FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended November 2, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-12497
_______________________
Dairy Mart Convenience Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2497894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Vision Drive, Enfield, CT 06082
(Address of principal executive offices)
Registrant's telephone number, including area code (860) 741-4444
_______________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
_______________________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares of Class A Common Stock outstanding November 2, 1996 - 2,953,154
Shares of Class B Common Stock outstanding November 2, 1996 - 2,783,060
PART I. FINANCIAL INFORMATION
Dairy Mart Convenience Stores, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
---------------------- ----------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
Revenues..................... $ 147,344 $ 143,492 $ 444,804 $ 428,194
--------- ---------- --------- ---------
Cost of goods sold and
expenses:
Cost of goods sold......... 106,354 102,878 325,892 309,649
Operating and administrative
expenses.................. 37,980 38,929 107,324 108,829
Interest expense............ 2,683 2,359 8,187 6,982
--------- ---------- --------- ---------
147,017 144,166 441,403 425,460
--------- ---------- --------- ---------
Income (loss) before income
taxes..................... 327 (674) 3,401 2,734
(Provision for) benefit from
income taxes................. (134) 269 (1,367) (1,231)
--------- ---------- --------- ---------
Net income (loss)....... $ 193 $ (405) $ 2,034 $ 1,503
- ------------------------------------------------------------------------------
Weighted average shares
outstanding................. 4,705 5,582 4,703 5,823
Earnings (loss) per share.... $ 0.04 $ (0.07) $ 0.43 $ 0.26
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Dairy Mart Convenience Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands)
November 2, February 3,
1996 1996
- -------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash...................................... $ 6,401 $ 12,654
Short-term investment..................... 1,514 -
Accounts and notes receivable............. 12,713 9,752
Inventory................................. 20,004 20,928
Prepaid expenses and other current assets. 3,181 3,454
Deferred income taxes..................... 2,585 2,669
---------- ----------
Total current assets................... 46,398 49,457
---------- ----------
Assets Held For Sale.......................... 8,685 8,685
---------- ----------
Property and Equipment, net................... 87,543 80,387
---------- ----------
Intangible Assets, net........................ 17,220 17,277
---------- ----------
Other Assets, net............................. 9,377 9,132
---------- ----------
Total assets.................................. $ 169,223 $ 164,938
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations $ 1,461 $ 1,430
Accounts payable........................... 31,579 30,803
Accrued expenses........................... 14,031 14,437
Accrued interest........................... 1,323 3,355
---------- ----------
Total current liabilities............... 48,394 50,025
---------- ----------
Long-Term Obligations, less current portion
above........................................ 99,156 99,451
---------- ----------
Other Liabilities............................. 9,943 6,254
---------- ----------
Stockholders' Equity:
Preferred Stock (serial)................... - -
Class A Common Stock....................... 35 33
Class B Common Stock....................... 30 30
Paid-in capital............................ 30,457 29,971
Retained earnings (deficit)................ (3,787) (5,821)
Treasury stock, at cost.................... (5,005) (5,005)
Note receivable from DM Associates......... (10,000) (10,000)
---------- ----------
Total stockholders' equity........... 11,730 9,208
---------- ----------
Total liabilities and stockholders' equity.... $ 169,223 $ 164,938
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Dairy Mart Convenience Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
FOR THE THREE FISCAL QUARTERS ENDED
-----------------------------------
November 2, October 28,
1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net Income..................................... $ 2,034 $ 1,503
Adjustments to reconcile net income to net
cash provided by operating activities:
Cash flow effect of corporate governance
issues and restructuring initiatives and
other operating costs...................... (1,350) (2,310)
Depreciation and amortization................ 8,850 9,060
Amortization of original issue discount...... 146 -
Change in deferred income taxes.............. (751) 3,142
Loss on other disposition of properties, net. 115 54
Net change in assets and liabilities:
Accounts and notes receivable........... (2,961) 1,401
Inventory............................... 924 6,224
Accounts payable........................ 776 997
Accrued interest........................ (2,032) (1,990)
Other assets and liabilities............. 4,906 (5,378)
- -------------------------------------------------------------------------------
Net cash provided by operating activities........ 10,657 12,703
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and increase in short-term
investments.................................. (1,514) (78)
Purchase of property and equipment............. (17,763) (13,820)
Proceeds from sale of property, equipment and
assets held for sale........................ 2,839 13,817
Increase in long-term notes receivable......... (1,427) (701)
Proceeds from collection of long-term notes
receivable................................... 1,261 729
Increase in intangibles and other assets....... (384) (69)
- -------------------------------------------------------------------------------
Net cash used in investing activities............ (16,988) (122)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in long-term obligations.............. 650 -
Repayment of long-term obligations............. (1,060) (1,520)
Issuance of common stock....................... 488 93
- -------------------------------------------------------------------------------
Net cash provided (used) by financing activities. 78 (1,427)
- -------------------------------------------------------------------------------
(Decrease) increase in cash...................... (6,253) 11,154
Cash at beginning of fiscal year................. 12,654 4,512
- -------------------------------------------------------------------------------
Cash at end of third fiscal quarter.............. $ 6,401 $ 15,666
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE)
Dairy Mart Convenience Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 1996
(Unaudited)
The unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not
misleading. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, and which are of a normal,
recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K/A Amendment No. 2, filed with the
Securities and Exchange Commission on August 23, 1996.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the
February 3, 1996 audited consolidated financial statements included in
the Company's Form 10-K/A Amendment No. 2. Certain prior year amounts
have been reclassified to conform to the presentation used for the
current year.
2. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first three
fiscal quarters ended November 2, 1996 follows:
Common Stock
---------------------------------------------------
Class A Class B
Shares Shares Paid-in
issued at issued at Capital
$.01 $.01 in excess of
par value par value Amount par value
---------------------------------------------------
Balance February 3, 1996 3,326,296 2,959,017 $ 62,854 $ 29,970,606
Employee stock purchase
plan 7,608 - 76 35,638
Stock options exercised 140,875 - 1,409 450,348
--------- --------- --------- -------------
Balance November 2, 1996 3,474,779 2,959,017 $ 64,339 $ 30,456,592
--------- --------- --------- -------------
As of November 2, 1996, there were 521,625 shares of Class A Common
Stock and 175,957 shares of Class B Common Stock held as treasury stock
at an aggregate cost of $5,004,847, leaving 2,953,154 Class A shares and
2,783,060 Class B shares outstanding.
3. Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is based on the weighted average number
of shares outstanding, including the dilutive effect of stock options, if
appropriate, during each period. The Company's note receivable from DM
Associates Limited Partnership is secured by 1,220,000 shares of the
Company's Class B Common Stock, which shares are being treated similar to
treasury stock for earnings (loss) per share purposes.
4. Seasonality
The results of operations for the first three fiscal quarters ended
November 2, 1996 are not necessarily indicative of results to be
expected for the full fiscal year. The convenience store industry in the
Company's marketing areas experiences a higher percentage of revenues and
profit margins during the summer months than during the winter months.
Historically, the Company has achieved more favorable financial results
in its second and third fiscal quarters, as compared to its first and
fourth fiscal quarters.
5. Supplemental Consolidating Financial Information (unaudited)
------------------------------------------------------------
The Company's payment obligations under the Series A and Series B
Senior Subordinated Notes are guaranteed by certain of the Company's
subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and
unconditionally guaranteed on an unsecured, senior subordinated, joint
and several basis by each of the Guarantor Subsidiaries. The following
supplemental financial information sets forth, on an unconsolidated
basis, statement of operations, balance sheet, and cash flows information
for the Company ("Parent Company Only"), for the Guarantor Subsidiaries
and for Financial Opportunities Inc. ("FINOP"), the Company's non-
guarantor subsidiary. Separate complete financial statements of the
respective Guarantor Subsidiaries would not provide additional
information which would be useful in assessing the financial condition of
the Guarantor Subsidiaries, and are accordingly omitted.
Investment in subsidiaries are accounted for by the Parent Company
on the equity method for purposes of the supplemental consolidating
presentation. Earnings of the subsidiaries are, therefore, reflected in
the Parent Company's investment accounts and earnings. The principle
elimination entries eliminate the Parent Company's investment in
subsidiaries and intercompany balances and transactions.
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended November 2, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ------- ------------ ------------
(in thousands)
Revenues............................ $ 1,027 $443,377 $ 400 $ - $444,804
------- -------- ------ -------- --------
Cost of goods sold and expenses:
Cost of goods sold................ - 325,892 - - 325,892
Operating and administrative
expenses......................... 208 107,116 - - 107,324
Interest expense.................. 7,540 380 267 - 8,187
------- -------- ------ -------- --------
7,748 433,388 267 - 441,403
------- -------- ------ -------- --------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries..... (6,721) 9,989 133 - 3,401
Benefit from (provision for)
income taxes....................... 2,967 (4,316) (18) - (1,367)
------- -------- ------ -------- --------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries..................... (3,754) 5,673 115 - 2,034
Equity in income (loss) of
consolidated subsidiaries.......... 5,788 115 - (5,903) -
------- -------- ------ -------- --------
Net income (loss)................ $ 2,034 $ 5,788 $ 115 $ (5,903) $ 2,034
======= ======== ====== ======== ========
Supplemental Consolidating Balance Sheets
as of November 2, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ------- ------------ ------------
(in thousands)
ASSETS
Current Assets:
Cash............................. $ 3,271 $ 2,072 $ 1,058 $ - $ 6,401
Short-term investment............ - - 1,514 - 1,514
Accounts and notes receivable.... - 11,996 717 - 12,713
Inventory........................ - 20,004 - - 20,004
Prepaid expenses and
other current assets............ 81 3,100 - - 3,181
Deferred income taxes............ 923 1,662 - - 2,585
-------- -------- ------- --------- --------
Total current assets.......... 4,275 38,834 3,289 - 46,398
-------- -------- ------- --------- --------
Assets Held For Sale................ - 8,685 - - 8,685
Property and Equipment, net......... - 87,543 - - 87,543
Intangible Assets, net.............. - 17,220 - - 17,220
Other Assets, net................... 3,320 3,609 2,448 - 9,377
Investment in and advances to
subsidiaries...................... 114,402 1,371 669 (116,442) -
-------- -------- ------- --------- --------
Total assets........................ $121,997 $157,262 $ 6,406 $(116,442) $169,223
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations.......... $ 1,145 $ 316 $ - $ - $ 1,461
Accounts payable................. 15,045 16,534 - - 31,579
Accrued expenses................. 639 13,384 8 - 14,031
Accrued interest................. 1,236 - 87 - 1,323
-------- -------- ------- --------- --------
Total current liabilities..... 18,065 30,234 95 - 48,394
-------- -------- ------- --------- --------
Long-Term Obligations,
less current portion above......... 92,117 2,809 4,230 - 99,156
Other Liabilities................... 85 9,817 41 - 9,943
Stockholders' Equity................ 11,730 114,402 2,040 (116,442) 11,730
-------- -------- ------- --------- --------
Total liabilities and
stockholders' equity.............. $121,997 $157,262 $ 6,406 $(116,442) $169,223
- -----------------------------------------------------------------------------------------------
Supplemental Consolidating Statement of Cash Flows
for the Three Fiscal Quarters ended November 2, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Net cash provided by (used in) operating
activities............................. $(9,377) $19,994 $ 40 $ - $10,657
------- ------- ------- ------- -------
Cash flow from investing activities:
Purchase of and increase in short-term
investments........................... - - (1,514) - (1,514)
Purchase of property and equipment..... - (17,763) - - (17,763)
Proceeds from sale of property,
equipment and assets held for sale.... - 2,839 - - 2,839
Investment in and advances to
subsidiaries.......................... 10,810 (10,416) (394) - -
Increase in long-term notes receivable. - (120) (1,307) - (1,427)
Proceeds from collection of
long-term receivables................. - 70 1,191 - 1,261
Increase in intangibles
and other assets...................... - (390) 6 - (384)
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities............................. 10,810 (25,780) (2,018) - (16,988)
------- ------- ------- ------- -------
Cash flows from financing activities:
Increase in revolving loan, net........ 300 350 - - 650
Repayment of long-term obligations..... (689) (363) (8) - (1,060)
Increase in common stock and paid-in
capital............................... 488 - - - 488
------- ------- ------- ------- -------
Net cash provided (used) by financing
activities.............................. 99 (13) (8) - 78
------- ------- ------- ------- -------
Increase (decrease) in cash.............. 1,532 (5,799) (1,986) - (6,253)
Cash at beginning of year................ 1,739 7,871 3,044 - 12,654
------- ------- ------- ------- -------
Cash at end of third fiscal quarter...... $ 3,271 $ 2,072 $ 1,058 $ - $ 6,401
======= ======= ======= ======= =======
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters ended October 28, 1995
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ------- ------------ ------------
(in thousands)
Revenues............................ $ 557 $427,260 $ 377 $ - $428,194
------- -------- ------ -------- --------
Cost of goods sold and expenses:
Cost of goods sold................ - 309,649 - - 309,649
Operating and administrative
expenses......................... 298 108,531 - - 108,829
Interest expense.................. 5,946 767 269 - 6,982
------- -------- ------ -------- --------
6,244 418,947 269 - 425,460
------- -------- ------ -------- --------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries..... (5,687) 8,313 108 - 2,734
Benefit from (provision for)
income taxes....................... 2,510 (3,722) (19) - (1,231)
------- -------- ------ -------- --------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries..................... (3,177) 4,591 89 - 1,503
Equity in income (loss) of
consolidated subsidiaries.......... 4,680 89 - (4,769) -
------- -------- ------ -------- --------
Net income (loss)................ $ 1,503 $ 4,680 $ 89 $ (4,769) $ 1,503
======= ======== ====== ======== ========
Supplemental Consolidating Balance Sheets
as of February 3, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ------ ------------ ------------
(in thousands)
ASSETS
Current Assets:
Cash............................. $ 1,739 $ 7,871 $3,044 $ - $ 12,654
Accounts and notes receivable.... - 9,081 671 - 9,752
Inventory........................ - 20,928 - - 20,928
Prepaid expenses and
other current assets............ 60 3,394 - - 3,454
Deferred income taxes............ 859 1,810 - - 2,669
-------- -------- ------ -------- --------
Total current assets.......... 2,658 43,084 3,715 - 49,457
-------- -------- ------ -------- --------
Assets Held For Sale................ - 8,685 - - 8,685
Property and Equipment, net......... - 80,387 - - 80,387
Intangible Assets, net.............. - 17,277 - - 17,277
Other Assets, net................... 2,442 4,352 2,338 - 9,132
Investment in and advances to
subsidiaries...................... 119,309 1,650 275 (121,234) -
-------- -------- ------ -------- --------
Total assets........................ $124,409 $155,435 $6,328 $(121,234) $164,938
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations.......... $ 932 $ 490 $ 8 $ - $ 1,430
Accounts payable................. 15,919 14,875 9 - 30,803
Accrued expenses................. 2,211 12,221 5 - 14,437
Accrued interest................. 3,236 - 119 - 3,355
-------- -------- ------ -------- --------
Total current liabilities..... 22,298 27,586 141 - 50,025
-------- -------- ------ -------- --------
Long-Term Obligations,
less current portion above......... 92,573 2,648 4,230 - 99,451
Other Liabilities................... 330 5,892 32 - 6,254
Stockholders' Equity................ 9,208 119,309 1,925 (121,234) 9,208
-------- -------- ------ -------- --------
Total liabilities and
stockholders' equity.............. $124,409 $155,435 $6,328 $(121,234) $164,938
- ----------------------------------------------------------------------------------------------
Supplemental Consolidating Statement of Cash Flows
for the Three Quarters ended October 28, 1995
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Net cash (used in) provided by operating
activities............................. $(7,871) $20,205 $ 369 $ - $12,703
------- ------- ------- ------- -------
Cash flow from investing activities:
Purchase of and increase in short-term
investments........................... - - (78) - (78)
Purchase of property and equipment..... - (13,820) - - (13,820)
Proceeds from sale of property,
equipment and assets held for sale.... - 13,817 - - 13,817
Investment in and advances to
subsidiaries.......................... 13,989 (14,076) 87 - -
Increase in long-term notes receivable. - - (701) - (701)
Proceeds from collection of
long-term receivables................. - 86 643 - 729
Increase in intangibles
and other assets...................... 710 (783) 4 - (69)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities.................. 14,699 (14,776) (45) - (122)
------- ------- ------- ------- -------
Cash flows from financing activities:
Repayment of long-term obligations..... 541 (2,061) - - (1,520)
Increase in common stock and paid-in
capital............................... 93 - - - 93
------- ------- ------- ------- -------
Net cash used in financing activities.... 634 (2,061) - - (1,427)
------- ------- ------- ------- -------
Increase (decrease) in cash.............. 7,462 3,368 324 - 11,154
Cash at beginning of year................ - 3,418 1,094 - 4,512
------- ------- ------- ------- -------
Cash at end of third fiscal quarter...... $ 7,462 $ 6,786 $ 1,418 $ - $15,666
======= ======= ======= ======= =======
Dairy Mart Convenience Stores, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
Revenues for the current year first three fiscal quarters increased
by $16.6 million from the prior year first three fiscal quarters, and
revenues for the third fiscal quarter increased by $3.8 million from the
prior year third fiscal quarter. A summary of revenues by functional
area for the comparative third fiscal quarter and the first three fiscal
quarters is as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- --------------------
Nov 2, Oct 28, Nov 2, Oct 28,
(in millions) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Convenience store $ 85.6 $ 87.3 $257.3 $256.8
Gasoline 59.7 55.5 183.9 169.1
Other 2.0 0.7 3.6 2.3
------------------- -------------------
Total $147.3 $143.5 $444.8 $428.2
=================== ===================
Convenience store revenues increased $0.5 million, or 0.2%, in the
current year first three fiscal quarters primarily due to a 1.9% increase
in comparable store sales, mostly offset by a reduction of approximately
70 underperforming stores in the current year first three fiscal
quarters. For the third fiscal quarter alone, convenience store revenues
decreased by $1.7 million or 1.95%, primarily due to a reduction of
approximately 60 underperforming stores, partially offset by a 0.8%
increase in comparable store sales. Although the reduction in stores had
a negative impact on revenues, they did not have a material adverse
effect on results of operations, since the majority of stores closed or
sold had been operating at a loss.
Gasoline revenues increased $14.8 million in the current year first
three fiscal quarters as compared to the prior year first three fiscal
quarters due to an increase in the average selling price of gasoline of
8.3 cents per gallon, combined with an increase in total gasoline gallons
sold of 0.9 million. For the current year third fiscal quarter alone,
gasoline revenues increased $4.2 million due to an increase in the
average selling price of gasoline of 10.8 cents per gallon, partially
offset by a decrease in gasoline gallons sold of 1.3 million. On a per
location basis, average gallons sold increased by 6.6% and 1.8% in the
current year first three fiscal quarters and third fiscal quarter,
respectively, as compared to the corresponding periods of the prior year.
The increase in the average store gallons sold was due to the further
development of new stores having a major gasoline presence and the
remodeling and expansion of gasoline facilities at certain existing
locations offset by the closure of certain low volume gasoline locations.
Gross Profits
Gross profits for the current year first three fiscal quarters and
for the current year third fiscal quarter increased by $0.4 million from
the corresponding periods of the prior year. A summary of the gross
profits by functional area for the comparative third fiscal quarter and
the first three fiscal quarters is as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- --------------------
Nov 2, Oct 28, Nov 2, Oct 28,
(in millions) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Convenience store $ 31.7 $ 33.5 $ 95.9 $ 97.9
Gasoline 7.3 6.4 19.4 18.3
Other 2.0 0.7 3.6 2.3
------------------- -------------------
Total $ 41.0 $ 40.6 $118.9 $118.5
=================== ===================
Convenience store gross profits decreased by $2.0 million in the
current year first three fiscal quarters as compared to the prior year
first three fiscal quarters, and convenience store gross profits for the
current year third fiscal quarter decreased by $1.8 million as compared
to the prior year third fiscal quarter. These decreases were primarily
due to lower product gross margins and due to the overall reduction in
the average number of stores, as described above, partially offset by
increased marketing allowances and an increase in comparable store sales,
as described above.
Gasoline gross profits increased by $1.1 million in the current
year first three fiscal quarters as compared to the prior year first
three fiscal quarters and gasoline gross profits in the current year
third fiscal quarter increased by $0.9 million as compared to the prior
year third fiscal quarter. These increases were due to a gasoline excise
tax rebate due the Company of $1.2 million from the state of Kentucky
since the Kentucky Supreme Court ruled that these taxes were improperly
assessed and collected. Excluding the excise tax rebate discussed above,
gasoline gross profits for the current year first three fiscal quarters
and the third fiscal quarter decreased by $0.1 million and $0.3 million,
respectively, as compared to the corresponding periods of the prior year.
The decrease in the current year first three fiscal quarters as compared
to the corresponding period of the prior year was due to a decrease of
0.13 cents in gross profit per gallon, partially offset by an increase in
gasoline gallons sold, as described above. The decrease in the current
year third fiscal quarter as compared to the corresponding period of the
prior year was due to a decrease of 0.3 cents in gross profit per gallon,
combined with a decrease in gasoline gallons sold, as described above.
Other gross profits increased by $1.3 million in the current year
first three fiscal quarters and for the current year third fiscal quarter
as compared to the corresponding periods of the prior year. These
increases were due to the recognition of a $0.4 million one-time license
fee earned upon the start up of a foreign consulting agreement and
approximately $0.8 million in interest income associated with the excise
tax rebate discussed above.
Operating and Administrative Expenses
Operating and administrative expenses for the current year first
three fiscal quarters decreased $1.5 million from the prior year first
three fiscal quarters, and operating and administrative expenses for the
third fiscal quarter decreased by $0.9 million from the prior year third
fiscal quarter. A summary of expenses by functional area for the
comparative third fiscal quarter and the first three fiscal quarters is
as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- --------------------
Nov 2, Oct 28, Nov 2, Oct 28,
(in millions) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Convenience store $ 25.0 $ 25.0 $ 74.6 $ 74.0
Gasoline 3.4 3.2 10.4 9.6
Administrative and other 9.6 10.7 22.3 25.2
------ ------ ------ ------
Total $ 38.0 $ 38.9 $107.3 $108.8
======= ====== ====== ======
Convenience store operating expenses increased by $0.6 million in
the current year first three fiscal quarters, and convenience store
operating expenses remained constant in the current year third fiscal
quarter as compared to the corresponding periods of the prior year due to
higher labor, rent and depreciation costs on a per store basis, partially
offset by the closure or sale of underperforming stores as described
above.
Gasoline operating expenses increased by $0.8 million in the
current year first three fiscal quarters as compared to the prior year
first three fiscal quarters, and gasoline operating expenses increased by
$0.2 million in the current year third fiscal quarter as compared to the prior
year third fiscal quarter. These increases were due to the operation of
higher volume new or remodelled and expanded facilities, as described
above combined with an increase in environmental expenses associated with
the remediation of gasoline locations after considering probable
reimbursements from various state environmental trust funds.
Administrative and other expenses decreased by $2.9 million in the
current year first three fiscal quarters, and administrative and other
expenses decreased by $1.1 million in the current year third fiscal
quarter as compared to the corresponding periods of the prior year. Both
the current year first three fiscal quarters and third fiscal quarter
were favorably impacted by a reduction of $1.8 million and $1.5 million,
respectively, of costs and expenses associated with corporate governance
issues, restructuring initiatives and other operating costs. In
addition, administrative and other expenses decreased in the current year
first three fiscal quarters as compared to the corresponding period of
the prior year primarily due to lower professional fees and reduced
administrative support costs. The decrease in professional fees was due
to a $0.6 million payment to the Company from the settlement of
previously pending litigation.
Interest Expense and Taxes
Interest expense increased in the current year first three fiscal
quarters and the third fiscal quarter as compared to the corresponding
periods of the prior year due to an increased level of borrowing
associated with the issuance of $13.5 million principal amount of 10.25%
senior subordinated notes (Series B) in December 1995.
The effective tax rate for the Company was a provision of 40% for
both the current year first three fiscal quarters and the current year
third fiscal quarter as compared to a provision of 40% for the prior year
first three fiscal quarters and a benefit of 40% for the prior year third
fiscal quarter. The Company provides for income taxes at the effective
rate expected to be incurred for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since most of
its revenues are received in cash. The amount of cash generated from
operations in the current year first three fiscal quarters significantly
exceeded the current debt service requirements of the Company's long-term
obligations. The capital expenditures of the Company are primarily
funded by the excess operating cash flow and by the cash generated from
the sale of certain assets. In addition, the Company has a revolving line
of credit available to address the timing of certain working capital and
capital expenditure disbursements. Management believes that the cash
flow from operations and the proceeds from the sale of certain assets,
supplemented by the availability of a revolving line of credit, will
provide the Company with adequate liquidity and the capital necessary to
achieve its expansion initiatives in its retail operations (see Capital
Expenditures).
Cash Provided by Operating Activities
During the current year first three fiscal quarters, net cash
generated by operations was $2 million lower than the prior year first
three fiscal quarters. This decrease was primarily due to a net
unfavorable change in accounts and notes receivable and inventory,
partially offset by a net favorable change in other assets and
liabilities, net of the change in deferred income taxes, improved results
of operations in the current year first three fiscal quarters (see
Results of Operations) and reduced cash outflows in the current fiscal
year related to certain costs and expenses associated with corporate
governance issues, restructuring initiatives and other operating costs.
The net unfavorable change in accounts and notes receivable was due to a
reduction in accounts and notes receivable in the prior year as compared
to an increase in the current year from a gasoline excise tax rebate due
the Company (see Results of Operations). The net unfavorable change
associated with inventory was due to a reduced amount of inventory
liquidations in the current year associated with store closures or sales
of underperforming stores. The net unfavorable change in other assets
and liabilities, net of the change in deferred income taxes, was due to
the receipt of marketing allowances from a grocery wholesaler under the
terms of a new supply agreement which expires in fiscal 2006. The
Company is deferring these marketing allowances over the life of the
agreement.
During the current year first three fiscal quarters, the Company
paid its trade payables in an average of 26 days, compared to 27 days for
both the fiscal year ended February 3, 1996 and for the prior year first
three fiscal quarters. The cash flow of the Company is also favorably
impacted by the Company's use of funds from the sale of money orders,
pending remittance of such funds to the issuer of the money orders. As
of November 2, 1996 and February 3, 1996, the amounts due the issuer were
$7.9 million and $7.6 million, respectively.
Cash Used by Financing Activities
Cash provided by financing activities increased by $1.5 million in
the current year first three fiscal quarters as compared to the
corresponding period of the prior year primarily due to lower debt
service requirements and due to an increase in the Company's long-term
obligations.
During the current year first three fiscal quarters, the Company
entered into a new $30.0 million senior revolving credit facility with
$15.0 million available for the issuance of letters of credit. The
Company may utilize the new revolving credit facility as needed for
working capital and general corporate purposes. As of November 2, 1996
the Company had no outstanding revolving credit loans and had $5.6
million in outstanding letters of credit.
Cash Used by Investing Activities
Net cash used by investing activities increased by $16.9 million in
the current year first three fiscal quarters as compared to the
corresponding period of the prior year due to reduced cash flows
generated from the sale of certain assets. In addition, the Company
increased its capital expenditures with respect to new store construction
and remodeling of existing store locations. Finally, the Company's
investing activities included the purchase in the current year first
fiscal quarter of a U.S. Treasury Bill.
Capital Expenditures
The Company anticipates spending approximately $20 to $25 million
for capital expenditures in fiscal 1997 by purchasing store and gasoline
equipment for new stores, remodeling a certain number of existing stores,
installing fast food concepts, such as Taco Bell , Subway and Pizza Hut
in the new and remodeled stores, installing store automation in a number
of locations, significantly upgrading certain gasoline locations to
provide credit card readers at the pump, improve outdoor lighting and to
meet current environmental standards (see Environmental Responsibility).
These capital expenditures will be funded primarily by the Company's
available cash, cash generated from operations and by cash generated from
the disposition of assets held for sale, supplemented by the availability
of the Company's senior revolving line of credit. The Company intends to
lease the real estate for the majority of new store locations.
Other Liquidity Item
During fiscal 1996, the Company acquired a $10,000,000 note
receivable (Note) from DM Associates Limited Partnership (DM Associates)
collateralized by 1,220,000 shares of the Company's Class B Common Stock
(Pledged Shares). This Note is due and payable in September 1997 and if
collected, would favorably impact the liquidity of the Company. The
Company does not, however, currently anticipate collection of this Note
and may therefore take direct ownership and control of the Pledged Shares
in full satisfaction of the Note. If the Pledged Shares are acquired
from DM Associates, it is the current intention of the Company to retire
such shares.
Environmental Responsibility
The Company accrues its estimate of all costs to be incurred for
assessment and remediation with respect to releases of regulated
substances from existing and previously operated retail gasoline
facilities. As of November 2, 1996, the Company had recorded an accrual
of $1,868,000 for such costs, the majority of which are anticipated to be
spent over the next 3 to 5 years.
The Company is entitled to reimbursement of a portion of the above
costs from various state environmental trust funds based upon compliance
with the terms and conditions of such trust funds. As of November 2,
1996, the Company has recorded a net state trust fund reimbursement
receivable of $1,381,000 (representing a gross receivable of $2,141,000
less an allowance of $760,000). Although there are no assurances as to
the timing, the Company believes that it is probable that reimbursements
from state environmental trust funds will be received within one to four
years from the payment of the reimbursable assessment and remediation
expenses.
In addition, the Company estimates that future capital expenditure
requirements to comply with federal and state underground gasoline
storage tank regulations will be approximately $10.0 to $12.0 million in
the aggregate through December 1998. These costs could be reduced for
low volume locations closed in lieu of the capital cost of compliance.
The Company's estimate of costs to be incurred for environmental
assessment and remediation and for required underground storage tank
upgrading and other regulatory compliance are based on factors and
assumptions that could change due to modifications of regulatory
requirements or detection of unanticipated environmental conditions.
Part II.
Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
1. Exhibit (3.ii)- Amended and Restated By-Laws.
2. Exhibit (11)- Statement re Computation of Per-Share
Earnings.
3. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
(b.) 8-K Reports:
During the third quarter of fiscal 1997, the Company filed no
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
Date: December 17, 1996 /s/ Gregory G. Landry
Gregory G. Landry
Executive Vice President
Chief Financial Officer