gulf Oil L.P. through December 31, 1998 pursuant to a supply agreement executed at the time of formation of Gulf Oil L.P. (the "Supply Agreement"). The Company is required to pay branded jobber prices published by Gulf Oil L.P. The Supply Agreement also requires the payment of additional amounts to cover certain of Gulf Oil L.P.'s costs in the event that certain target earnings are not met and/or the Company fails to purchase certain minimum amounts of branded products. The Company, for the calendar year 1996 purchased 525 million gallons of branded products from Gulf Oil L.P.; the minimum requirement was 476.7 million gallons. Future calendar year minimums of branded product for 1997 and 1998 are 483.5 and 488.7 million gallons, respectively. The Company expects to meet all minimum purchase requirements, though there can be no assurance in this regard. For the fiscal years ended September 30, 1997 and 1996, the Company purchased approximately $408.8 and $372.1 million, respectively, from Gulf Oil L.P. Brand maintenance costs, which are based upon quantities purchased and earnings of Gulf Oil L.P., for each calendar year, have resulted in additional brand maintenance costs of $4.0 and $1.4 million for calendar 1996 and 1995, respectively, and $2.2 million has been paid or accrued through September 30, 1997. The ultimate amount for 1997 will be determined based on actual results for calendar 1997. There can be no assurance whether Gulf Oil L.P. will achieve its target earnings in future years or whether the Company will purchase in future years the minimum amounts of branded products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of Gulf Oil L.P.'s results of operations and Note 5 to the Company's Financial Statements. The Company also provides transportation services for Gulf Oil L.P. with its fleet of vehicles as well as other services at competitive market rates. COMPETITION All aspects of the Company's business are highly competitive, including convenience store operations, gasoline operations, bakery and dairy operations and real estate operations. In its convenience store operations, the number and type of the Company's competitors vary by location. The Company presently competes with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, drugstores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains and many of which have greater financial and other resources than the Company. Key competitive factors include, among other things, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing. The single largest factor affecting the convenience store industry in recent years has been the continued expansion into the market of major oil companies, usually as limited selection convenience stores adjacent to existing gas properties. Such companies have a low cost, readily available supply of gasoline and, therefore, have the ability to be gasoline price leaders in order to establish market presence. The primary objective of these companies is to sell large volumes of gasoline. As a result, staple convenience store products such as tobacco and soda are frequently priced very low and sold in high volumes. Accordingly, retail convenience store industry merchandise margins have been under significant pressure in recent years. Increased competition with respect to the sale of tobacco products has also affected the convenience store industry. This has resulted primarily from the advent of consumer tobacco warehouses and other competitors. For fiscal year 1997, the sale of tobacco products accounted for approximately 28.5% of the Company's retail store sales. -8- 9 Based upon management's analysis of its market area, the Company's major convenience store competitors (excluding major oil companies), by geographic area are as follows: New England..... Dairy Mart, Christy's, Irving, Store 24, Li'l Peach and Tedeschi's Mid Atlantic.... 7-Eleven, Stewarts, Wilson Farms, Wawa and Quick Chek Florida......... 7-Eleven, Circle K and Racetrac Gasoline sales are highly competitive. The Company competes with both independent and national brand gasoline stations. Gasoline profit margins have a significant impact on the Company's earnings. These profit margins are most influenced by factors beyond the Company's control, such as volatility in the wholesale gasoline market, and are continually influenced by competition in each local market area. ADVERTISING The Company's advertising strategy is concentrated on all manufactured products and immediately consumable food products such as coffee, bakery items, candy and ice cream novelties. The current advertising slogan, "Cumberland Farms - - The Stop That Keeps You Going," is used to promote the quick service and complete offering of those products at all Cumberland locations. The Company's advertising program includes periodic distribution of direct mail circulars and newspaper and radio commercials, all designed to increase consumer awareness and to highlight special promotions on manufactured products. LABOR RELATIONS The Company employs approximately 7,100 full time and part time employees. Less than 1.5% of the Company's employees are represented by unions. In general, the Company considers its relations with its employees to be satisfactory. SEASONALITY Weather conditions have a significant effect on the Company's sales, as convenience store customers are more likely to go to stores to purchase convenience goods and services, particularly higher profit margin items such as fast food items, fountain drinks and other beverages, when weather conditions are favorable. Accordingly, the Company's stores generally experience higher revenues and profit margins during the warmer weather months, which occur within the Company's third and fourth fiscal quarters. TRADE NAMES, SERVICE MARKS AND TRADEMARKS The Company uses a variety of trade names, service marks and trademarks. Except for "Gulf," "Cumberland Farms," "Newport" and "Cloverfield Dairy," the Company does not believe any trade name, service mark or trademark is material to its business. The Gulf trade names and trademarks are licensed by Chevron to Gulf Oil L.P. which, in turn, sublicenses them to the Company. ENVIRONMENTAL REGULATIONS AND COMPLIANCE The Company incurs ongoing costs to comply with federal, state and local environmental compliance laws and regulations primarily relating to underground storage tank systems. These costs include assessment, compliance, and remediation costs, as well as certain capital expenditures relating to the Company's gasoline operations. The United States Environmental Protection Agency (the "EPA") has established standards for owners and operators of Underground Storage Tank Systems ("USTs") relating to, among other things: (i) maintaining leak detection systems; (ii) upgrading USTs; (iii) implementing corrective action in response to releases; (iv) closing out-of-use USTs to prevent future releases; (v) maintaining appropriate records; and (vi) maintaining evidence of financial responsibility for corrective action and compensating third parties for bodily injury and property damage resulting from UST releases. All states in which the Company operates also have adopted UST regulatory programs which, in some cases, are more stringent than EPA regulations. -9- 10 Under current federal and certain state regulatory programs, the Company is obligated to upgrade or replace all non-complying USTs it owns or operates to meet corrosion protection and overfill/spill containment standards on or before December 22, 1998. In some states, this upgrading or replacement must be accomplished by an earlier date. The Company has evaluated each of its sites to determine the type of expenditures required to comply with these and other requirements under federal, state and local UST regulatory programs. Approximately 90% of the Company's USTs meet the December 22, 1998 environmental protection requirements, and approximately 80 more USTs require upgrading or replacement by December 22, 1998. The Company over recent years has made, and is committed through 1998 to make, significant capital expenditures to comply with UST system upgrade requirements as well as other upgrades related to the marketing of motor fuels. The Company's capital expenditures for such upgrades for the fiscal year ended September 30, 1997 was $14.3 million, and it is projected that an additional $19.6 million of such capital expenditures will be made through December 22, 1998. These amounts are net of estimated reimbursement from various state environmental trust funds which have provisions for sharing or reimbursing certain costs incurred by UST owners or operators based upon compliance with the terms and conditions of the funds. The foregoing amounts are based on factors and assumptions that could change due to modifications of regulatory requirements, detection of unanticipated environmental conditions or other unexpected circumstances. As a result, the actual costs incurred may vary substantially from these estimates. As of September 30, 1997, ten of the 12 states in which the Company operated have enacted so-called "trust fund" legislation. These trust fund programs have been submitted to or approved by the EPA, with a variety of mechanisms for sharing or reimbursing corrective-action (remediation) costs, many including third-party compensation. All companies that operate USTs are required to pay a variety of fees to participate in trust fund programs for remediation activities. As part of its UST management program, the Company is involved in environmental assessment and remediation activities with respect to discovered releases of regulated substances from its existing and previously owned or operated retail gasoline facilities. The Company systematically upgrades or replaces USTs where appropriate and initiates any required remediation at that time. Older tanks are replaced in conjunction with gasoline facility renovation in order to reduce downtime and enhance revenues when the site is completed. The Company spent approximately $3.4 million for the fiscal year ended September 30, 1997 for assessment and remediation and estimates that it will incur approximately $3.5 million for such costs for fiscal year 1998. The Company's estimates of costs to be incurred for environmental assessment and remediation and for UST upgrading and other regulatory compliance are based on its review of (i) test drilling and other subsurface activities, (ii) computerized tank management data, and (iii) present and estimated future remediation costs and results at UST sites. Since certain of these factors and assumptions could change due to potential changes in the status of federal and state regulations and state reimbursement programs, detection of unanticipated environmental conditions or other unexpected circumstances, the actual costs incurred may vary significantly from the estimates noted above and may vary significantly from year to year. The Company also incurs certain ongoing environmental costs associated with the operation of the plants. Among other things, the large quantities of ammonia used by the fluid milk plants and the wastewater treatment facilities and waste oil burners located at the plants are subject to federal, state and local regulations. In addition, the Company may also, from time to time, incur liability as a result of contamination associated with the operation of the plants. The Company has adopted an Environmental Compliance Program which sets forth the Company's corporate environmental policies with respect to (i) monitoring compliance with applicable environmental laws and regulations, (ii) training employees, including convenience store managers, in regulatory compliance issues and emergency response procedures, (iii) disciplinary actions for violations of environmental policies and procedures for the Lessee Dealers, and (iv) federal, state and local regulations. There can, of course, be no assurance that such program will ensure compliance with applicable environmental laws and regulations. Company management reports regularly to the Board of Directors on environmental compliance matters. -10- 11 OTHER REGULATORY MATTERS In addition to being subject to extensive environmental regulation and compliance requirements as described above, the Company's operations are highly regulated in areas such as milk processing, retail petroleum operations, the sale of lottery tickets, participation in federal food stamp programs and the sale of alcoholic beverages and tobacco products. Compliance, for the most part, with such regulations involves adhering to applicable federal and state laws with respect to operations and, in many instances, the posting of security bonds or other forms of collateral. These bonds secure numerous obligations incurred in connection with the collection of motor fuel taxes, purchases of raw milk, cigarette tax stamps and alcoholic beverages. The ability to obtain, and, in some instances, maintain, permits from local municipalities to store and dispense petroleum products and to sell alcoholic beverages is increasingly difficult. The Company's profitability can be impacted negatively by the inability to retain or obtain new permits from towns and municipalities where the Company is interested in retailing motor fuels or alcoholic beverages. In addition, various federal, state and local legislative and regulatory proposals are made from time to time to, among other things, increase the minimum wage payable to employees, require a minimum of two employees at convenience stores during certain nighttime hours, increase taxes on the retail sale of certain items, such as petroleum products, cigarettes and other tobacco products and alcoholic beverages, and health care. Changes to such laws, regulations or ordinances may adversely affect the Company's performance by increasing the Company's costs or affecting its sales of certain products. FORWARD LOOKING STATEMENTS Certain statements contained herein are forward-looking statements (as such terms are defined in the rules and regulations promulgated pursuant to the Securities Act of 1933, as amended). These forward-looking statements include plans and objectives to upgrade and remodel store locations, to build new stores and increase gasoline sales, to operate its manufacturing facilities, as well as the estimated costs for environmental remediation and environmental capital expenditures and other matters contained herein that are not historical facts. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those expressed in or implied by such forward-looking statements. Such factors and uncertainties include, but are not limited to the availability of capital to fund the Company's business strategy, the future profitability of the Company, the performance of Gulf Oil L.P., competition and pricing in the Company's market area, volatility in the wholesale gasoline market due to supply interruptions, modifications of environmental conditions, the timing of reimbursements from state environmental trust funds, the Company's ability to manage its long-term indebtedness, weather conditions, the favorable resolution of certain pending and future litigation, and general economic conditions. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. -11- 12 ITEM 2. PROPERTIES As of September 30, 1997, the Company owned or leased the following properties, including convenience stores and gas stations in the geographic locations indicated. CONVENIENCE STORES AND GASOLINE STATIONS(1) LESSEE DEALERS TOTAL Owned Leased Owned Leased Owned Leased ----- ------ ----- ------ ----- ------ NEW ENGLAND REGION - ------------------ Connecticut 56 10 14 4 70 14 Maine 45 2 0 0 45 2 Massachusetts 192 35 37 4 229 39 New Hampshire 47 6 1 1 48 7 Rhode Island 60 16 6 1 66 17 Vermont 23 0 0 0 23 0 MID-ATLANTIC REGION - ------------------- Delaware 10 0 9 1 19 1 New Jersey 55 7 75 18 130 25 New York 91 4 29 14 120 18 Ohio 0 0 1 0 1 0 Pennsylvania 15 3 40 5 55 8 FLORIDA 138 6 0 0 138 6 - ------- --- -- --- -- --- --- TOTAL 732 89 212 48 944 137(2) === == === == === === (1) Includes approximately 300 "strip centers," each of which typically has one to three units rented to third parties. (2) In addition to the properties shown on the chart, the Company leases or subleases to third parties 21 properties, which are not gas stations or convenience stores located in nine states. The Company also owns or leases 134 vacant properties and undeveloped sites located in 12 states. The Company's leases of properties have terms extending from tenancies at will to expirations through the year 2023. Many of these real estate leases have multiple option periods which will enable the Company to retain favorable locations. The annual rent expense associated with these leases for the year ended September 30, 1997, excluding leases with related parties, was approximately $4.1 million. The above leases include 23 properties leased from affiliates of the Company. During the fiscal year ended September 30, 1997, the Company paid $1.1 million to these affiliates for the lease of these properties. See "Certain Relationships and Related Transactions". Third-party rental income is derived from gas station rentals to Lessee Dealers (260 tenants) and rental of retail store and office facilities (approximately 400 units). The annual rent roll for the properties currently under lease is approximately $19.3 million. In addition, there are currently 134 available units vacant with a potential annual rent roll of approximately $1.5 million. In addition to the properties shown on the chart, the Company also operates 19 warehouses, offices and manufacturing facilities, nine of which are owned and ten of which are leased, located in eight states. The Company owns a facility in Westborough, Massachusetts, which is used as follows: (i) bakery operations (120,000 square feet), (ii) beverage operations (70,000 square feet), and (iii) warehouse and distribution center (370,000 square feet). The Company's headquarters, located in Canton, Massachusetts, consists of three -12- 13 buildings of 97,209, 94,810 and 17,080 square feet, which includes a fluid milk and ice cream manufacturing facility of 68,810 square feet. In the Mid-Atlantic region, the Company owns two fluid milk processing facilities of 89,600 and 28,777 square feet. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is party to various legal actions which the Company believes are routine in nature and incidental to the operation of its business. These legal actions are primarily in the areas of personal injury and property damage, wrongful termination, environmental claims, real estate and contract disputes as well as claims brought pursuant to the Petroleum Marketing Practices Act, the statute regulating the franchise relationship existing between the Company and its Lessee Dealers. The Company's policy is to defend vigorously those actions in which it has been named as a defendant and to pursue aggressively those actions involving the collection of amounts owed to it or compliance by others with obligations to which the Company believes it is entitled. The Company has civil actions pending against Mr. Demetrios B. Haseotes, a shareholder and Director of the Company. Two actions relate to the Company's efforts to collect its judgments in the amount of (a) $663,267, plus interest, which represents funds distributed to Mr. Haseotes to pay certain tax liabilities but applied for other uses and (b) $356,456 plus interest, with respect to funds borrowed by Mr. Haseotes but not yet repaid. Another action relates to the Company's efforts to obtain an accounting and possible disgorgement of funds received by him in connection with the sale of a crude oil refinery in Canada. Mr. Demetrios B. Haseotes is also pursuing a claim against the Company seeking reinstatement of his position and attendant compensation which the Board of Directors terminated in 1995. In addition, the Company has an outstanding injunction barring Mr. D.B. Haseotes' involvement in the Company's management. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the securityholders of the Company during the fourth fiscal quarter of the fiscal year ended September 30, 1997. -13- 14 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. No established public trading market exists for the Company's Class A Common Stock, par value $1.00 per share, or the Class B Common Stock, par value $1.00 per share, and accordingly, no high and low bid information or quotations are available with respect to the Company's Common Stock. As of December 20, 1997, there were four holders of record of Class A Common Stock and seven holders of record of Class B Common Stock. The Company operates as an S Corporation under the Internal Revenue Code and, therefore, no dividends are issued by the Company. See Note 4 to the Company's Financial Statements for a discussion of distributions made to the shareholders in order to pay income taxes. -14- 15 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA The following selected financial data for the five years ended September 30, 1997, are derived from the audited financial statements of the Company. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company's financial statements, related notes and other financial information included elsewhere herein. YEARS ENDED SEPTEMBER 30, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ---------- ---------- Statement of operations data: (in thousands except for ratios) Income Retail revenues $ 1,169,348 $ 1,121,509 $ 1,080,389 $ 974,802 $ 949,133 Wholesale revenues (1) 299,298 274,635 240,835 213,198 150,362 Equity in earnings of Gulf Oil, L.P. (1) 7,677 7,855 13,612 6,361 - Gain on sales of property, and equipment 8,782 11,372 9,673 9,517 8,971 ----------- ----------- ----------- ---------- ---------- Total income 1,485,105 1,415,371 1,344,509 1,203,878 1,108,466 Special charge (2) - - - (22,098) - Operating income 33,454 46,639 57,675 19,030 39,817 Interest expense (3) (22,823) (22,872) (25,071) (27,891) (25,947) Reorganization expense (4) - - - (2,491) (6,175) Provision for state income taxes (600) (1,919) - - - ----------- ----------- ----------- ---------- ---------- Income (loss) before extraordinary gains 10,031 21,848 32,604 (11,352) 7,695 Extraordinary gains (4) - - 2,197 9,653 - ----------- ----------- ----------- ---------- ---------- Net income (loss) $ 10,031 $ 21,848 $ 34,801 ($ 1,699) $ 7,695 =========== =========== =========== ========== ========== Ratio of earnings to fixed charges (5) 1.4x 1.8x 2.2x .6x 1.3x Balance Sheet Data: Total assets $ 362,211 $ 366,204 $ 362,427 $ 349,687 $ 422,669 Long-term debt (6) 212,906 231,506 254,265 282,023 - Stockholders' equity (deficit) 46,667 39,211 26,074 (5,762) (1,659) NOTES TO SELECTED FINANCIAL DATA FOOTNOTES (1) The Company's wholesale revenues include sales of petroleum, dairy and bakery products to independent third parties. In January 1992, the Company entered into an interim supply agreement, during which time the Company earned commissions and thruput income from Catamount Petroleum Limited Partnership, which was replaced in December 1993 by a joint venture agreement between the Company and Catamount (following the closing, Catamount was renamed Gulf Oil, L.P.). As a result of these agreements, substantially all wholesale petroleum sales from January 1992 through December 30, 1993, together with costs and expenses related thereto, have been made by Catamount under the interim supply agreement, and subsequently by Gulf Oil, L.P. Effective January 1, 1994, the Company commenced recording its equity in the earnings of the Gulf Oil, L.P. and began selling gasoline directly to the Company's Lessee Dealers (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of results of operations of Gulf Oil, L.P. for the fiscal year ended September 30, 1997 and 1996, Note 5 of Notes to the Company's Financial Statements and separate financial statements of Gulf Oil, L.P.). (2) The special charge in fiscal year 1994, represents the write-off of advances to a Company controlled by a related party. (3) Interest expense decreased as a result of reductions in the Company's debt levels and effective rate of interest. (4) Reorganization expense and the extraordinary gains related to reductions in debt are a result of the Company's Chapter 11 filing and subsequent reorganization efforts. (5) The Company's earnings were inadequate to cover the minimum fixed charge ratio of 1.0 to 1 in the fiscal year ended September 30, 1994. The coverage deficiencies amounted to $11.4 million. (6) Long term debt as of September 30, 1993 excludes liabilities subject to compromise of $359.3 million. -15- 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table summarizes the results of operations for the fiscal years ended September 30, 1997, 1996 and 1995, which is followed by Management's Discussion and Analysis of Financial Condition and Results of Operations. The financial information set forth below should be read in conjunction with the Company's financial statements, related notes and other financial information included elsewhere herein. YEARS ENDED SEPTEMBER 30, % INCREASE (DECREASE) 1997 1996 1995 1997 1996 ------------------------------------------ --------------------- In Thousands INCOME Retail Revenues $1,149,987 $1,101,076 $1,059,011 4.4% 4.0% Other Income 19,361 20,433 21,378 (5.2)% (4.4)% ---------- ---------- ---------- ----- ----- Total $1,169,348 $1,121,509 $1,080,389 4.3% 3.8% Equity in earnings of Gulf Oil, L.P 7,677 7,855 13,612 (2.3)% (42.3)% Gains On sales of property and equipment 8,782 11,372 9,673 (22.8)% 17.6% ---------- ---------- ---------- ----- ----- Total 1,185,807 1,140,736 1,103,674 4.0% 3.4% Wholesale revenues 299,298 274,635 240,835 9.0% 14.0% ---------- ---------- ---------- ----- ----- Total income 1,485,105 1,415,371 1,344,509 4.9% 5.3% ---------- ---------- ---------- ----- ----- Costs and expenses Cost of sales 1,181,426 1,102,582 1,027,162 7.1% 7.3% Operating expenses 270,225 247,447 242,131 0.3% 2.2% Depreciation and amortization 22,299 18,703 17,541 19.2% 6.6% ---------- ---------- ---------- ----- ----- Total 1,451,651 1,368,732 1,286,834 6.1% 6.4% ---------- ---------- ---------- ----- ----- Operating income $ 33,454 $ 46,639 $ 57,675 (28.3)% (19.1)% ========== ========== ========== ===== ===== OTHER OPERATING DATA Merchandise gross profit $ 152,308 $ 151,404 $ 147,925 0.6% 2.4% Merchandise gross profit as a percentage of sales 29.8% 30.5% 29.9% Gasoline gallons sold 501,050 493,623 470,576 1.5% 4.9% Gasoline gross profit $ 58,470 $ 63,947 $ 65,737 (8.6)% (2.7)% Gasoline gross profit cents per gallon 11.7 13.0 14.0 (10.0)% (7.1)% Operating income before depreciation and amortization as a percentage of total revenues 3.7% 4.6% 5.6% Operating income as a percentage of total revenues 2.2% 3.3% 4.3% Comparable average store and station data: Merchandise sales growth 3.0% 0.5% 3.5% Gasoline gallons sold 1.5% 4.9% 10.3% -16- 17 YEAR ENDED SEPTEMBER 30, 1997 VERSUS 1996 Included in retail revenues are convenience store and retail gasoline sales. Convenience store sales were $509.5 million for the fiscal year 1997 an increase of $14.8 million or 3.0%, from the prior fiscal year. Sales gross margin dollars increased slightly. Gross margin, as a percentage of sales, decreased from 30.5% to 29.8%. Retail gasoline sales were $640.5 million, an increase of $34.1 million, or 5.6% over the prior fiscal year. Gasoline gallon sales were 501.1 million, an increase of 7.4 million gallons, or 1.5% over the prior fiscal year. The increase in gallons sold results primarily from expanded facilities, improved dispenser amenities and competitive marketing strategies. The average cents per gallon gross margin of 11.7 cents decreased 1.3 cents or 10% from the prior fiscal year principally due to an increase in the cost of gasoline. Other income is comprised of rental income from tenants located at retail and gasoline sites and has decreased as a result of sales of properties. The Company owns a 66-2/3% limited partnership interest in Gulf Oil L.P. Control of the partnership rests with the general partner. The Company accounts for its investment under the equity method. See Note 5 to the Company's Financial Statements. Gains on sales of property decreased from the prior fiscal year. The gains for fiscal year 1997 were decreased by a provision for impairment loss on properties held for disposal of $950,000 as required by Financial Accounting Standards Board Statement No. 121. See Note 2 to the Company's Financial Statements for additional explanation. For the fiscal year ended September 30, 1997, 40 properties were sold, compared to 82 sold in the prior fiscal year. A non-operating petroleum terminal was sold in the prior fiscal year for a gain of approximately $2.5 million. Included in wholesale revenues are plant and wholesale petroleum sales to third parties. Plant revenues were $160.7 million, an increase of $15.0 million or 10.3% over the prior fiscal year. The increase is attributable to price increases and sales to additional wholesale milk customers. Wholesale petroleum revenues were $138.6 million, an increase of $9.7 million, or 7.5% from the prior year. The increase results primarily from increased wholesale selling prices in the previous quarters. Cost of sales for the year ended September 30, 1997 increased over the prior fiscal year primarily as a result of increases in product costs and volume sold in the gasoline operations. A LIFO charge was incurred to recognize increasing costs of materials purchased. Operating expenses increased from the prior year primarily as a result of increases in payroll, benefits and repair expenses. Depreciation and amortization increased as a result of capital expenditures during the prior fiscal years. The Company has undertaken a program, utilizing both internal personnel and a third party vendor, to ensure that the Company's computer systems are Year 2000 compliant. Cost of the program was $450,000 for fiscal year 1997, with additional costs estimated to be $1,470,000 for fiscal year 1998 and $555,000 for fiscal year 1999. YEAR ENDED SEPTEMBER 30, 1996 VERSUS 1995 Included in retail revenues are convenience store and retail gasoline sales. Convenience store sales were $494.7 million for fiscal year 1996, an increase of $2.3 million or .5%, over the prior fiscal year. Merchandise sales gross margin dollars remained relatively stable; gross margin, as a percentage of sales, increased from 29.9% to 30.5%, reflecting improved product gross margins and slightly higher ancillary income. -17- 18 Retail gasoline sales were $606.4 million, an increase of $39.8 million, or 7.0% over the prior fiscal year, aided by a 2.4 cents per gallon increase in the average retail selling price. Gasoline gallon sales were 493.6 million, an increase of 23.0 million gallons, or 4.9% over the prior fiscal year. The increase in gallons sold results primarily from continued attention to the convenience retailing aspects of selling gasoline and the remodeling and expansion of gasoline facilities at existing locations. The average cents per gallon margin of 13.0 cents decreased 1.0 cent or 7.1% from the prior fiscal year principally due to an increase in the cost of gasoline, offset to some extent by an increase in the retail selling price of gasoline. Other income is comprised of rental income from tenants located at retail and gasoline sites and has decreased due to fewer tenants. On December 30, 1993, the Company entered into a joint venture agreement with Gulf Oil L.P. The Company owns a 66-2/3% limited partnership interest in Gulf Oil L.P. Control of the partnership rests with the general partner. The Company accounts for its investment under the equity method. The decrease in earnings from $13.6 million in the prior fiscal year to $7.9 million in fiscal year 1996 resulted primarily from unusually high margins achieved by Gulf Oil L.P. in the first quarter of the prior fiscal year. Gains on sales of property increased over the prior fiscal year. Eighty-two properties were sold during the fiscal year ended September 30, 1996, compared to ninety-three sold in the prior fiscal year. A non-operating petroleum terminal was sold in fiscal year 1996 for a gain of $2.5 million. Included in wholesale revenues are plant and wholesale petroleum sales to third parties. Plant revenues were $145.7 million, an increase of $32.8 million or 29.1% over the prior fiscal year, due to price increases and the addition of wholesale milk customers. Wholesale petroleum revenues were $128.9 million, an increase of $1.0 million, or .8% over the prior year. Cost of sales increased over the prior year as a result of increases in product costs and volumes sold in the gasoline operations. A LIFO charge was incurred to recognize the increasing costs of materials purchased. Operating expenses increased over the prior year as a result of increases in payroll and benefits, and as a result of increases in the volume of gasoline sold and the severity of the winter weather. Depreciation and amortization increased as a result of capital expenditures incurred during the year. Interest expense decreased from the prior fiscal year principally due to lower debt. The Company provided for estimated state income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company annually generates substantial operating cash flow because most of its revenues are received in cash. Based on current projections, the Company believes that the amount of cash generated from operations, together with proceeds from anticipated property sales will be sufficient to meet its current and long-term obligations and future capital expenditure requirements. Notwithstanding its $30 million loan facility and satisfactory operating results since emergence from Reorganization in December, 1993, the Company remains highly leveraged. In addition, $17 million of the availability under the loan facility has been utilized for the issuance of letters of credit. There can be no assurance that the Company's business will continue to generate income at or above current projections. Moreover, the Company's ability to generate sufficient funds to meet its obligations is dependent upon future economic conditions, general business and industry performance and other matters, many of which are beyond the control of the Company and which cannot be predicted at this time. If the Company is unable to generate sufficient income from operations and proceeds from property sales to service its debt requirements and make necessary capital expenditures, the Company may be required to seek additional sources of financing. There can be no assurance that any additional financing could be achieved. -18- 19 Moreover, additional financing may not be a viable option or may be viable only with credit enhancement or overcollateralization. Among those obligations and capital expenditures that now, or in the future may, require significant commitments of the Company's available cash are (i) debt service, including principal repayment, Target Payments under the Company's restructured indebtedness and debt service under its working capital facility, (ii) insurance coverage for worker's compensation and general and automobile liability claims, (iii) costs associated with environmental compliance, (iv) capital expenditures (v) payments to meet certain tax obligations of the Company's shareholders and (vi) the Company's potential response to the Put or exercise of the Call with respect to its partners' partnership interests in Gulf Oil L.P. Those items are discussed below. DEBT SERVICE The Company's Plan of Reorganization (the "Plan") became effective on December 30, 1993. The Plan restructured the Company's indebtedness and contemplated improving the Company's operating performance. Nevertheless, the Company has significant interest expense and principal repayment obligations under the Plan. As of December 30, 1993, the Effective Date of the Plan, the Company had total secured debt of approximately $308 million which has been reduced to approximately $213 million as of September 30, 1997. Substantially all of the indebtedness arising under the Plan is secured. Moreover, substantially all of the major debt instruments contain cross-default provisions. The Company has in place a $30 million working capital and letter of credit facility with a maturity date of December 30, 1998. This facility provides a revolving credit line, term loan and a facility for the issuance of letters of credit. As of September 30, 1997, the Company had drawn down $5 million of the revolving credit line and used $17 million to provide letters of credit for its insurance and bond program, resulting in unused availability of $8 million. Certain of the Company's credit agreements require the Company to make principal payments from the proceeds of the sales of certain designated mortgaged properties (such payments are hereinafter referred to as "Target Payments"). The Company's failure to make a Target Payment does not constitute an Event of Default, but rather permits the lender to take control of the sale process to meet the Target Payments. The Company's remaining Target Payments aggregated approximately $5.0 million as of September 30, 1997. Remaining Target Payments for the next two fiscal years are estimated to be $2.6 and $.8 million, respectively, and $1.6 million thereafter. Aggregate cash requirements for the year ended September 30, 1997 were approximately $71 million, comprised of debt repayment of $18.6 million, interest cost of $22.8 million and capital expenditures of $29.6 million, including Target Payments of $2.8 million. Aggregate cash requirements for fiscal year 1998 are estimated to be $65.1. The funding for such anticipated cash requirements is expected to be provided from existing cash and short term investments, earnings of the Company and proceeds from asset dispositions. ASSET DISPOSITION PROGRAM For fiscal years ended September 30, 1997 and 1996, the Company raised $15.1 million and $21.1 million respectively, from its asset disposition program. Substantially all proceeds from asset dispositions have been or will be used to pay down secured debt. To date, the Company has generated adequate cash flow from its asset disposition program and operations to meet its cash flow needs. The properties anticipated to be sold consist of vacant lots, closed locations, underperforming locations based on a profit-per-store analysis, and properties located in market areas where the Company has decided to reduce or eliminate its presence. The objective of the asset disposition program has been to increase capital resources and liquidity and improve operations by retaining the better- performing properties of the Company. The Company's asset disposition program has contemplated disposal, in most instances, of non-performing or under-performing properties and accordingly has not had, nor is the program expected to have an adverse effect on the Company's historical or future results of operations. -19- 20 The Company believes that, to date, the asset disposition program has been beneficial and has both accelerated debt repayment and contributed to the improvement in average store sales per week. INSURANCE AND BOND PROGRAMS The Company assumes a high degree of risk as a result of the high deductibles under its worker's compensation, general liability and automobile insurance policies issued by an unrelated insurer. These risks, estimated at $22.7 million, on a present value basis for the years 1992 through 1997, net of cash and reinsurance deposits of $4.7 million, resulted in accrued insurance liabilities of $18.0 million at September 30, 1997. The unrelated insurance company providing these coverages required collateral in the form of a $12 million letter of credit, certain real properties, cash and reinsurance at September 30, 1997. Conven-Petro Insurance Company ("Conven-Petro"), a wholly-owned subsidiary of Cumberland Farms of Vermont, Inc., which is related to the Company through common ownership, reinsures the unrelated insurance company for certain Company worker's compensation claims for the policy years 1992, 1993 and 1994 and for any increases in such claims subsequent thereto. In addition to collateral for its insurance program, the Company also provides a $5 million letter of credit to secure a $20 million bond line. Bonds are posted with various regulatory agencies for the purchase of raw milk, to secure tax payments for motor fuel and cigarette taxes and for various municipal planning board requirements. ENVIRONMENTAL COMPLIANCE The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations, particularly the comprehensive regulatory programs governing underground storage tank systems ("USTs") used in its operations. In addition, the Company had operating expenses for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs at the Company's current or former gasoline facilities, a portion of which expenses were reimbursed from state trust fund programs. Due to the nature of releases, the actual costs incurred may vary from the Company's estimates, and the ongoing costs of assessment and remediation activities may vary from year to year. In addition to annual "expense" type environmental costs, federal and state regulatory programs mandate that all existing USTs be upgraded or replaced by December 22, 1998 to meet certain environmental protection requirements. Approximately 90% of the Company's USTs meet the December 22, 1998 environmental protection requirements, and approximately 80 more USTs require upgrading or replacement by December 22, 1998. The Company estimates that capital expenditures of approximately $19.6 million will be made through December 22, 1998 in order to comply with UST regulatory requirements. The Company also incurs certain ongoing environmental costs associated with the operations of its plants. Among other things, the large quantities of ammonia used by the fluid milk plants and the wastewater treatment facilities and waste oil burners located at the plants are subject to federal, state and local regulations. In addition, the Company may also, from time to time, incur liability as a result of contamination associated with the operation of the plants. CAPITAL EXPENDITURES Capital expenditures, including those for environmental compliance, amounted to $29.6 and $27.6 million for the fiscal years ended September 30, 1997 and 1996, respectively. -20- 21 TAX DISTRIBUTIONS TO SHAREHOLDERS The Company's Federal income tax returns have been examined by the Internal Revenue Service through the year ended September 30, 1991. The Internal Revenue Service is currently examining the fiscal years ended September 30, 1992 and 1993 and has selected the 1994 return for examination. The Company believes that the Internal Revenue Service will propose changes to the Company's returns, as filed, for the years under examination. Additional federal taxes, as a result of assessments for years under audit are not the responsibility of the Company because of its S Corporation status. However, the Company may be required to make significant distributions to Shareholders in the future for any assessments for tax years commencing with the year ended September 30, 1992. GULF OIL L.P. In connection with the Plan, a substantial portion of the Company's wholesale petroleum and gasoline operations was transferred to Gulf Oil L.P. in exchange for a 66-2/3% Class A limited partnership interest in Gulf Oil L.P. The Company's equity in the earnings of Gulf Oil L.P. was approximately $7.7 million and $7.9 million for the years ended September 30, 1997 and 1996, respectively. Gulf Oil L.P.'s earnings are dependent upon volumes and margins from wholesale sales of petroleum products, which may fluctuate depending upon economic conditions and other factors that may exist in the future. Accordingly, there can be no assurance that the Company's equity in Gulf Oil L.P. will generate earnings consistent with prior year's levels. The Partnership Agreement provides for certain distributions to partners however, such distributions are subject to restrictive covenants imposed by Gulf Oil L.P.'s lenders which only permit distributions for tax payments, provided there is no event of default or unless otherwise consented to by the lenders. The Company received aggregate distributions from Gulf Oil L.P. of $5.5 million during the fiscal year ended September 30, 1997. Subsequent to September 30, 1997, the Company received a distribution in the amount of $13.3 million consented to by the lenders. The Partnership Agreement provides that at any time on or after January 1, 1999, CMC and the Class B partners have the right, but not the obligation, to Put their partnership interest to the Company and the Company has the right, but not the obligation, to Call such interests at a formula price equal to a multiple of Gulf Oil L.P.'s earnings. If the Company is unable or determines it is not in its best interest to purchase upon the exercise of the Put or, if the Company, following the exercise of the Call is unable to complete the purchase, the Partnership Agreement provides that Gulf Oil L.P. will be sold by an investment banker as a going concern. The Company has agreed to purchase its petroleum products, except for its Florida locations, from Gulf Oil L.P., with specific minimum purchase and brand maintenance cost requirements for each calendar year of the Supply Agreement (which expires on December 31, 1998). The Company, for the calendar year 1996, purchased 525 million gallons of branded products from Gulf Oil L.P.; the minimum requirement was 476.7 million gallons. Future calendar year minimums of branded product for the periods 1997 through 1998 are 483.5, and 488.7 million gallons, respectively. The Company expects to meet all minimum purchase requirements, though there can be no assurances in this regard. For the fiscal years ended September 30, 1997 and 1996, the Company purchased approximately $408.8 and $372.1 million, respectively, from Gulf Oil L.P. Brand maintenance costs, which are based upon quantities purchased and target earnings of Gulf Oil L.P. were $4.0 million and $1.4 million for the calendar years 1996 and 1995, respectively, and $2.2 million has been paid or accrued through September 30, 1997. At September 30, 1997 and 1996, accounts payable due to Gulf Oil L.P. were approximately $7.8 million and $8.1 million, respectively. -21- 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Company and Gulf Oil L.P. and the notes thereto appear on pages F-1 through F-33 of this Form 10-K. -22- 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE -23- 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information (and the ages as of December 22, 1997) with respect to Executive Officers and Directors of the Company. NAME AGE POSITION HELD ---- --- ------------- Lily H. Bentas 57 Chairperson of the Board of Directors, President and Chief Executive Officer; Member of Compensation and Audit Committees of the Board of Directors Harry J. Brenner 48 Executive Vice President and Chief Operating Officer Donald E. Holt 52 Senior Corporate Vice President Arthur G. Koumantzelis** 67 Senior Vice President and Chief Financial Officer Francis G. Locklin 61 Senior Vice President--Real Estate Daniel E. Phaneuf 55 Senior Vice President--Retail Operations Mark G. Howard 41 Associate General Counsel and Secretary; General Counsel, Gulf Division Michael A. Kelly 44 General Counsel Robert J. Handforth 59 Vice President of Manufacturing and Distribution George P. Haseotes 35 Vice President, Gulf Division John E. Burke* 58 Director; Member of Compensation Committee of the Board of Directors Dr. Paul Hand* 66 Director Byron Haseotes 65 Director Demetrios B. Haseotes 69 Director; Chairman, Corporation Development Committee George Haseotes 66 Director Kenneth T. Koehler* 51 Director; Member of Compensation and Audit Committees of the Board of Directors James C. McDermott* 43 Director; Member of Audit Committee of the Board of Directors Dr. Geoffrey Pottow* 64 Director - ---------------------------- * Independent Directors **Mr. Koumantzelis has notified the Board of Directors of his intention to retire from his position as Chief Financial Officer in early 1998. It is expected that a replacement for Mr. Koumantzelis will be appointed by the Board of Directors sometime in the first quarter of 1998. The Plan mandates that the Board of Directors consist of a total of nine directors, five of whom are not affiliated with the shareholders or the Company (the "Independent Directors") and four of whom are members of the Haseotes family. The Plan provides that the Independent Directors shall serve a term commencing December 30, 1993 and ending, in effect, on the date when the claims of the Unsecured Creditors Group have been paid in full which, absent prepayments, is scheduled to occur on December 30, 1998. In addition, it is an -24- 25 event of default under the Company's working capital facility if less than a majority of the Board consists of Independent Directors. The Independent Directors were initially selected by Lily H. Bentas and the Committee of Unsecured Creditors (as defined in the Plan). The Plan provides that in the event an Independent Director resigns or is otherwise unable to serve, the person to fill such vacancy will be selected by a member of the Post- Confirmation Committee (as defined in the Plan) and a representative of the Company selected by the shareholders. If the two parties cannot agree, the vacancy will be filled by arbitration. At such time when the majority of the Board of Directors does not consist of Independent Directors, certain actions, as prescribed by certain of the Company's credit agreements, will require approval by an Independent Mediation Board, consisting of three individuals who are not affiliates of the Company. One of the three individuals will be selected by the Company, and the other two will be selected in the same manner as the Independent Directors. If the Company is unable to find individuals willing to serve pursuant to the selection procedure for Independent Directors, the two members may be selected by the Company provided that such members are not affiliates and do not have a material business or personal relationship with the Company or any affiliate of the Company and the Trustee determines such qualifications are met. Directors who are not Independent Directors are elected by the shareholders and serve a one year term or until a successor is duly appointed and qualified. The Plan requires that Lily Bentas serve as chairperson of the Board of Directors until the claims of the Unsecured Creditor Group have been paid in full. Vacancies with respect to directors who are not Independent Directors (as defined in the Plan) are filled by the shareholders. The positions of General Counsel, Senior Vice President of Retail Operations, Vice President of Manufacturing and Distribution and Vice President of the Gulf Division are appointed by the President. All other Executive Officers are appointed by the Board of Directors annually to serve a one year term or until a successor is duly appointed and qualified. The following is a description of the business experience of each Executive Officer and Director. Except as indicated, each of the named individuals has held the position for more than the past five years. Ms. Bentas is the sister of Demetrios B., George and Byron Haseotes, all of whom are brothers. Mr. George P. Haseotes is the son of Demetrios B. Haseotes. LILY H. BENTAS serves as Chairperson of the Board of Directors, President and Chief Executive Officer. Ms. Bentas has been employed in key management positions at the Company for her entire business career. HARRY J. BRENNER has served as Chief Operating Officer and Executive Vice President since 1993. Prior to that time, Mr. Brenner was Senior Vice President, Retail Operations. Mr. Brenner has served the Company in various management capacities since 1984 and has 20 years of experience in the convenience store business. DONALD E. HOLT serves as Senior Corporate Vice President. Mr. Holt has served the Company since 1985 and has over 25 years of experience in manufacturing and convenience store businesses. Mr. Holt also serves as President and Director of Conven-Petro Insurance Company, an affiliate of the Company. Mr. Holt is a Certified Public Accountant. ARTHUR G. KOUMANTZELIS has served as Senior Vice President and Chief Financial Officer since July 1990. Prior to that time, Mr. Koumantzelis was employed at the international accounting firm of Ernst & Young for 37 years, including 24 years as a senior partner, serving in various management positions. Mr. Koumantzelis also serves as a trustee of Hospitality Properties Trust, a real estate investment trust which is listed on the New York Stock Exchange. Mr. Koumantzelis has notified the Board of Directors of his intention to retire from his -25- 26 position as Chief Financial Officer in early 1998. It is expected that a replacement for Mr. Koumantzelis will be appointed by the Board of Directors sometime in the first quarter of 1998. FRANCIS G. LOCKLIN serves as Senior Vice President--Real Estate. Mr. Locklin also serves as Vice President and Director of Conven-Petro Insurance Company, an affiliate of the Company. DANIEL E. PHANEUF has served as Senior Vice President of Retail Operations since October 1996. Mr. Phaneuf has served the Company in various management capacities since 1969. MARK G. HOWARD serves as Associate General Counsel of the Company, a position he has held since 1986. Effective January 1, 1995, he was appointed to the additional positions of Secretary to the Corporation and General Counsel of the Gulf Division. Prior to joining Cumberland Farms, Mr. Howard was Corporate Counsel with Exxon Corporation. His practice specialties include general corporate, environmental, litigation and petroleum issues. Mr. Howard is a member of the bars of Connecticut, Massachusetts, New Jersey, New York, Texas and Washington, D.C. MICHAEL A. KELLY has served as General Counsel since January 1995. Prior to that time, Mr. Kelly was a senior partner with Adler, Pollock & Sheehan. During his time at Adler, Pollock & Sheehan, Mr. Kelly specialized in real estate, land use, construction and environmental litigation and published several articles and lectured on these subjects. Mr. Kelly also served as General Counsel to the Rhode Island Port Authority and Economic Development Corporation. Mr. Kelly is chairman of the Rhode Island Judicial Nominating Commission and is a member of the Massachusetts and Rhode Island bars. ROBERT J. HANDFORTH has served as Vice President of Manufacturing and Distribution since November 1994. Prior to that time, he was Vice President and Director of Operations for Lehigh Valley Dairies, Inc., formerly a Division of John LaBatt Ltd. GEORGE P. HASEOTES has served as Vice President of the Gulf Division since October 1, 1996. Prior to that time, Mr. Haseotes was Director of Wholesale Petroleum Sales for the Company. Mr. Haseotes has extensive experience in various aspects of the petroleum business. JOHN E. BURKE has served as an Independent Director since December 30, 1993. Mr. Burke is Vice President, Credit and Collections of Nestle, USA. He joined Nestle Company, Inc. as Assistant Credit Manager in 1971. In 1979 he was appointed Assistant Treasurer of Nestle Corporation, and, in 1991 was appointed to his current position. He is presently on the Board of Directors of the National Food Manufacturers Credit Association, and a director of several organizations. He is past Chairman of the National Food Manufacturers Credit Association. He has chaired or served on creditor's committees for a number of food company reorganization cases. DR. PAUL HAND has served as an Independent Director since December 30, 1993. Dr. Hand was Secretary and General Manager of the Atlantic Dairy Cooperative from 1982 until July 1993, and retired after 36 years as an executive in the dairy industry. BYRON HASEOTES serves as a Director and an Executive Employee and has served in key management positions of the Company for his entire business career. DEMETRIOS B. HASEOTES serves as a Director and an Executive Employee and has served in key management positions of the Company for his entire business career. GEORGE HASEOTES serves as a Director and an Executive Employee and has served in key management positions of the Company for his entire business career. -26- 27 KENNETH T. KOEHLER has served as an Independent Director since December 30, 1993. Mr. Koehler was elected President, Chief Executive Officer and Director of Golden City Commercial Bank in 1994. Mr. Koehler was Principal of Lyons, Zomback & Ostrowski, Inc., Bank and Thrift Consultants from 1992 to 1993. Mr. Koehler was also President and Chief Executive Officer of Dollar Dry Dock Bank from 1989 to 1992. He has spent 17 years as a commercial banker with Rhode Island Hospital Trust National Bank as well as serving as a director of various corporate and non-profit entities. JAMES C. MCDERMOTT has served as an Independent Director since May 1994. Mr. McDermott has served as National Credit Manager for Bemis Co., Inc. since November 1995. Prior to that time, Mr. McDermott served as the Division Manager of Credit of Continental Baking Company. DR. GEOFFREY POTTOW has served as an Independent Director since December 30, 1993. Dr. Pottow has been employed in various capacities at the Becker Milk Co., Ltd. of Scarborough, Ontario, a convenience store company which is publicly traded on the Toronto Stock Exchange, since 1964 and has served as President/Director since 1984. -27- 28 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation for services rendered of the Chief Executive Officer and the four most highly compensated Executive Officers of the Company for fiscal years 1997, 1996 and 1995. NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ALL OTHER COMPENSATION --------------------------- ---- -------- -------- ---------------------- (1) Lily H. Bentas, President, 1997 $488,000 $150,000 $42,000(3) Chairperson of the Board of Directors 1996 $469,000 $200,000 $43,500(3) and Chief Executive Officer 1995 $394,000 $150,000 $30,500(3) Harry J. Brenner, Executive Vice President and Chief 1997 $285,000 $ 93,750 Operating Officer 1996 $275,000 $125,000 1995 $250,000 $125,000 Michael A. Kelly, General Counsel 1997 $265,000 $ 18,750 1996 $259,375 $ 25,000 1995 $187,500(2) $ 25,000 Mark G. Howard, Associate General 1997 $180,000 $ 45,000 Counsel and Secretary 1996 $166,250 $ 60,000 1995 $159,844 $ 50,000 Daniel Phaneuf, Senior Vice 1997 $175,000 $ 48,750 President--Retail Operations 1996 $157,000 $ 65,000 1995 $147,500 $ 65,000 - ------------------------------------------- (1) The Company made matching 401(k) contributions for fiscal year 1995, 1996 and 1997 as follows: Ms. Bentas $3,848, $4,485, $4,750, Mr. Brenner $1,964, $4,500, $4,750, Mr. Kelly $0, $3,750, $4,750, Mr. Howard $4,500, $4,500, $4,750 and Mr. Phaneuf $4,183, $4,500, $4,750, respectively. (2) Mr. Kelly was hired as General Counsel of the Company at an annual salary of $250,000, effective January 1, 1995. (3) Director's fees. -28- 29 DIRECTOR COMPENSATION Each director receives an annual director's fee of $30,000 payable in arrears at the end of each fiscal year. Directors also receive $1,000 for each regularly scheduled meeting, $500 for each telephonic meeting in excess of 30 minutes, $500 for each committee meeting and $1,000 per day for special projects, and $2,500 for service on committees of the Board. EXECUTIVE EMPLOYEE COMPENSATION For fiscal year 1997, the Company paid compensation, including director's fees, to the Executive Employees as follows: Demetrios B. Haseotes -- $34,500 (Director fees only), George Haseotes -- $310,333, and Byron Haseotes -- $332,000. The aggregate annual compensation paid to members of the Haseotes family who are "Affiliates" (which is defined in certain credit agreements of the Company to include shareholders of the Company) is limited by the Indentures and other credit agreements of the Company. The Indentures limit such compensation to an annual aggregate amount of $2 million, subject to cost-of-living increases and other amounts approved by the Board, including by a majority of Independent Directors or, if the Independent Directors are not a majority of the Board, by the Independent Mediation Board. The Board of Directors has suspended, effective April 30, 1995, the payment of compensation to Mr. Demetrios B. Haseotes as a result of the Company's concerns about improper receipt of funds by Mr. Haseotes from the sale of a crude oil refinery in Canada. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with each of Lily H. Bentas, President and Chief Executive Officer, Harry J. Brenner, Chief Operating Officer and Mark G. Howard, Associate General Counsel and Secretary and General Counsel of the Gulf Division. Each of these agreements became effective as of October 1, 1997. The employment agreements for Ms. Bentas and Mr. Brenner provide for a lump sum severance payment equal to one year's salary in the event employment is terminated without cause, at any time, and also contain a covenant not to compete following termination. The employment agreement with Mr. Howard provides for a lump sum severance payment equal to one year's salary in the event his employment is terminated without cause at any time. 401(k) SAVINGS PLAN For fiscal year 1997, the Company had in effect an Employee Savings Plan (the "Savings Plan") which provided coverage to all eligible Company employees. The Savings Plan is in the form of a 401(k) plan and has been established for the primary purpose of providing eligible employees with an opportunity to accumulate savings by means of salary adjustment and contributions by the Company. Participation in the Savings Plan is available to employees who meet the eligibility requirements. To be eligible, an employee must be employed for at least one year and must actually work 1,000 hours in a plan year. Enrollment is permitted on the first day of the calendar quarter following the completion of the eligibility requirements. An employee may defer from 1% to 15% of his/her total compensation but in no event to exceed the maximum amount prescribed by the Internal Revenue Code of 1986, as amended (the "Code") for each calendar year. On a quarterly basis, the Company matches $.50 on the dollar up to 6% of an employee's gross quarterly compensation. Each participant may select among several investment funds in which the amounts credited to a participant's account are invested. An employee will always be 100% vested in his/her contributions. The Company matching contribution will vest 25% after two years of service, 50% after three years of service, 75% after four years of service and 100% after five years of service. The vested portion of the contributions allocable to a participant are distributable upon termination of employment, other than by reason of retirement, disability or death. All contributions allocable to a participant, whether or not vested, are payable upon retirement, disability or death. A full distribution is available upon attainment of age 59 1/2 or prior to age 59 1/2 if a participant qualifies for financial hardship. The Savings Plan also has a loan feature and allows for rollover contributions from other qualified plans. -29- 30 TRANSFERRED EMPLOYEES RETIREMENT PLAN For fiscal year 1997, the Company contributed to the Cumberland Farms Transferred Employees Retirement Plan (the "Retirement Plan"), a defined benefit plan, which covers the employees transferred to the Company upon acquisition in 1986 of certain of the Gulf assets from Chevron U.S.A. Inc. (some of whom are now employed by Gulf Oil L.P.). None of the Directors or Executive Officers are covered by the Retirement Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS Following the Company's Reorganization, the Board of Directors appointed a Compensation Committee which presently consists of Lily H. Bentas (the Chairperson of the Board of Directors, President and Chief Executive Officer), John Burke and Kenneth Koehler. The purpose of the committee is to determine the compensation of Executive Officers, including the President and key employees. The Compensation Committee considers several factors in determining annual compensation, including past performance, individual talents and industry standards. See "Item 13 -- Certain Relationships and Related Transactions" for a discussion of certain transactions between the Company and certain entities affiliated with Ms. Bentas. The Compensation Committee has determined salaries for fiscal year 1997 as it did for fiscal years 1995 and 1996. The Compensation Committee has also determined the bonuses paid to Executive Officers, including the President and Chief Executive Officer, for fiscal years 1995, 1996 and 1997. In determining the bonuses, the Compensation Committee took into account the overall contribution made by the individual over the past year and bonuses paid to individuals in comparable positions at similarly situated companies. The committee may also, from time to time, make recommendations concerning compensation arrangements for directors to be submitted to the full Board for approval. -30- 31 ITEM 12. SECURITY OWNERSHIP The Company's equity securities consist of two classes of Common Stock, par value $1.00 per share, Class A Common Stock and Class B Common Stock. The two classes are identical, except that the Class B Common Stock has no voting rights. The following table provides information as of December 22, 1997, with respect to the shares of Class A Common Stock and Class B Common Stock deemed to be beneficially owned by each person known by the Company to own more than 5% of the outstanding Class A Common Stock, by each Director, each Executive Officer, and all Directors and Executive Officers as a group. Except as noted below, each holder has sole voting and investment power. The mailing address of each party named below is c/o Cumberland Farms, Inc., 777 Dedham Street, Canton, MA 02021. Percentage of Name Title of Class Owned Amount of Class Owned Class Owned ---- -------------------- --------------------- ------------- Demetrios B. Haseotes* Class A Common 2 25% Class B Common 30,253.5 25% Byron Haseotes Class A Common 2 25% Class B Common 30,253.5 25% George Haseotes** Class A Common 2 25% Class B Common 30,253.5 25% Lily H. Bentas Class A Common 2 25% Class B Common 7,566 6.25% Directors and Executive Officers as a group own eight shares, constituting 100%, of the Class A Common Stock and 98,326.5 shares, constituting 81.25%, of the Class B Common Stock; all Directors and Executive Officers who hold stock are members of the Haseotes Family. * Shares are subject to liens in favor of Conven-Petro Insurance Company as assigned to the Company. ** Shares are subject to liens in favor of David Wilkes, a creditor of Mr. Haseotes. -31- 32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has had significant transactions since October 1, 1996 with the following affiliates: Name of Affiliate Nature of Affiliate ----------------- ------------------- Bay Colony Realty Associates ("Bay Colony") Owned by the Class A Shareholders Cumberland Farms of Vermont, Inc. Owned by the Class A Shareholders ("CFI of Vermont") Cumberland Farms of Massachusetts, Inc. Owned by the Class A Shareholders ("CFI of Mass.") Conven-Petro Insurance Company Owned by CFI of Vermont LHB Enterprises, Inc. Owned by Lily H. Bentas Public Petroleum, Inc. Owned by Demetrios E. Haseotes, son of ("Public Petroleum") Demetrios B. Haseotes, a Director and Shareholder LEASES. For fiscal year 1997, the Company leased 19 properties from Bay Colony and paid to Bay Colony an aggregate of $1.0 million under leases related to such properties. Effective September 30, 1997, the Company entered into a new fifteen (15) year master lease arrangement with Bay Colony which includes the lease of the units operated, and previously leased during fiscal year 1997, by the Company, as well as units leased to third party tenants. The Company leases four properties located in Florida, Maine and New Hampshire from LHB Enterprises. The Company paid an aggregate of $65,350 during fiscal year 1997 to LHB Enterprises for the lease of these properties. The Company leases two properties located in Massachusetts to Public Petroleum which are operated as retail gasoline stations. The Company received for the fiscal year ended 1997 the aggregate amount of $90,726 for the lease of these two properties. The Company believes that all of its leases with affiliates are on terms at least as favorable to the Company as would be negotiated with unaffiliated third parties. -32- 33 LOANS BETWEEN THE COMPANY AND AFFILIATES. As of September 30, 1997, the Company had outstanding loans in excess of $60,000 with its shareholders and affiliates in the amounts detailed below. Interest was being accrued on the outstanding indebtedness; however, the Company stopped accruing interest at different times over the past years. Interest has not been paid on any of these loans since May 1, 1992. AMOUNTS DUE TO THE COMPANY AMOUNTS DUE FROM THE COMPANY -------------------------- -------------------- (IN THOUSANDS) SHAREHOLDERS Demetrios B. Haseotes $1,621 $3,107 George Haseotes 1,212 604 Byron Haseotes 1,212 322 Lily H. Bentas 303 282 Anastasia Marty 303 68 Hytho Pantazelos 303 69 JoAnn Tambakis 303 AFFILIATED PARTIES Bay Colony $1,154 LIQUOR AFFILIATES. Certain of the Company's stores provide space and personnel to affiliates whose sole business is to hold liquor licenses and sell alcoholic beverages, principally beer, in the Company's stores. The Company believes that the terms of such arrangements are at least as favorable to it as would be negotiable with a third party. A summary of such sales, costs charged by the Company to such affiliates and the profitability of such affiliates during each the last fiscal year is as follows: FISCAL 1997 (IN THOUSANDS) -------------- CFI of Vermont Sales $1,817 Intercompany charges 1,783 Net Profit 34 CFI of Mass. Sales $ 205 Intercompany charges 202 Net Profit 3 DISTRIBUTIONS. The Company is an S corporation for federal and certain state tax purposes. As such, the Company's principal tax liabilities are payable by its shareholders rather than by the Company. Pursuant to agreements between the Company and its shareholders, distributions will be made for any taxes payable by the shareholders as a result of the examination of the Company's tax returns. The Company paid approximately $2.6 million to its shareholders for estimated tax liabilities during fiscal years 1997. The IRS is presently conducting an audit of fiscal years 1992, 1993 and 1994. See Note 2 to the Company's Financial Statements. TRANSACTIONS WITH CONVEN-PETRO. Conven-Petro is the Company's captive insurance company and is owned by CFI of Vermont which is, in turn, owned by the Company's Class A Shareholders. As a result of -33- 34 the Company's insurance arrangements with Conven-Petro, Conven-Petro earns interest on funds deposited by the Company to secure letters of credit issued in connection with the Company's self-insurance program. The interest earned by Conven-Petro from these arrangements for the fiscal year ended September 30, 1997 was $253,063. The Company believes that the terms of such arrangements are at least as favorable to it as would be negotiated with a third party. Donald E. Holt, an Executive Officer of the Company is also President and Director of Conven-Petro. Francis G. Locklin, an Executive Officer of the Company, is also Vice President and Director of Conven-Petro. See Note 7 to the Company's Financial Statements for a discussion regarding payments made to Conven-Petro. PURCHASE OF PROPERTY. In April, 1997, the Company acquired three properties from a third party landlord for an aggregate purchase price of $750,000, the estimated fair value of the properties. These properties were originally owned by Mr. George Haseotes, a shareholder and Director of the Company, who sold them to the third party landlord in 1994. Under an arrangement between the third party and Mr. Haseotes, the proceeds were paid to Mr. Haseotes. The transaction was approved by the Board of Directors as a transaction at least as favorable to the Company as would be negotiated with a third party. OTHER. In addition to compensation paid to Demetrios B. Haseotes, Byron Haseotes, George Haseotes and Lily Bentas, during the fiscal year ended September 30, 1997, the Company paid $177,000 to George P. Haseotes, Vice President of the Gulf Division, a member of the Haseotes family. The Company believes that the terms of such arrangements are at least as favorable to it as would be negotiated with a third party. -34- 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: The following financial statements of the Company and Gulf Oil L.P. and the Independent Auditors' Reports relating thereto, respectively, are filed under Item 8 in Part II of this report: FINANCIAL STATEMENTS OF CUMBERLAND FARMS, INC. Report of Independent Auditors - Ernst & Young LLP Balance Sheets as of September 30, 1997 and 1996 Statements of Operations and Retained Earnings Years ended September 30, 1997, 1996 and 1995 Statements of Cash Flows, Years ended September 30, 1997, 1996 and 1995 Notes to Financial Statements FINANCIAL STATEMENTS OF GULF OIL L.P. Independent Auditors Report - Coopers & Lybrand L.L.P. Balance sheets as of September 30, 1997 and 1996 Statements of Operations for the years ended September 30, 1997, 1996 and 1995 Statements of Changes in Partners' Capital for the Years ended September 30, 1997, 1996 and 1995 Statements of Cash Flows for the Years ended September 30, 1997, 1996 and 1995 Notes to Financial Statements The following financial statement schedules of the Company and Gulf Oil, L.P. and the Independent Auditors' Report relating thereto are filed as part of this report: Schedule II - Cumberland Farms, Inc. Valuation and Qualifying Accounts Schedule III - Gulf Oil L.P. Valuation and Qualifying Accounts (a)(3) Exhibits filed as part of this report: As listed on the Exhibit Index beginning on page 38 hereof. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended September 30, 1997. -35- 36 INDEX TO FINANCIAL STATEMENTS Financial Statement of Cumberland Farms, Inc. Report of Independent Auditors -- Ernst & Young LLP.................. F-2 Balance Sheets as of September 30, 1997 and 1996 .................... F-3 Statements of Operations and Retained Earnings, Years Ended September 30, 1997, 1996, and 1995................................. F-4 Statements of Cash Flows, Years Ended September 30, 1997, 1996 and 1995...................................................... F-5 Notes to Financial Statements........................................ F-6 Financial Statements of Gulf Oil L.P. Report of Independent Auditors -- Coopers & Lybrand L.L.P. .......... F-22 Balance Sheets as of September 30, 1997 and 1996..................... F-23 Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995...................................................... F-24 Statements of Changes in Partners' Capital for the Years Ended September 30, 1997, 1996 and 1995.................................. F-25 Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995................................................ F-26 Notes to Financial Statements........................................ F-27 Schedule II -- Valuation and Qualifying Accounts -- Cumberland Farms, Inc. ......... S-1 Report of Independent Accountants on Schedule of Gulf Oil L.P. -- Coopers & Lybrand L.L.P. ............................................ S-2 Schedule III -- Valuation and Qualifying Accounts -- Gulf Oil, L.P. ................. S-3 F-1 37 REPORT OF INDEPENDENT AUDITORS The Board of Directors Cumberland Farms, Inc. We have audited the accompanying balance sheets of Cumberland Farms, Inc. as of September 30, 1997 and 1996, and the related statements of operations and retained earnings, and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of the Gulf Oil Limited Partnership (Gulf Oil, L.P.), a partnership in which the Company has a 66-2/3% limited partnership interest, have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to data included for Gulf Oil, L.P., it is based solely on their report. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Cumberland Farms, Inc. at September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth therein. Boston, Massachusetts December 11, 1997 Ernst & Young LLP F-2 38 CUMBERLAND FARMS, INC. BALANCE SHEETS SEPTEMBER 30 1997 1996 ------------------------ (000'S OMITTED) ASSETS Current Assets: Cash and cash equivalents $ 23,824 $ 24,116 Cash escrow 406 793 Short-term investments, at cost -- 12,200 Accounts receivable, net 22,463 21,476 Inventories, at FIFO cost 63,325 59,042 Less: adjustment to LIFO cost (30,761) (29,100) -------- -------- Net inventories 32,564 29,942 -------- -------- Prepaid insurance (Note 7) 912 431 Property under agreement 1,697 3,343 Other current assets 4,298 5,382 -------- -------- Total current assets 86,164 97,683 Property and equipment (Note 3) 353,028 343,151 Accumulated depreciation 130,653 124,396 -------- -------- Net property and equipment 222,375 218,755 Notes and accrued interest receivable from stockholders (Note 4) 5,257 5,224 Investment in Gulf Oil, L.P. (Note 5) 40,321 36,445 Other assets, net 8,094 8,097 -------- -------- $362,211 $366,204 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 14,361 $ 13,108 Accounts payable 44,582 39,819 Accrued gasoline taxes 7,976 7,573 Accrued insurance liability (Note 7) 5,168 5,000 Accrued payroll 6,599 5,995 Other accrued expenses 6,126 9,761 -------- -------- Total current liabilities 84,812 81,256 Long-term debt (Note 6) 198,545 218,398 Accrued insurance liability (Note 7) 12,880 9,075 Deferred credits and other liabilities 13,595 12,806 Notes and accrued interest payable to related parties (Note 4) 5,712 5,458 -------- -------- Total liabilities 315,544 326,993 -------- -------- Commitments and contingencies (Notes 7 and 8) Stockholders' equity: Common stock (Note 2) 121 121 Additional paid-in capital 8,617 8,617 Retained earnings (Note 4) 37,929 30,473 -------- -------- Total stockholders' equity 46,667 39,211 -------- -------- $362,211 $366,204 ======== ======== See accompanying notes. F-3 39 CUMBERLAND FARMS, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS YEAR ENDED SEPTEMBER 30 1997 1996 1995 ----------------------------------------------- (000'S OMITTED) Income Revenues (see Note below) $1,468,646 $1,396,144 $1,321,224 Equity in earnings of Gulf Oil, L.P. 7,677 7,855 13,612 Gains on sales of property and equipment 8,782 11,372 9,673 ---------- ---------- ---------- Total income 1,485,105 1,415,371 1,344,509 ---------- ---------- ---------- Cost & expenses Cost of sales 1,181,426 1,102,582 1,027,162 Operating expenses 270,225 266,150 259,672 ---------- ---------- ---------- Total costs & expenses 1,451,651 1,368,732 1,286,834 ---------- ---------- ---------- Operating income 33,454 46,639 57,675 Interest expense, net (22,823) (22,872) (25,071) ---------- ---------- ---------- Income before provision for state income taxes and extraordinary gain 10,631 23,767 32,604 Provision for state income taxes (600) (1,919) -- ---------- ---------- ---------- Income before extraordinary gain 10,031 21,848 32,604 Extraordinary gain (Note 1) -- -- 2,197 ---------- ---------- ---------- Net income 10,031 21,848 34,801 Retained earnings at beginning of year 30,473 18,851 (13,231) Distributions to shareholders (2,575) (10,226) (2,719) ---------- ---------- ---------- Retained earnings at end of year $ 37,929 $ 30,473 $ 18,851 ========== ========== ========== Note: Excise taxes of approximately $263,000, $243,000, and $231,000 collected from customers on retail gasoline and cigarette sales are included in Revenues and Cost of sales for fiscal years 1997, 1996 and 1995, respectively. See accompanying notes. F-4 40 CUMBERLAND FARMS, INC. STATEMENTS OF CASH FLOWS YEAR ENDED SEPTEMBER 30 1997 1996 1995 --------------------------------------- (000's OMITTED) OPERATING ACTIVITIES Net income $ 10,031 $ 21,848 $ 34,801 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,299 18,703 17,541 Gain on sales of property and equipment (8,782) (11,372) (9,673) Equity in earnings of Gulf Oil, L.P. (7,677) (7,855) (13,612) Brand maintenance income adjustment (Note 5) (1,649) -- -- Distribution of earnings by Gulf Oil, L.P. 5,450 2,650 7,650 Extraordinary gain -- -- (2,197) Changes in assets and liabilities: Cash escrow 387 (793) 0 Accounts receivable (987) (2,395) (3,198) Inventories (2,622) 1,837 (3,309) Other current assets 1,084 (341) (2,951) Receivables from related parties (33) (33) (343) Other assets (933) 162 (2,288) Prepaid/accrued insurance 3,492 22,509 22,560 Accounts payable and accrued expenses 2,135 228 9,214 Other liabilities 1,043 611 (2,632) -------- -------- -------- Net cash provided by operating activities 23,238 45,759 51,563 -------- -------- -------- INVESTING ACTIVITIES Additions to property and equipment (29,648) (27,582) (23,636) Proceeds from sales of property and equipment 15,093 21,108 21,244 Purchases, sales and maturities of short-term investments - net 12,200 (12,200) -- -------- -------- -------- Net cash (used) by investing activities (2,355) (18,674) (2,392) -------- -------- -------- FINANCING ACTIVITIES Payments of debt (18,600) (27,758) (25,561) Distributions to shareholders (2,575) (10,227) (2,719) Proceeds from new debt -- 5,000 -- -------- -------- -------- Net cash (used) by financing activities (21,175) (32,985) (28,280) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (292) (5,900) 20,891 Cash and cash equivalents at beginning of year 24,116 30,016 9,125 -------- -------- -------- Cash and cash equivalents at end of year $ 23,824 $ 24,116 $ 30,016 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 22,814 $ 23,415 $ 24,933 ======== ======== ======== Income taxes paid $ 1,066 $ 529 $ 304 ======== ======== ======== Non-cash investing and financing transactions: Transfer of assets to Gulf Oil, L.P. $ -- $ -- $ 127 ======== ======== ======== See accompanying notes. F-5 41 CUMBERLAND FARMS, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Cumberland Farms, Inc. is an independent oil marketer and convenience store operator. The Company is organized into three divisions: Cumberland Farms, Gulf Oil and VSH Realty. The Cumberland Farms division includes the convenience store, retail gasoline and manufacturing operations. The Gulf Oil division markets refined petroleum products on a wholesale basis to lessee dealers as well as to company-operated locations. In addition to management and disposition of real property, the VSH Realty division acquires and develops properties for lease to the other divisions of the Company and others for use as retail and wholesale sales locations. On May 1, 1992 (the "petition date"), the Company filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. The Company's amended and restated Plan of Reorganization (the "Plan"), as modified, became effective on December 30, 1993. The Plan provided for, among other things, the cancellation of certain indebtedness in exchange for cash or new indebtedness. During fiscal 1995, the Company repaid debt at less than face value, resulting in an extraordinary gain of $2.2 million. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH The Company includes as cash and cash equivalents, cash in banks, certificates of deposit and U.S. Government and other short-term securities readily convertible into cash with original maturities of three months or less when purchased. Investments with a maturity period of more than three months, but less than one year, are classified as short-term investments. Included in the cash escrow account are certain savings accounts whose balances, aggregating approximately $139,000 and $660,000 at September 30, 1997 and 1996, respectively, contain the proceeds from sales of property and equipment which are to be used to repay secured debt. In addition, the Plan permits the Company to withhold from the proceeds of sales of capital assets an amount equal to the imputed income tax on the gain recognized in the transaction, to be available for distributions to shareholders for their F-6 42 tax payments (See Note 4). These amounts ($267,000 at September 30, 1997 and $130,000 at September 30, 1996) were held in escrow by the Trustee and were also included in the cash escrow account. Due to the short maturity of short-term investments, the carrying amounts approximate fair value. ACCOUNTS RECEIVABLE Accounts receivable are presented net of allowances for doubtful accounts of $1,509,000 at September 30, 1997 and $1,590,000 at September 30, 1996. The Company has a working capital and letter of credit facility (see Note 6). The facility is secured by certain of the Company's accounts receivable, inventories and real property. REVENUE RECOGNITION Retail revenues are recognized upon sale at the stores and stations. Wholesale revenues are recognized upon shipment. Rental revenues are recorded ratably over the lease term. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with financially responsible institutions. Concentration of credit risk with respect to trade receivables are limited due to the number of customers comprising the Company's customer base and the prompt payment terms. The Company has not experienced significant losses related to trade receivables. INVENTORIES Inventories are stated at the lower of cost or market. Cost for inventories having a carrying value of approximately $27,362,000 and $24,918,000 at September 30, 1997 and 1996, respectively, was determined by the last-in, first-out ("LIFO") inventory method. The excess of current cost (determined on a first-in, first-out basis) of LIFO inventories over their carrying value was approximately $30,761,000 and $29,100,000 at September 30, 1997 and 1996, respectively. Other inventories, which include construction-related supplies and plastics, are valued at cost based on the first-in, first-out ("FIFO") method. PROPERTY, PLANT AND EQUIPMENT Depreciation is calculated using straight-line and accelerated methods. Provision for depreciation is based upon the estimated useful lives of the assets or the lease terms, if shorter, as follows: F-7 43 Buildings 15 to 39 years Leasehold Improvements 7 to 19 years Machinery and equipment 3 to 10 years DEBT ACQUISITION COSTS Debt acquisition costs, amounting to approximately $1.8 million at September 30, 1997 and 1996, were included in other assets and are being amortized on a straight-line basis over the term of the loans. Accumulated amortization amounted to $1,189,000 at September 30, 1997 and $696,000 at September 30, 1996. INCOME TAXES The Company operates as an S Corporation under the Internal Revenue Code and, accordingly, no provision for Federal income taxes was made on account of income for 1997, 1996 and 1995, since the stockholders are individually liable for Federal income taxes on their share of the Company's earnings. Provision has been made for income taxes due to certain states which do not recognize S Corporation status. The Company's Federal income tax returns have been examined by the Internal Revenue Service through the year ended September 30, 1991 (see Note 4). The Internal Revenue Service is currently examining the fiscal years ended September 30, 1992 and 1993 and has also selected the 1994 return for examination. The Company believes that the Internal Revenue Service will propose changes to the Company's returns, as filed, for the years under examination. Additional taxes, as a result of assessments for years under audit are not the responsibility of the Company because of its S Corporation status. However, the Company during fiscal 1996, was required to distribute $3.9 million to its shareholders for tax assessments for the years 1988 to 1991 and may be required to make significant distributions to shareholders in the future for any assessments for tax years commencing with the year ended September 30, 1992 (See Note 4). GULF OIL, L.P. The Company owns a 66-2/3% limited partnership interest in Gulf Oil Limited Partnership ("Gulf Oil, L.P.") (see Note 5). Because control of Gulf Oil, L.P. resides with the general partner, the Company accounts for its investment in Gulf Oil, L.P. under the equity method. ADVERTISING COSTS The Company charges advertising costs to expense as incurred. Advertising expense amounted to $4,221,000, $5,463,000 and $4,132,000, in fiscal years 1997, 1996 and 1995, respectively. F-8 44 ENVIRONMENTAL REMEDIATION COSTS Costs incurred to investigate and remediate contaminated sites, caused principally by the release of petroleum from underground storage tanks, are expensed unless the remediation extends the economic useful life of the assets employed at the site. Remediation costs that extend the economic life of the assets are capitalized and amortized over the remaining economic life of the assets. Remediation costs for properties held for sale are considered in the assessment of the property's net realizable value. To the extent that such costs are expected to result in a loss on sale, such costs are accrued. To the extent not previously accrued, the Company provides for these costs at time of sale of the property. The Company may also be liable for environmental remediation relating to properties previously sold. These costs are accrued as they become probable and determinable. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable, short and long-term debt and letters of credit. The Company believes that the carrying value of its financial instruments approximates fair value. The Company has made this determination for its fixed rate, long-term debt based upon interest rates currently available to refinance such debt. IMPAIRMENT OF LONG-LIVED ASSETS During fiscal 1997, the Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company evaluates, on an ongoing basis, the performance of each of its properties in order to identify those which are non-contributors. It also has a program to market and dispose of certain underperforming, non-core business properties. At September 30, 1997, the Company had provided $950,000, which was recorded as a reduction of Gain on Sales of Property and Equipment, representing the difference between the carrying value (approximately $3 million) of certain properties held for sale and the estimated proceeds to be received or the appraised value of the properties. The Company has additional properties held for sale with a carrying value of $7.4 million which the Company believes will be sold at a gain. POST-EMPLOYMENT OR POST-RETIREMENT BENEFITS The Company does not have any material post-employment or post-retirement benefits. F-9 45 COMMON STOCK The authorized, issued and outstanding common stock of the Company consists of: o Class A Voting, $1 par value, 8 shares o Class B Non-voting, $1 par value, 121,014 shares RECLASSIFICATIONS Certain amounts in the financial statements for the years ended September 30, 1996 and 1995 have been reclassified to conform to 1997 classifications. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, and consist of the following (in thousands): September 30, 1997 1996 ---------------------- Land and buildings $242,002 $249,246 Leasehold improvements 6,454 6,458 Machinery and equipment 104,572 87,447 -------- -------- 353,028 343,151 Less accumulated depreciation 130,653 124,396 -------- -------- Net property, plant and equipment $222,375 $218,755 ======== ======== During the years ended September 30, 1997 and 1996, the Company wrote off approximately $6,665,000 and $5,339,000, respectively, of fully-depreciated assets, some of which are still in use. 4. TRANSACTIONS WITH RELATED PARTIES Amounts due to and notes receivable from related parties were as follows (in thousands): September 30, 1997 1996 ----------------- Notes receivable from stockholders $4,065 $4,065 Accrued interest thereon 1,192 1,159 ------ ------ Total $5,257 $5,224 ====== ====== F-10 46 Amounts due to related parties: Due to V.S. Haseotes & Sons $ 9 $ 9 Due to other related parties 2,562 2,308 Due to Bay Colony Realty Assoc. 1,154 1,154 Notes payable to stockholders 1,500 1,500 ------ ------ 5,225 4,971 Accrued interest thereon 487 487 ------ ------ Total $5,712 $5,458 ====== ====== Interest, at rates ranging from 9% to 10.5%, was accrued through September 30, 1992 on notes receivable from stockholders amounting to $3,750,000. Under the terms of the Company's Plan, the above amounts due to related parties are subordinated to claims of other creditors. No interest has been accrued on these notes since September 30, 1992. During fiscal year 1995, the Company purchased from a related party, a note receivable from Demetrios B. Haseotes in the face amount of $315,000. Interest accrues on the unpaid balance at the rate of two (2) percent over prime. The unpaid balance plus interest at September 30, 1997 was approximately $409,000. The face amount, plus interest, will be offset against payables to such stockholder when permitted by the Company's Plan. The Company leases real property from affiliated parties. Related-party rental expense in 1997, 1996 and 1995 was approximately $1,166,000, $1,124,000 and $1,153,000, respectively. In May 1996, the Company's President, a voting shareholder, purchased a property from the Company for $275,000. In October 1995, a non-voting shareholder purchased a property from the Company for $225,000. On April 1, 1997, the Company acquired three properties from a third party landlord at an aggregate purchase price of $750,000, the estimated fair value of the properties. These properties were originally owned by George Haseotes, a Shareholder and Director of the Company, who sold them to the third party landlord in 1994. The third party landlord directed that the aggregate purchase price of these properties be paid over to Mr. Haseotes. The purchase and sales of the properties were approved by the Company's Board of Directors. The terms of the Company's secured debt prohibit the payment of dividends, except for income taxes payable by the shareholders on account of corporate income, as provided in agreements between the Company and its shareholders. Pursuant to agreements between the Company and its shareholders, distributions will be made for any taxes payable by the shareholders as a result of the examination of the Company's tax returns. In fiscal year 1996, the Company distributed approximately $3.9 million to the shareholders for income taxes and interest payable by the shareholders as a result of an Internal Revenue Service examination of the Company's federal income tax returns for the fiscal years ended 1988-1991 (See Note 2). In addition, the Company paid approximately $2.6, $6.3 and $2.7 million to its shareholders for estimated tax liabilities during fiscal years 1997, 1996 and 1995, respectively. F-11 47 5. GULF OIL/GULF OIL, L.P. In 1986, the Company acquired the Northeast marketing and distribution organization of Chevron/Gulf and has the exclusive rights to use and license the trade name "Gulf" in New England and the rest of the northeastern United States. The business consists of wholesale and retail petroleum operations. On December 30, 1993, the Company entered into an agreement with Catamount Petroleum Limited Partnership ("Catamount") pursuant to which the Company transferred a substantial portion of the assets comprising its Gulf Oil Division to Catamount in exchange for a 66-2/3% limited partnership (Class A) interest in Catamount. The General Partner, and holder of a 1% general partnership interest, is Catamount Management Corporation ("CMC"). The remaining limited partnership interest (Class B) is held by affiliates of the Chief Executive Officer of Catamount. Upon consummation of the arrangement, Catamount changed its name to Gulf Oil, L.P. The assets transferred were, among other things, certain petroleum storage terminals, equipment, all rights to the "Gulf" name and all of its rights under contracts and agreements with its contract dealers, jobbers and certain customers. The Class B limited partners contributed Catamount's existing business and assets and arranged for financing for the partnership. The Partnership Agreement provides that at any time on or after January 1, 1999, CMC and the Class B partners have the right, but not the obligation, to put their partnership interest to the Company and the Company has the right, but not the obligation, to call such interests at a formula price equal to a multiple of the Gulf Oil, L.P.'s earnings. If the Company is unable or determines it is not in its best interest to purchase upon the exercise of the Put or, if the Company, following the exercise of the Call is unable to complete the purchase, the Partnership Agreement provides that Gulf Oil, L.P. will be sold by an investment banker as a going concern. Gulf Oil, L.P.'s partnership agreement provides for distributions to partners. However, such distributions are subject to restrictive covenants in Gulf Oil, L.P.'s agreements with its lenders, which only permit distributions for tax payments, provided that there is no event of default or unless otherwise consented to by the lenders. Distributions amounted to $5,450,000 in 1997 and $2,650,000 in 1996. Subsequent to September 30, 1997, the Company received a distribution in the amount of $13.3 million, consented to by the lenders. F-12 48 The Company has agreed to purchase its petroleum products, except for its Florida locations, from Gulf Oil, L.P., with specific minimum purchase and brand maintenance cost requirements for each calendar year of the Supply Agreement (ending December 30, 1998). The Company, for the calendar year 1996 purchased 525.0 million gallons of branded products from Gulf Oil, L.P.; the minimum requirement was 476.7 million gallons. Future calendar year minimums of branded product for the periods 1997 and 1998 are 483.5 and 488.7 million gallons, respectively. The Company expects to meet all minimum purchase requirements. For the fiscal years ended September 30, 1997 and 1996, the Company purchased approximately $408.8 and $372.1 million, respectively, from Gulf Oil, L.P. Brand maintenance costs, which are based upon quantities purchased and earnings of the Gulf Oil, L.P., for each calendar year, have resulted in additional brand maintenance costs of $4.0 and $1.4 million for calendar years 1996 and 1995, respectively, and $2.2 million has been paid or accrued through September 30, 1997. The ultimate amount for 1997 will be determined based on actual results for calendar 1997. At September 30, 1997 and 1996, there was approximately $7.8 and $8.1 million, respectively, in accounts payable due to Gulf Oil, L.P. Summarized financial statements of Gulf Oil, L.P. were as follows (000's omitted): September 30, 1997 1996 ---- ---- Current assets: Cash $ 1,990 $ 4,891 Margin deposits 332 3,131 Receivables, net 52,181 58,193 Inventory 49,647 50,488 Other 7,359 6,697 -------- -------- Total current assets 111,509 123,400 Property and equipment, net 26,276 22,529 Intangible and other assets, net 13,454 14,556 -------- -------- $151,239 $160,485 ======== ======== F-13 49 Current liabilities: Note payable to bank $ 8,900 $ 27,950 Current portion of long-term debt -- 2,500 Accounts payable and accrued expenses 59,069 56,626 Subordinated notes payable to partners 5,269 3,722 -------- -------- Total current liabilities 73,238 90,798 Long-term debt 20,000 17,500 Partners' capital 58,001 52,187 -------- -------- $151,239 $160,485 ======== ======== For the years ended September 30, 1997, 1996 and 1995 (000's omitted): 1997 1996 1995 ---- ---- ---- Sales $2,110,096 $1,925,498 $1,817,324 Cost of Sales 2,071,703 1,882,170 1,762,441 ---------- ---------- ---------- Gross profit 38,393 43,328 54,883 Operating expenses 11,589 12,388 12,088 Selling, general and administrative expenses 10,635 15,828 16,118 Interest expense, net 2,883 3,330 5,956 Gain on fixed asset disposal (703) -- -- ---------- ---------- ---------- Net income $ 13,989 $ 11,782 $ 20,721 ========== ========== ========== Equity in Earnings of Gulf Oil, L.P. $ 7,677 $ 7,855 $ 13,612 ========== ========== ========== The Company's equity in the net income of Gulf Oil, L.P. for the year ended September 30, 1997, has been reduced by $1,649,000 to reflect the Company's share of brand maintenance income earned by Gulf Oil, L.P. from the Company, which was included as a reduction of the related costs of approximately $2,500,000 in the Company's financial statements for the prior fiscal year. 6. SECURED DEBT Approximately $173,100,000 of secured debt has fixed interest rates ranging principally from 8.0% to 10.5%. Variable rates are slightly higher than the prime rate (9.02% at September 30, 1997). The notes payable to the previously unsecured creditors (amounting to $4,522,000 at September 30, 1997) are interest-free through December 1997, with a variable rate thereafter. F-14 50 The maturities of the Company's secured debt at September 30, 1997 are as follows: Fiscal Year (000'S OMITTED) ----------- 1998 $ 14,361 1999 12,360 2000 3,593 2001 3,751 2002 3,939 Thereafter 174,902 -------- $212,906 ======== Included in the current portion of long-term debt at September 30, 1997 are target payments aggregating approximately $2.6 million. Nonpayment of these amounts when due would not constitute an event of default under the related loan agreements, but would permit the lender to assume control of the process of disposal of identified real estate, pledged as collateral for the loan, during the remaining term of the loan. Included in other assets in the accompanying balance sheets at September 30, 1997 and 1996 were approximately $1.0 and $1.9 million, respectively, from sales of property and equipment held in a cash collateral account by State Street Bank & Trust, as Trustee for certain secured lenders. Such amounts have been or will be used to pay down secured debt. The restructured loan agreements contain financial covenants and restrict, among other things, transactions with affiliates, capital expenditures, total indebtedness and dividends. Substantially all of the Company's real property and other assets are encumbered by the secured debt. The Company has a $30 million working capital and letter of credit facility. The facility provides a revolving credit line, term loan and a facility for the issuance of letters of credit. The facility is secured by certain of the Company's accounts receivable, inventory and real properties. As of September 30, 1997, the Company had drawn down $5 million of the revolving credit line and used $17 million to provide letters of credit for its insurance and bond programs. The loan agreement provides for, among other things, certain financial covenants including leverage and fixed charge coverage ratios, to be met on a quarterly and annual basis. Borrowings under the facility are due December 30, 1998 and bear interest at a variable rate based upon the prime rate or LIBOR (8.72% at September 30, 1997). 7. COMMITMENTS AND CONTINGENCIES The Company, in the ordinary course of business, is a party to various legal actions which the Company believes are routine in nature and incidental to the operation of its business. These legal actions are primarily in the areas of personal injury and property damage, wrongful termination, environmental claims, real estate and contract disputes, as well as claims brought pursuant to the Petroleum Marketing Practices Act, the statute regulating F-15 51 the franchise relationship existing between the Company and its Gulf branded service station dealers. In connection with the Reorganization, the Company entered into a settlement agreement relating to certain actions brought by former employees of the Company regarding the Company's loss prevention program. A settlement pool of approximately $5.5 million was funded substantially by the Company's insurers to satisfy these claims which pool had been completely disbursed by September 30, 1995. There are seven related cases still pending in various Appellate Courts in the Commonwealth of Massachusetts having been dismissed by the applicable trial courts. The Company believes they will be dismissed or precluded under the settlement agreement referred to above. The Company entered into a Settlement Agreement with Chevron in fiscal 1996, which provides for the allocation of environmental cleanup responsibilities with respect to certain sites transferred to the Company in connection with the 1986 acquisition of certain "Gulf" assets. The Settlement Agreement requires Chevron to remediate or reimburse the Company for remediation at certain designated sites. The Settlement Agreement also confirms the Company's responsibility for the remediation of the other sites acquired from Chevron, indemnification of Chevron for Chevron allocated sites after cleanup to State standards and the indemnification of Chevron for all future releases as provided for in the original asset purchase documents. The Company believes its obligations under the Settlement Agreement will not have a material effect on the Company's financial statements, or results of operations taken as a whole. At September 30, 1997, remaining litigation related to the Reorganization consisted primarily of various objections to claims which will be settled or, failing settlement, tried before the Bankruptcy Court or District Court in the ordinary course. If such claims are not settled on terms acceptable to the Company, the Company will continue to contest such claims vigorously. The Company does not believe the outcome of these claims will materially effect the financial position of the Company at September 30, 1997 or results of operations taken as a whole. The Company assumes a high degree of risk as a result of the high deductibles under worker's compensation, general liability and automobile insurance policies issued by an unrelated insurer. These risks, estimated at $22.7 on a present value basis for the years 1992 through 1997, net of cash and reinsurance deposits of $4.7 million, resulted in accrued insurance liabilities of $18.0 at September 30, 1997. The unrelated insurance company providing these coverages required collateral in the form of a $12.0 million letter of credit and certain real properties, cash and reinsurance at September 30, 1997. Conven-Petro Insurance Company (Conven-Petro), a wholly-owned subsidiary of Cumberland Farms of Vermont, Inc., which is related to the Company through common ownership, reinsures the unrelated insurance company for certain Company worker's compensation claims for the policy years 1992, 1993 and 1994 and for any increases in such claims subsequent thereto. Payments and deposits to Conven-Petro amounted to $.1 million, $3.6 million and $1.1 F-16 52 million for the years ended September 30, 1997, 1996 and 1995, respectively. In addition to collateral for its insurance program, the Company also provides a $5 million letter of credit to secure a $20 million bond line. Bonds are also posted with various regulatory agencies for the purchase of raw milk, to secure tax payments for motor fuel and cigarette taxes and for various municipal planning board requirements. The Company has civil actions pending against Mr. Demetrios B. Haseotes, a shareholder and Director of the Company. Two actions related to the Company's efforts to collect its judgments in the amount of (a) $663,267, plus interest, which represents funds distributed to Mr. Haseotes to pay certain tax liabilities but applied for other uses and (b) $365,455 plus interest, with respect to funds borrowed by Mr. Haseotes but not yet repaid. Another action relates to the Company's efforts to obtain an accounting and possible disgorgement of funds received by him in connection with the sale of a crude oil refinery in Canada. Mr. Haseotes is also pursuing a claim against the Company seeking reinstatement of his position and attendant compensation which the Board of Directors terminated in 1995. In addition to the above contingencies, the Company has certain environmental contingencies related to ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures related to its petroleum operations. In the ordinary course of business, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from its existing and previously operated retail gasoline and wholesale petroleum facilities. The Company accrues its estimates of all costs to be incurred for assessment and remediation for known releases. These accruals are adjusted periodically if, and when, new information becomes known. Due to the nature of such releases, the actual costs of assessment and remediation activities may vary significantly from year to year. Additionally, under current federal and state regulatory programs, the Company will be obligated by December 22, 1998 to upgrade or replace a significant amount of all underground storage tanks ("USTs") it owns or operates. The Company currently estimates that capital expenditures related to the upgrading or replacing of USTs as well as other environmentally related expenditures will amount to approximately $15.7 million for fiscal year 1998 and an additional $3.9 million through December 1998, which expenditures could be reduced for locations which may be closed in lieu of capital costs of compliance or sold. In addition, the Company has agreed to indemnify Gulf Oil, L.P. (see Note 2) for any costs or liabilities arising from remediation and cleanup of certain terminals for conditions existing prior to December 30, 1993. Management believes that certain of these expenditures are eligible for reimbursement through government programs, insurance or indemnification by the prior owner; a provision was made for agreed upon receivables amounting to approximately $.2 million at September 30, 1997. Included in other accrued and deferred credits and other liabilities at September 30, 1997 was approximately $7.2 million, representing an undiscounted allowance for estimated remediation costs. The Company believes the amounts provided are sufficient for reasonably determinable liabilities as of September 30, 1997. F-17 53 Amounts charged to expense related to environmental remediation costs, including costs to administer the remediation program, amounted to approximately $3.4, $2.0 and $2.0 million for fiscal years 1997, 1996 and 1995, respectively. 8. LEASES Operating leases with nonaffiliated lessors for real estate, vehicles and equipment generally have terms ranging from three to five years. Many have multiple option periods. Many real estate leases provide for the Company to pay its share of increases in real estate taxes and other costs. Total rent expense on these leases was approximately $14,804,000, $14,729,000 and $11,354,000 for 1997, 1996 and 1995, respectively. Minimum lease payments for operating leases with nonaffiliated lessors having initial or remaining noncancelable lease terms in excess of one year at September 30, 1997 were as follows (in thousands): Fiscal Year ----------- 1998 $9,504 1999 8,198 2000 6,428 2001 4,484 2002 3,147 Thereafter 2,678 Leases with nonaffiliated lessees, principally for store and station locations, are generally for short terms, usually three years or less. 9. RETIREMENT PLANS The Company has a 401-k savings plan under which employees generally may elect to contribute up to 15% of their income to the 401-k Plan. The Company's matching contribution vests in increasing percentages beginning after two years of service through five years of service. The Company's matching contribution for the years ended September 30, 1997, 1996 and 1995 amounted to $1,510,000, $1,444,000 and $1,390,000, respectively. Certain employees are covered by the Cumberland Farms Transferred Employees' Retirement Plan (the "Plan"), a defined benefit plan. The following table sets forth the Plan's funded status and amounts recognized in the balance sheets at September 30, 1997 and 1996 (in thousands): F-18 54 1997 1996 ---- ---- Actuarial present value of benefit obligations: Accumulated benefit obligation, (totally vested) $6,159 $6,910 ====== ====== Projected benefit obligation for service rendered to date $6,159 $6,910 Plan assets at fair value, consisting of corporate obligations and common stocks 8,451 7,284 ------ ------ Plan assets in excess of projected benefit obligation 2,292 374 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions (124) 1,257 Unrecognized net obligation at transition being recognized over 15 years (5) (8) ------ ------ Prepaid pension costs $2,163 $1,623 ====== ====== Net pension cost included the following components (in thousands): 1997 1996 1995 ---- ---- ---- Service cost - benefits earned during the period $ -- $ -- $ 297 Interest cost on projected benefits obligations 462 524 649 Actual return on plan assets (1,970) (988) (1,420) Net amortization and deferral 1,437 502 815 ------- ----- ------- Net periodic pension cost (income) $ (71) $ 38 $ 341 ======= ===== ======= The assumptions used to determine the actuarial present value of the projected benefit obligation were as follows: 1997 1996 1995 ---- ---- ---- Discount rate 7.5% 7.5% 7.5% Rate of increase in future compensation 4.0% 4.0% 4.0% Expected rate of return on assets 8.5% 8.5% 8.5% Contributions of $444,260, $1,097,717 and $1,344,088 were made in the years ended September 30, 1997, 1996 and 1995, respectively. F-19 55 The Company's arrangement with Gulf Oil, L.P. contemplates a funding schedule for the pension plan, subject to modification resulting from actuarial assumptions or if required by government authorities. Payments are not required for fiscal year 1998. In fiscal year 1995, the Company amended the pension plan to freeze benefit accruals, resulting in a curtailment gain of approximately $786,000. In addition, lump sum payments during fiscal years 1997, 1996 and 1995 resulted in settlement (gain) losses of approximately ($25,000), $390,000 and $505,000, respectively. F-20 56 10. BUSINESS SEGMENT INFORMATION The Company's operating results and other financial data are presented for its principal business segments for the years ended September 30, 1997, 1996 and 1995, as follows: Retail Wholesale Corporate Total ------ --------- --------- ----- (000's Omitted) Year Ended September 30, 1997 - ----------------------------- Revenues $1,185,807 $299,298 $ 0 $1,485,105 Operating income (loss) 40,527 12,858 (19,931) 33,454 Identifiable assets 251,685 37,022 73,504 362,211 Capital expenditures 27,079 2,147 422 29,648 Depreciation and Amortization 19,897 2,015 387 22,299 Year Ended September 30, 1996 - ----------------------------- Revenues $1,140,736 $274,635 $ 0 $1,415,371 Operating income (loss) 51,658 16,421 (21,440) 46,639 Identifiable assets 242,883 40,056 83,265 366,204 Capital expenditures 25,599 1,929 54 27,582 Depreciation and Amortization 16,560 1,771 372 18,703 Year Ended September 30, 1995 - ----------------------------- Revenues $1,103,674 $240,835 $ 0 $1,344,509 Operating income (loss) 59,206 18,741 (20,272) 57,675 Identifiable assets 259,012 50,047 53,368 362,427 Capital expenditures 21,541 1,936 159 23,636 Depreciation and Amortization 15,497 1,625 419 17,541 F-21 57 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Gulf Oil Limited Partnership: We have audited the accompanying balance sheets of Gulf Oil Limited Partnership as of September 30, 1997 and 1996, and the related statements of operations, changes in partners' capital, and cash flows for the years ended September 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gulf Oil Limited Partnership as of September 30, 1997 and 1996, and the results of its operations and its cash flows for the years ended September 30, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Boston, Massachusetts December 10, 1997 F-22 58 GULF OIL LIMITED PARTNERSHIP BALANCE SHEETS September 30, 1997 and 1996 ASSETS 1997 1996 ---- ---- Current assets: Cash $ 1,989,947 $ 4,891,281 Margin deposits (market value of $61,186 in 1997, and $2,612,956 in 1996) (Notes 2 and 3) 332,064 3,131,127 Accounts receivable, trade (net of allowance for doubtful accounts of $1,250,000 in 1997 and $1,500,000 in 1996) 39,924,883 43,603,621 Credit card receivables (net of allowance for doubtful accounts of $1,870,000 in 1997 and $1,935,000 in 1996) 12,255,974 14,588,943 Inventory (Notes 2 and 3) 49,646,887 50,487,970 Current portion dealer advances, jobber loans and notes receivable 3,261,898 3,080,071 Other current assets 4,097,389 3,616,966 ------------ ------------ Total current assets 111,509,042 123,399,979 Property and equipment, net (Notes 2 and 4) 26,276,027 22,529,182 Intangible assets (net of accumulated amortization of $5,535,532 and $5,022,551 in 1997 and 1996, respectively) (Note 2) 4,089,611 4,602,592 Noncurrent portion dealer advances, jobber loans and notes receivable 9,323,042 9,713,138 Other assets 41,511 239,920 ------------ ------------ Total assets $151,239,233 $160,484,811 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Note payable (Note 5) $ 8,900,000 $ 27,950,000 Current portion of long-term debt (Note 6) - 2,500,000 Accounts payable, trade 55,044,335 52,318,540 Accrued expenses 4,024,656 4,307,665 Subordinated notes payable to partners (Note 7) 5,269,181 3,721,688 ------------ ------------ Total current liabilities 73,238,172 90,797,893 Long-term debt (Note 6) 20,000,000 17,500,000 Commitments (Notes 5, 6, 7 and 8) Partners' capital 58,001,061 52,186,918 ------------ ------------ Total liabilities and partners' capital $151,239,233 $160,484,811 ============ ============ The accompanying notes are an integral part of the financial statements. F-23 59 GULF OIL LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1997 1996 1995 -------------------- ------------------- ------------------- Sales $2,110,096,359 $1,925,498,444 $1,817,324,643 Cost of sales 2,071,703,229 1,882,170,625 1,762,441,378 -------------- -------------- -------------- Gross profit 38,393,129 43,327,819 54,883,265 Operating expenses 11,589,125 12,388,140 12,088,275 Selling, general and administrative expenses 10,635,314 15,828,255 16,118,196 -------------- -------------- --------------- Operating income 16,168,690 15,111,424 26,676,794 Other income (expense): Interest income 388,306 218,273 243,138 Interest expense (3,271,208) (3,548,096) (6,198,598) Gain on fixed asset disposal 703,355 - - -------------- -------------- -------------- Net income $13,989,143 $11,781,601 $20,721,334 ============== ============== ============== The accompanying notes are an integral part of the financial statements. F-24 60 GULF OIL LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1997 1996 1995 ------------------ ----------------- ----------------- Beginning balance $ 52,186,918 $ 44,380,317 $ 34,603,459 Net income 13,989,143 11,781,601 20,721,334 Contributions from partners (Note 9) - - 530,524 Distributions to partners (8,175,000) (3,975,000) (11,475,000) ---------------- ---------------- ---------------- Ending balance $ 58,001,061 $ 52,186,918 $ 44,380,317 ================ ================ ================ The accompanying notes are an integral part of the financial statements. F-25 61 GULF OIL LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1995 ----------------- ----------------- ----------------- Cash flows from operating activities: Net income $13,989,143 $ 11,781,601 $ 20,721,334 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,675,359 2,179,210 1,434,184 Amortization 2,185,530 2,090,750 2,096,066 Changes in operating assets and liabilities: (Increase) decrease in margin deposits 2,799,063 (1,431,432) 3,196,008 (Increase) decrease in accounts receivable, trade 3,678,738 (2,161,179) (12,098,263) Decrease in credit card receivables 2,332,969 3,601,342 2,465,665 (Increase) decrease in inventory 841,083 (8,767,431) 31,721,244 Decrease (increase) in other current assets (480,423) 510,931 43,979 (Increase) in dealer advances and jobber loans (1,464,280) (4,639,682) (1,675,477) (Increase) decrease in other assets 198,409 (221,460) (2,338,973) Increase (decrease) in accounts payable, trade 2,725,795 15,005,590 (236,306) Increase (decrease) in accrued expenses (283,009) 372,043 1,142,427 ----------- ------------- ------------ Net cash provided by operating activities 29,198,377 18,320,283 46,471,888 ----------- ------------- ------------ Cash flows from investing activities: Purchase of property and equipment (6,422,204) (5,447,940) (5,970,663) Additions to intangible assets - (80,250) - --------- ------------- ------------ Net cash used in investing activities (6,422,204) (5,528,190) (5,970,663) Cash flows from financing activities: Distributions to partners (8,175,000) (3,975,000) (11,475,000) Payment of subordinated notes payable (1,837,507) (328,312) (4,750,000) Proceeds from issuance of subordinated note payable to partners 3,385,000 1,325,000 4,475,000 Net payments under line of credit agreement (19,050,000) (11,850,000) (26,200,000) Payments of long-term debt - (750,000) (3,000,000) Proceeds from issuance of long-term debt - 6,500,000 - ------------- ------------ ------------- Net cash used in financing activities (25,677,507) (9,078,312) (40,950,000) Net increase (decrease) in cash (2,901,334) 3,713,781 (448,775) ------------- ------------- -------------- Cash at beginning of period 4,891,281 1,177,500 1,626,275 ------------ ------------- -------------- Cash at end of period $ 1,989,947 $ 4,891,281 $ 1,177,500 ============ ============= ============== Interest paid $ 3,271,694 $ 3,811,126 $ 6,010,990 Noncash investing transactions: Contribution of property and equipment from partners (Note 9) $ 530,524 The accompanying notes are an integral part of the financial statements. F-26 62 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS: Gulf Oil Limited Partnership is engaged in the business of wholesale distribution of petroleum products, enters into forward contracts to purchase and sell products in the cash market and also buys and sells product futures contracts on regulated exchanges. On December 30, 1993, Cumberland Farms, Inc. ("CFI") contributed the assets of its Gulf Oil Division to Catamount Petroleum Limited Partnership ("Catamount") in return for a 66.67% Limited Partnership interest. The remaining Limited Partnership interest is held by the original limited partners of Catamount. The general partner and holder of the 1% general partner interest remains Catamount Management Corporation ("CMC"). Catamount's name was changed to Gulf Oil Limited Partnership (the "Company") on January 3, 1994. CFI contributed certain petroleum storage terminals and related terminal machinery and equipment used in the wholesale petroleum business, all its rights to the "Gulf" name, and all its rights under contracts and agreements with certain customers. In addition, the Company purchased CFI's credit card receivables, receivables and advances due from certain dealers and customers, and certain inventories. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. VALUATION OF INVENTORY, HEDGING, AND RELATED ACTIVITIES Inventory represents petroleum products held for resale and amounts due under exchange contracts. The Company values inventory at the lower of cost, first-in, first-out basis, or market. Revenue from sales transactions is recognized when title is passed. In order to mitigate the risk of market and price fluctuations in its inventory and purchases and sales commitments, the Company enters into futures transactions on commodity exchanges. These contracts are accounted for as hedges and, accordingly, gains and losses on open contracts are deferred and recognized in cost of sales along with the cost of the product hedged, when they are closed. Deferred unrealized losses included in inventory, hedging and related activities amounted to $969,831 and $1,822,797 at September 30, 1997 and 1996, respectively. Sales and cost of sales include the value of futures contracts closed. For the years ended September 30, 1997, 1996 and 1995, the value of futures contracts closed were $936,789,966, $893,430,695 and $898,752,196, respectively. Continued F-27 63 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED PROPERTY AND EQUIPMENT Property and equipment are stated at acquisition cost or historical cost in the case of contributed property and equipment. Expenditures for repairs and maintenance are charged to expense as incurred. The cost of assets sold or retired and related accumulated depreciation are removed from the accounts at the time of sale and any resulting gain or loss is recognized in income. Depreciation is computed over the estimated useful lives using a combination of straight-line and accelerated methods. The estimated useful lives of property and equipment are as follows: YEARS ----- Buildings 19-31 Improvements and equipment 4-31 Furniture and Fixtures 7 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," was implemented in October 1996. This statement had no impact on the Company's fiscal 1997 results of operations or financial position. INTANGIBLE ASSETS Intangible assets contributed consists principally of goodwill and trademarks and are amortized on a straight-line basis over periods of 4 to 40 years. INCOME TAXES The Company has elected limited partnership status for federal and state tax reporting purposes. Under this election the Company passes through to its partners as individual taxpayers, net income or loss, on a pro rata basis. Accordingly, no federal or state income tax provision is provided by the Company. AMORTIZATION OF DEALER ADVANCES Dealer advances are stated at historical cost less accumulated amortization. Amortization on dealer advances is computed over the life of the contract based on actual gallons sold. FINANCE CHARGES Finance charges on credit card collections are fully reserved for when billed. Finance charges are taken into income when collected. Continued F-28 64 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising costs for the years ended September 30, 1997, 1996 and 1995 are $1,973,054, $2,513,683 and $1,526,481, respectively. BASIS OF PRESENTATION Certain prior period amounts have been reclassified to conform with the current financial statement presentation. 3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: The Company uses established petroleum futures exchanges to hedge a portion of the market risks associated with its petroleum inventory, purchases, and sales activities. Futures are used as hedge instruments to reduce the Company's exposure to price volatility. These instruments may be used to establish margins, and may be used in conjunction with specifically identified transactions or projected purchases/sales of inventory. In implementing its hedging program, the Company analyzes the sensitivity of its commodity-based cash flows to market price changes. Based on this market risk profile, as well as trends in prices and overall business objectives, a determination is made as to the appropriate hedging strategy. Futures contracts expose the Company to counterparty credit risk; however, management views this risk to be minimal. As discussed in Note 2, the net unrealized gains or losses on any open positions have been deferred by the Company until the underlying product is sold, or the contract has been fulfilled. At September 30, 1997 and 1996, there were open futures contracts required to be settled in cash. Notional contract amounts, excluding unrealized gains and losses were $47 million and $85 million, respectively. These amounts principally represent future values of contract volumes over the remaining duration of outstanding futures contracts at the respective dates. The Company has adopted FAS No. 107, Disclosures about Fair Values of Financial Instruments. The carrying amounts of notes payable, long-term debt and subordinated notes payable to partners approximate fair value because these financial instruments contain variable interest rates. The fair value of margin deposits is determined through quoted market prices. Continued F-29 65 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. PROPERTY AND EQUIPMENT: Property and equipment consists of the following: 1997 1996 ---- ---- Land $ 9,779,500 $ 9,779,500 Buildings 2,772,657 2,772,657 Improvements and equipment 18,874,798 14,377,080 Office furniture and equipment 2,198,741 1,861,016 Leasehold improvements 126,164 98,523 Construction in progress 3,309,462 1,750,342 ------------ ------------ 37,061,322 30,639,118 Less accumulated depreciation and amortization (10,785,295) (8,109,936) ------------ ------------ $ 26,276,027 $ 22,529,182 ============ ============ 5. COMMITMENTS AND CONTINGENT LIABILITIES: The Company has available a demand line of credit agreement with two banks which provide for a combination of loans and letters of credit aggregating $100,000,000 at September 30, 1997. Certain assets of the Company are pledged as collateral under this agreement. At September 30, 1997 and 1996 the Company had outstanding letters of credit of approximately $24,117,000 and $30,548,000, respectively. Interest is payable monthly on the aggregate outstanding principal at the bank's base rate plus 1/2%. At September 30, 1997 and 1996 borrowings outstanding under this agreement were $8,900,000 and $27,950,000, respectively, and the interest rate was 9.00% and 8.75%, respectively. CFI has agreed to indemnify the Company for any costs or liabilities arising from the remediation and clean-up of certain terminals for conditions existing on or prior to December 30, 1993. The level of future expenditures for environmental remediation is not estimable at this time. 6. LONG-TERM DEBT: Long-term debt consists of the following: 1997 1996 ---- ---- Term loan $20,000,000 $20,000,000 Less current portion - (2,500,000) ----------- ----------- $20,000,000 $17,500,000 =========== =========== (Continued) F-30 66 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED The Company maintains a term loan agreement with a bank in the aggregate amount of $20,000,000. Certain assets of the Company are pledged as collateral under this agreement. During 1997 the Company amended this term loan agreement such that the entire loan matures and is payable on March 31, 1999. Interest is payable quarterly on the aggregate outstanding principal balance at the bank's base rate plus 1% or the LIBOR rate plus 3%. At September 30, 1997 and 1996 the interest rate was 8.719% and 8.531%, respectively. The credit agreement contains financial covenants that include requirements to maintain certain financial ratios and minimum working capital requirements. The Company is in compliance with all covenants at September 30, 1997 and 1996. On October 31, 1997, subsequent to year end, the Company entered into and subsequently drew down a $20,000,000 revolving credit agreement. The credit facility matures and full payment is due on March 31, 1999. The facility is cross collateralized with the line of credit (See note 5). The funds received from the revolving credit agreement may be used to support general partnership purposes and capital expenditures. 7. RELATED PARTIES: Under the provisions of the agreement of Limited Partnership, CMC is entitled to a fee for providing certain management and administrative services to the Company. Included in the statement of operations for the years ended September 30, 1997, 1996 and 1995 is a fee for such services of $706,000, $825,000, and $850,000, respectively. During 1997, 1996 and 1995 the Company sold petroleum products to Gibbs Oil Company Limited Partnership ("Gibbs"), a related entity. Total sales for the years ended September 30, 1997, 1996, and 1995 were approximately $53,000,000, $54,000,000 and $23,000,000, respectively. The amounts due from Gibbs at September 30, 1997 and 1996 were approximately $3,370,000 and $2,100,000, respectively. During 1997, 1996 and 1995, the Company sold petroleum products to CFI, and utilized miscellaneous trucking and administrative services provided by CFI. Total sales to CFI for the years ended September 30, 1997, 1996, 1995 were approximately $409,000,000, $373,000,000, and $348,000,000, respectively. At September 30, 1997 and 1996, there was approximately $8,200,000 and $8,100,000 respectively, in trade accounts receivable due from CFI. Total expenditures for trucking and administrative services for the years ended September 30, 1997, 1996 and 1995 were approximately $3,300,000, $3,400,000 and $3,600,000 respectively. At September 30, 1997 and 1996, there was approximately $232,000 and $796,000 respectively, due to CFI. (Continued) F-31 67 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED Under the terms of a Supply Agreement with CFI, the Company is entitled to reimbursement for certain costs. The amount is calculated by determining whether the Company exceeds target earnings (as defined in the Supply Agreement) in any calendar year and the quantity of product purchased by CFI. After January 1, 1999, the Company is no longer eligible for these reimbursements. For the year ended September 30, 1997, the selling, general and administrative expenses have been reduced by $4,090,000 as a result of these reimbursements. Of this amount, $2,596,000 has been paid by CFI and $1,494,000 is included in accounts receivable at September 30, 1997. During 1997, 1996 and 1995, the Company sold petroleum products to New England Petroleum Limited Partnership ("NEP"), a related entity. Total sales for the years ended September 30, 1997, 1996 and 1995, were approximately $10,000,000 $7,300,000 and $3,600,000, respectively. The amount due from NEP at September 30, 1997 and 1996 was approximately $201,000 and $150,000, respectively. Subordinated notes payable to partners in the accompanying financial statements consist of amounts owed to certain partners and CMC. These amounts are subordinate to the demand line of credit and the term loan agreement (the "credit agreements"). No payment of interest or principal shall be paid on the subordinated notes if such payment would cause an event of default or noncompliance under the "credit agreements." Interest is calculated at the prime rate in effect from time to time plus 2%. The effective rate at September 30, 1997 and 1996 on these notes was 10.50% and 10.25%, respectively. These notes are payable on demand. 8. LEASE COMMITMENTS: In April 1994, the Company leased new office space under an operating lease arrangement for a period of five years with an option on an additional five years. Rent expense for the years ended September 30, 1997, 1996 and 1995 totaled $515,906, $505,825, and $471,330, respectively. At September 30, 1997, long-term lease commitments were as follows: OPERATING LEASES ---------------- 1998 $ 463,225 1999 311,048 2000 98,000 2001 98,000 2002 58,583 Thereafter 224,583 ----------- Total $ 1,253,439 =========== 9. SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: (Continued) F-32 68 GULF OIL LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS, CONTINUED During the year ended September 30, 1995, CFI contributed property and equipment with a net book value of $530,524. 10. DEFERRED COMPENSATION ARRANGEMENTS: The Company has a defined contribution pension plan which is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("Plan"). Eligible for the Plan are all employees who have worked at the Company for a period of at least one year and have achieved age twenty one. The Company's contribution to the Plan is discretionary. During the years ended September 30, 1997, 1996 and 1995, the Company made a matching contribution to the Plan of approximately $135,000, $160,000 and $120,000, respectively. F-33 69 CUMBERLAND FARMS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ------------additions------------- BEGINNING CHARGED TO CHARGED TO ENDING DESCRIPTION BALANCE COSTS & EXPENSES OTHER ACCOUNTS DEDUCTIONS BALANCE - ----------- ------- ---------------- -------------- ---------- ------- Year ended September 30, 1997 Reserves deducted from asset accounts: Allowance for Accounts and Notes Receivable $1,591,000 $ 97,000 $ 179,000 $1,509,000 Environmental reserve 6,526,000 3,450,000 2,786,000 7,190,000 Year ended September 30, 1996 Reserves deducted from asset accounts: Allowance for Accounts and Notes Receivable 1,614,000 136,000 159,000 1,591,000 Environmental reserve 7,408,000 2,068,000 2,950,000 6,526,000 Year ended September 30, 1995 Reserves deducted from asset accounts: Allowance for Accounts and Notes Receivable 1,210,000 756,000 352,000 1,614,000 Environmental reserve 6,151,000 2,467,000 1,210,000 7,408,000 S-1 70 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Gulf Oil Limited Partnership: In connection with our audit of the balance sheets of Gulf Oil Limited Partnership as of September 30, 1997 and 1996, and the related statement of operations, changes in partners' capital and cash flows for the years ended September 30, 1997, 1996 and 1995, we have also audited the accompanying "Schedule III - Valuation and Qualifying Accounts." In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Boston, Massachusetts December 10, 1997 S-2 71 GULF OIL LIMITED PARTNERSHIP SCHEDULE III - VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Charged to Balance Beginning Costs and Other End of of Period Expenses Accounts Deductions Period ---------- ---------- ---------- ---------- ------- Year Ended September 30, 1997 - ----------------------------- Allowance for doubtful accounts - accounts receivable, trade $1,500,000 $163,583 $413,583 $1,250,000 Allowance for doubtful accounts - credit card receivables $1,935,000 $696,000 $761,000 $1,870,000 Year Ended September 30, 1996 - ----------------------------- Allowance for doubtful accounts - accounts receivable, trade $1,500,000 $227,986 $227,986 $1,500,000 Allowance for doubtful accounts - credit card receivables $1,780,000 $960,000 $805,000 $1,935,000 Year Ended September 30, 1995 - ----------------------------- Allowance for doubtful accounts - accounts receivable, trade $550,000 $945,240 ($4,760) $1,500,000 Allowance for doubtful accounts - credit card receivables $1,492,631 $1,000,000 $712,631 $1,780,000 S-3 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts, on the 22nd day of December, 1997. CUMBERLAND FARMS, INC. By: /s/ Lily H. Bentas --------------------------------------------- Name: Lily H. Bentas Title: President, Chairperson of the Board of Directors and Chief Executive Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on the dates set forth opposite their names. NAME: DATE: - ----- ----- By: /s/ Lily H. Bentas 12/22/97 - --------------------------------------------------- -------------- Name: Lily H. Bentas Title: President, Chairperson of the Board and Chief Executive Officer By: /s/ Kevin P. Johnson 12/22/97 - --------------------------------------------------- -------------- Name: Kevin P. Johnson Title: Vice president and Corporate Controller By: /s/ Arthur G. Koumantzelis 12/22/97 - --------------------------------------------------- -------------- Name: Arthur G. Koumantzelis Title: Senior Vice President and Chief Financial Officer By: /s/ John E. Burke 12/22/97 - --------------------------------------------------- -------------- Name: John E. Burke Title: Director 73 By: /s/ Paul E. Hand 12/22/97 - --------------------------------------------------- -------------- Name: Dr. Paul Hand Title: Director By: /s/ Byron Haseotes 12/22/97 - --------------------------------------------------- -------------- Name: Byron Haseotes Title: Director - --------------------------------------------------- -------------- Name: Demetrios B. Haseotes Title: Director - --------------------------------------------------- -------------- Name: George Haseotes Title: Director By: /s/ James C. Mcdermott 12/22/97 - --------------------------------------------------- -------------- Name: James C. McDermott Title: Director By: /s/ Dr. Geoffrey Pottow 12/22/97 - --------------------------------------------------- -------------- Name: Dr. Geoffrey Pottow Title: Director By: /s/ Kenneth T. Koehler 12/22/97 - --------------------------------------------------- -------------- Name: Kenneth T. Koehler Title: Director 37 74 EXHIBIT INDEX Each exhibit marked with an asterisk (*) was previously filed as an Exhibit to the Registration Statement filed on August 17, 1995. Each exhibit marked with a double asterisk (**) was previously filed as an Exhibit to Amendment No. 1 to the Registration Statement filed on November 6, 1995. Each exhibit marked with a triple asterisk (***) was previously filed as an exhibit to the Company's quarterly report on Form 10-Q for the fiscal quarter ended June 30, 1996. (a) The following exhibits are filed herewith: Exhibit Item Exhibit ------- ---- ------- No. --- 2 Third Amended and Restated Plan of Reorganization, dated Filed as Exhibit 2* as of July 1, 1993, of the Registrant, as amended by Omnibus Amended and Restated Modification of Third Amended and Restated Plan of Reorganization dated as of October 15, 1993 3.1 Certificate of Incorporation of the Registrant, filed with the Filed as Exhibit 3.1* Secretary of State of Delaware on September 14, 1984, as amended 3.2 Bylaws of the Registrant Filed as Exhibit 3.2* 4.1A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.1A* Registrant and State Street Bank & Trust Company, as Trustee (Class 11A 10.5% Secured Notes due 2003) 4.1B Supplemental Indenture, dated as of October 1, 1993, Filed as Exhibit 4.1B* between the Registrant and State Street Bank & Trust Company, as Trustee (Class 11A 10.5% Secured Notes due 2003) 4.1C Supplemental Indenture, dated as of March 1, 1994, between Filed as Exhibit 4.1C* the Registrant and State Street Bank & Trust Company, as Trustee (Class 11A 10.5% Secured Notes due 2003) 4.2A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.2A* Registrant and State Street Bank & Trust Company, as Trustee (Class 11F 10.5% Secured Notes due 2003) 4.2B Supplemental Indenture, dated as of January 3, 1995, Filed as Exhibit 4.2B* between the Registrant and State Street Bank & Trust Company, as Trustee (Class 11F 10.5% Secured Notes due 2003) 4.2C Supplemental Indenture, dated as of January 11, 1995, Filed as Exhibit 4.2C* between the Registrant and State Street Bank & Trust Company, as Trustee (Class 11F 10.5% Secured Notes due 2003) 4.2D Supplemental Indenture, dated as of April 1, 1995, between Filed as Exhibit 4.2D* the Registrant and State Street Bank & Trust Company, as Trustee (Class 11F 10.5% Secured Notes due 2003) 38 75 4.3A Indenture, dated as of October 1, 1993, between the Filed as Exhibit 4.3A* Registrant and State Street Bank & Trust Company, as Trustee (Class 11G 9.75% Secured Notes due 2003) 4.3B Supplemental Indenture, dated as of November 1, 1994, Filed as Exhibit 4.3B* between the Registrant and State Street Bank & Trust Company, as Trustee (Class 11G 9.75% Secured Notes due 2003) 4.3C Supplemental Indenture, dated as of January 11, 1995, Filed as Exhibit 4.3C* between the Registrant and State Street Bank & Trust Company, as Trustee (Class 11G 9.75% Secured Notes due 2003) 4.4 "S Corporation" Agreement among Shareholders of Filed as Exhibit 4.4* Cumberland Farms, Inc., dated September 14, 1984, among the Registrant, the shareholders named therein and Allan van Gestel, as Agent 4.5 Supplement No. 1 to "S Corporation" Agreement among Filed as Exhibit 4.5* Shareholders of Cumberland Farms, Inc., dated September 10, 1993, among the Registrant, the shareholders named therein and Allan van Gestel, as Agent 5 Opinion of Sullivan & Worcester with respect to the legality Filed as Exhibit 5** of the Notes and the status of the Notes as binding obligations of the Registrant 10.1 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.1* between the Registrant and the Securityholders named therein with respect to the Class 11A 10.5% Secured Notes due 2003 10.2 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.2* between the Registrant and the Securityholders named therein with respect to the Class 11F 10.5% Secured Notes due 2003 10.3 Registration Rights Agreement, dated December 29, 1993 Filed as Exhibit 10.3* between the Registrant and the Securityholders named therein with respect to the Class 11G 9.75% Secured Notes due 2003 10.4A Joint Venture Agreement, dated June 30, 1993, among the Filed as Exhibit 10.4A* Registrant, Catamount Petroleum Limited Partnership and Catamount Management Corporation 10.4B Amendment of Joint Venture Agreement, dated as of Filed as Exhibit 10.4B* December 29, 1993, among the Registrant, Catamount Petroleum Limited Partnership and Catamount Management Corporation 10.5 Second Amended and Restated Agreement of Limited Filed as Exhibit 10.5** Partnership, dated December 29, 1993, of Gulf Oil L.P. 39 76 10.6 Supply Agreement, dated December 29, 1993, between the Filed as Exhibit 10.6** Registrant and Gulf Oil L.P. 10.7 Amended and Restated Credit Agreement, dated December Filed as Exhibit 10.7* 29, 1993, between the Registrant and The Industrial Bank of Japan Trust Company 10.8 Amended and Restated Credit Agreement, dated December Filed as Exhibit 10.8* 29, 1993, between the Registrant and Chevron U.S.A. Inc. 10.9 Indenture, dated as of December 29, 1993, between the Filed as Exhibit 10.9* Registrant and Shawmut Bank, N.A. as trustee 10.10 Amended, Restated and Consolidated Loan Agreement, dated Filed as Exhibit 10.10* as of December 30, 1993, between the Registrant and Merrill Lynch, Pierce, Fenner & Smith, Inc. 10.11 Loan Agreement, dated as of December 30, 1993, between Filed as Exhibit 10.11* the Registrant and First Fidelity Bank, N.A. 10.12 Note Modification Agreement, dated as of December 30, Filed as Exhibit 10.12* 1993, between the Registrant and Metropolitan Life Insurance 10.13 Employment Agreement between the Registrant and Lily H. Filed as Exhibit 10.13* Bentas 10.14 Indemnity Agreements between the Registrant and the Filed as Exhibit 10.14* independent directors of the Registrant 10.15 Loan and Security Agreement, dated as of June 14, 1996, by Filed as Exhibit 10*** and between the Registrant and Transamerica Business Credit Corporation 10.16 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.16 the Company and Lily H. Bentas 10.17 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.17 the Company and Harry J. Brenner 10.18 Employment Agreement, dated November 3, 1997, between Filed as Exhibit 10.18 the Company and Mark G. Howard 12 Statement re computation of ratios Filed as Exhibit 12 27 Financial Data Schedule Filed as Exhibit 27 ====================================================================================================================== 40