SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
- ---
X Quarterly Report Pursuant to Section 13 or
- ---
15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended October 28, 1995
----------------
- --- 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 0-12497
DAIRY MART CONVENIENCE STORES, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2497894
- ------------------------------- ---------------------------------
(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE VISION DRIVE, ENFIELD, CT 06082
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 741-4444
--------------
N/A
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Shares of Class A Common Stock outstanding October 28, 1995 - 2,800,934
Shares of Class B Common Stock outstanding October 28, 1995 - 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
------------------------ ------------------------
OCTOBER 28, OCTOBER 29, OCTOBER 28, OCTOBER 29,
1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------
Net Sales of the Company,
Its Subsidiaries and Franchises................. $ 181,935 $ 197,543 $ 542,928 $ 581,139
- ---------------------------------------------------------------------------------------------------------
Revenues......................................... $ 143,492 $ 157,067 $ 428,194 $ 460,135
----------- ----------- ---------- ----------
Cost of goods sold and expenses:
Cost of goods sold.............................. 102,878 114,620 309,649 340,580
Selling, general and administrative
expenses....................................... 36,770 38,415 106,325 113,186
Interest expense................................ 2,359 2,361 6,982 6,995
Loss (gain) on disposition of
properties, net................................ (38) 297 54 643
Nonrecurring charges............................ 2,197 750 2,450 3,953
----------- ----------- ---------- ----------
144,166 156,443 425,460 465,357
----------- ----------- ---------- ----------
Income (loss) before income taxes
and cumulative effect of
accounting change............................ (674) 624 2,734 (5,222)
Benefit (provision) from income taxes............ 269 (256) (1,231) 2,110
----------- ----------- ---------- ----------
Income (loss) before cumulative
effect of accounting change.................. (405) 368 1,503 (3,112)
Cumulative effect of accounting change
(net of income tax benefit of $271)........... - - - (389)
----------- ----------- ---------- ----------
Net income (loss)............................. $ (405) $ 368 $ 1,503 $ (3,501)
- ---------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 5,582 5,545 5,823 5,538
----------- ----------- ---------- ----------
Earnings (loss) per share:
Before cumulative effect of
accounting change.............................. $ (0.07) $ 0.07 $ 0.26 $ (0.56)
Cumulative effect of accounting change.......... - - - (0.07)
----------- ----------- ---------- ----------
Earnings (loss) per share........................ $ (0.07) $ 0.07 $ 0.26 $ (0.63)
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
OCTOBER 28, 1995 JANUARY 28, 1995
- -----------------------------------------------------------------------------------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash................................................. $ 15,666 $ 4,512
Short-term investment................................ 2,131 2,053
Accounts and notes receivable........................ 10,997 12,398
Inventory............................................ 19,820 26,044
Prepaid expenses and other current assets............ 2,516 1,945
Deferred income taxes................................ 2,051 3,537
------------ ------------
Total current assets.............................. 53,181 50,489
------------ ------------
NET BOOK VALUE OF PROPERTY AND EQUIPMENT HELD FOR SALE.... 9,874 23,378
------------ ------------
PROPERTY AND EQUIPMENT:
Land and improvements................................ 9,178 9,180
Buildings and leaseholds............................. 31,913 31,370
Equipment............................................ 70,307 59,358
------------ ------------
111,398 99,908
Less - Accumulated depreciation...................... 35,733 30,345
------------ ------------
Net property and equipment........................ 75,665 69,563
------------ ------------
PROPERTY UNDER CAPITAL LEASES, NET........................ 1,545 1,015
------------ ------------
OTHER ASSETS:
Goodwill, net........................................ 10,393 10,647
Franchise and operating rights, net.................. 7,059 7,314
Notes receivable..................................... 2,466 2,494
Other................................................ 6,496 7,328
------------ ------------
Total other assets................................ 26,414 27,783
------------ ------------
TOTAL ASSETS.............................................. $ 166,679 $ 172,228
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................... $ 1,285 $ 1,285
Current portion of capital lease obligations......... 418 285
Accounts payable..................................... 29,939 28,942
Accrued expenses..................................... 11,198 17,214
Accrued interest..................................... 1,062 3,052
------------ ------------
Total current liabilities......................... 43,902 50,778
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION ABOVE................ 86,125 87,324
------------ ------------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION ABOVE..... 1,749 1,374
------------ ------------
OTHER LIABILITIES AND DEFERRED CREDITS.................... 5,736 6,837
------------ ------------
DEFERRED INCOME TAXES..................................... 4,754 3,098
------------ ------------
STOCKHOLDERS' EQUITY:
Class A Common Stock................................. 33 33
Class B Common Stock................................. 30 30
Paid-in capital in excess of par value............... 27,673 27,580
Retained earnings.................................... 1,682 179
Treasury stock, at cost.............................. (5,005) (5,005)
------------ ------------
Total stockholders' equity........................ 24,413 22,817
------------ ------------
Total liabilities and stockholder's equity................ $ 166,679 $ 172,228
- -----------------------------------------------------------------------------------------------
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
-----------------------------------
OCTOBER 28, 1995 OCTOBER 29, 1994
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 1,503 $ (3,501)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cash flow effect of nonrecurring items......................... (2,310) 3,258
Cumulative effect of accounting change......................... - 389
Depreciation and amortization.................................. 9,060 9,336
Change in deferred income taxes................................ 3,142 (2,100)
Loss on other disposition of properties, net................... 54 643
Decrease (increase) in accounts and notes receivable........... 1,401 (467)
Decrease (increase) in inventory............................... 6,224 (756)
Increase in accounts payable................................... 997 1,485
(Decrease) increase in accrued interest........................ (1,990) 115
Increase in other current assets and liabilities, net.......... (4,565) (2,986)
(Decrease) increase in other noncurrent liabilities
and deferred credits......................................... (813) 496
---------- ----------
Net cash provided by operating activities.......................... 12,703 5,912
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investment................................ (78) (2,031)
Purchase of property and equipment............................... (13,820) (12,766)
Proceeds from sale of property and equipment..................... 13,817 638
Proceeds from long-term notes receivable......................... 729 972
Increase in long-term notes receivable........................... (701) (1,400)
(Increase) decrease in intangibles and other assets, net......... (69) 185
---------- ----------
Net cash used by investing activities.............................. (122) (14,402)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of senior subordinated notes, net of offering costs..... - 72,653
Repayment of term debt........................................... - (22,000)
Retirement of subordinated debentures............................ - (27,944)
Decrease in revolving loan, net.................................. - (12,100)
Additional long-term debt........................................ - 1,362
Repayment of other long-term debt and capital lease obligations.. (1,520) (1,300)
Increases in common stock and paid-in capital.................... 93 81
---------- ----------
Net cash (used) provided by financing activities................... (1,427) 10,752
---------- ----------
Increase in cash................................................... 11,154 2,262
Cash at beginning of fiscal year................................... 4,512 6,632
---------- ----------
CASH AT END OF THIRD FISCAL QUARTER................................ $ 15,666 $ 8,894
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 28, 1995
(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, filed with the Securities and Exchange Commission on
May 15, 1995.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in accordance
with the accounting policies described in Note 1 to the January 28, 1995 audited
consolidated financial statements included in the Company's Form 10-K. 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 October 28, 1995 follows:
COMMON STOCK
--------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES PAID-IN-CAPITAL
ISSUED AT ISSUED AT IN EXCESS OF
$.01 PAR VALUE $.01 PAR VALUE AMOUNT PAR VALUE
-------------- -------------- --------------- ---------------
Balance January 28, 1995 3,290,460 2,961,953 $ 62,526 $ 27,579,716
Employee stock purchase plan 13,038 - 129 48,914
Stock options exercised 16,125 - 161 44,182
Exchange of Class B shares
for Class A shares
2,936 (2,936) - -
Balance October 28, 1995 ----------- ----------- ---------- --------------
3,322,559 2,959,017 $ 62,816 $ 27,672,812
----------- ----------- ---------- --------------
As of October 28, 1995, 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 2,800,934 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.
4. Seasonality
-----------
The results of operations for the third fiscal quarter ended October 28,
1995 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. Nonrecurring Charges
--------------------
A summary of nonrecurring charges for the third fiscal quarter and the
three fiscal quarters ended October 28, 1995 and October 29, 1994 is as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ---------------------
OCT 28, OCT 29, OCT 28, OCT 29,
1995 1994 1995 1994
- --------------------------------------------------------------- ---------------------
(IN THOUSANDS)
Expenses associated with purchase
of majority shareholder's interest.. $ 945 $ - $ 945 $ -
Costs of store closings................ 500 - 740 518
Costs to divest of dairy
manufacturing and distribution
operations.......................... 752 - 765 -
Regulatory and financing fees
and expenses........................ - - - 285
Administrative severance,
settlement and related costs........ - 750 - 2,550
Writedown of non-operating
properties to net realizable
value............................... - - - 600
--------------------- ---------------------
Total $ 2,197 $ 750 $ 2,450 $ 3,953
===================== =====================
During the current year third fiscal quarter, the Company incurred
$945,000 in legal and professional fees associated with the purchase of a former
majority shareholder's interest in the Company (see Note 6). The further effects
of such purchase will be reflected in the fourth fiscal quarter financial
statements of the Company.
In the prior fiscal year, the Company recorded a nonrecurring charge for
costs associated with the sale or closing of 143 of its retail convenience
stores and the closing of 81 of its retail gasoline facilities. During the
current year three fiscal quarters, the Company has incurred $740,000 of costs
in excess of the previously recorded estimate to close or sell such stores. Such
costs relate, in part, to disposal of equipment, inventory and leases associated
with closed stores and the removal of underground storage tanks associated with
the closed gasoline facilities.
In the prior fiscal year, the Company recorded a nonrecurring charge for
costs associated with the discontinuance and sale of its dairy manufacturing and
distribution operations. During the current year three fiscal quarters, the
Company has incurred $765,000 of costs in excess of the previously recorded
estimate to close and sell such operations.
In the prior fiscal year, the Company incurred $285,000 in nonrecurring
duplicative interest expense, net of interest income, due to the issuance of the
Company's 10.25% senior subordinated notes on March 3, 1994 and the subsequent
retirement of the Company's 14.25% subordinated debentures on April 4, 1994.
In the prior year three fiscal quarters, the Company recorded
nonrecurring charges of $2,550,000 for costs, including legal expenses,
associated with the removal of the Company's former president and Chief
Executive Officer by the Board of Directors, and the settlement of legal
disputes arising therefrom and severance and other personnel related costs
associated with a reduction in other administrative support positions by the
Company.
6. Subsequent Events
-----------------
Subsequent to the end of the current year third fiscal quarter, the
Company consummated the purchase of the interests of Charles Nirenberg and
certain of his affiliates (collectively, "Nirenberg") in DM Associates Limited
Partnership (the "Nirenberg Transaction"). Nirenberg's interests in the limited
partnership included limited partnership interests and a promissory note secured
by 1,220,000 shares of the Company's Class B Common Stock.
The aggregate cash consideration paid by the Company to Nirenberg for
their interests in the limited partnership, including the note, was $10,000,000.
In addition, Dairy Mart agreed to pay Nirenberg $2,300,000 in consideration of
certain matters, including Nirenberg waiving certain claims against the Company,
Nirenberg executing a non-compete agreement and Nirenberg allowing Dairy Mart to
use his name and likeness in advertising and marketing materials. Dairy Mart
also agreed to reimburse Nirenberg for up to $850,000 of previously unreimbursed
fees and expenses incurred in connection with activities relating to Dairy Mart.
In order to finance the transaction, the Company issued $13,500,000
aggregate principal amount of its 10-1/4% Senior Subordinated Notes (Series B)
due 2004 (the "Series B Notes"). The Series B Notes have substantially the same
terms and conditions as the Company's current $75,000,000 10-1/4% Senior
Subordinated Notes (Series A) due 2004 (the "Series A Notes"). The Indenture
pursuant to which the Company issued the Series A Notes has been amended and
restated so as to also apply to the Series B Notes. The Series B noteholders
also acquired warrants (the "Warrants") with a six year maturity to purchase
1,215,000 shares of the Company's Class A Common Stock at $6.95 per share. The
exercise price may be adjusted to 110% of the market price of the Company's
Class A Common Stock one year after the issuance of the Warrants, if such
adjustment results in a decrease of the exercise price.
The Company has also agreed to register the Warrants and the underlying
Class A Common Stock for sale with the Securities and Exchange Commission at the
Company's expense. Failure to so register the Warrants and underlying Class A
Common Stock may cause the interest rate on the Series B Notes to increase in
increments to a maximum rate of 11-3/4%.
The Company also obtained from the holders of a majority of the Company's
Series A Notes
a consent to the Nirenberg Transaction and a waiver of certain alleged events
of default. For such consent and waiver, the Company issued to all of the
holders of the Series A Notes, Warrants with a six year maturity to purchase
500,000 shares of the Company's Class A Common Stock at $6.95 per share. Such
Warrants to purchase 500,000 shares of Class A Common Stock have substantially
the same provisions as the Warrants to purchase 1,215,000 shares of Class A
Common Stock.
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY RESULTS OF OPERATIONS
The Company's net income for the first three fiscal quarters ended
October 28, 1995 was $1.5 million as compared to a net loss of $3.1 million in
the first three fiscal quarters of the prior year. The three fiscal quarters and
third fiscal quarter of both years included nonrecurring charges as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ---------------------
OCT 28, OCT 29, OCT 28, OCT 29,
(IN MILLIONS) 1995 1994 1995 1994
- ---------------------------------------------------------------- ---------------------
Expenses associated with
purchase of majority
shareholder's interest $ 0.9 $ - $ 0.9 $ -
Costs of store closings 0.5 - 0.7 0.5
Costs to divest of dairy
manufacturing and
distribution operations 0.8 - 0.8 -
Regulatory and financing fees
and expenses - - - 0.3
Administrative severance,
settlement and related costs - 0.8 - 2.6
Writedown of non-operating
properties to net realizable
value - - - 0.6
-------------------- --------------------
Total $ 2.2 $ 0.8 $ 2.4 $ 4.0
==================== =====================
RESULTS OF OPERATIONS
REVENUES
Revenues for the current year first three fiscal quarters decreased by
$31.9 million from the prior year first three fiscal quarters and revenues for
the current year third fiscal quarter decreased by $13.6 million from the prior
year third fiscal quarter. A summary of revenues by operating area for the
comparative third fiscal quarter and the three fiscal quarters is as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ---------------------
OCT 28, OCT 29, OCT 28, OCT 29,
(IN MILLIONS) 1995 1994 1995 1994
- -------------------------------------------------------- ---------------------
Convenience store $ 87.3 $ 93.3 $256.8 $277.2
Gasoline 55.5 55.9 169.1 159.5
Manufacturing and distribution - 7.5 - 21.8
Other .7 .4 2.3 1.6
-------------------- ---------------------
Total $143.5 $157.1 $428.2 $460.1
==================== =====================
Convenience store revenues decreased $20.4 million, or 7.4%, in the
current year first three fiscal quarters as compared to the prior year first
three fiscal quarters, and convenience store revenues for the current year third
fiscal quarter decreased by $6.0 million as compared to the prior year third
fiscal quarter. These decreases are primarily due to the closing or sale of
approximately 120 underperforming stores. Although such closures had a negative
impact on revenues, they did have a material favorable effect on the results
from operations, since the majority of stores closed or sold had been operating
at a loss.
Gasoline revenues increased $9.6 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 5.8 cents per gallon
combined with an increase in total gasoline gallons sold of 630,000. The
increase in gasoline gallons sold was due to 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. Gasoline revenues decreased $400,000 in the current
year third fiscal quarter as compared to the prior year third fiscal quarter due
to a decrease in
the average selling price of 0.5 cents per gallon combined with a decrease in
total gasoline gallons sold of 94,000 resulting from the closure of low volume
gasoline locations described above.
Manufacturing and distribution revenues are not reflected in the current
year first three fiscal quarters and the current year third fiscal quarter as
compared to the corresponding periods of the prior fiscal year due to the
closing and divestiture of the Company's dairy manufacturing and distribution
operations in the current fiscal year.
GROSS MARGINS
Gross margins for the current year first three fiscal quarters decreased
$1.1 million from the prior year first three fiscal quarters and gross margins
for the current year third fiscal quarter decreased $1.8 million from the prior
year third fiscal quarter. A summary of the gross margins by operating area for
the comparative third fiscal quarter and the three fiscal quarters is as
follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ----------------------
OCT 28, OCT 29, OCT 28, OCT 29,
(IN MILLIONS) 1995 1994 1995 1994
- -------------------------------------------------------- ----------------------
$ 33.5 $ 34.5 $ 97.9 $ 99.8
Convenience store
Gasoline 6.4 7.3 18.3 17.5
Manufacturing and distribution - .2 - .7
Other .7 .4 2.3 1.6
---------------------- ----------------------
Total $ 40.6 $ 42.4 $ 118.5 $119.6
====================== ======================
Convenience store gross margins decreased by $1.9 million in the current
year first three fiscal quarters as compared to the prior year first three
fiscal quarters, and convenience store gross margins for the current year third
fiscal quarter decreased $1.0 million as compared to the prior year third fiscal
quarter. These decreases were due to the reduction in the number of stores
described above, offset by improved product gross margins and higher lottery
commissions.
Gasoline gross margins increased by $800,000 in the current year first
three fiscal quarters as compared to the prior year first three fiscal quarters
and gasoline gross margins decreased by $900,000 in the current year third
fiscal quarter as compared to the prior year third fiscal quarter. The increase
for the current year first three fiscal quarters is primarily due to an increase
of 0.5
cents in gross margin per gallon. The decrease for the current year third fiscal
quarter is due to a decrease of 1.6 cents in gross margin per gallon combined
with the decrease in gasoline gallons sold as described above.
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses for the current year first three fiscal quarters
decreased $4.3 million from the prior year first three fiscal quarters. General
and administrative expenses for the current year first three fiscal quarters
decreased $2.6 million from the prior year first three fiscal quarters. For the
current year third fiscal quarter alone, selling expenses decreased $1.3 million
and general and administrative expenses decreased $300,000 as compared to the
corresponding period of the prior year. A summary of selling expenses by
operating area and general and administrative expenses for the comparative third
fiscal quarter and the three fiscal quarters is as follows:
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
-------------------- --------------------
OCT 28, OCT 29, OCT 28, OCT 29,
(IN MILLIONS) 1995 1994 1995 1994
- --------------------------------------------------- --------------------
Convenience store $ 25.1 $ 26.6 $ 74.1 $ 79.0
Gasoline 3.2 3.0 9.6 9.0
-------------------- --------------------
28.3 29.6 83.7 88.0
General and
administrative expenses 8.5 8.8 22.6 25.2
-------------------- --------------------
Total $ 36.8 $ 38.4 $106.3 $113.2
==================== ====================
Convenience store selling expenses decreased $4.9 million in the current
year first three fiscal quarters as compared to the prior year first three
fiscal quarters, and convenience store selling expenses decreased $1.5 million
for the current year third fiscal quarter as compared to the prior year third
fiscal quarter. These decreases were due to the closure or sale of
underperforming stores as described above, partially offset by higher labor and
rent costs on a per store basis.
Gasoline selling expenses increased $600,000 in the current year first
three fiscal quarters as compared to the prior year first three fiscal quarters
and gasoline selling expenses increased $200,000 in the current year third
fiscal
quarter as compared to the prior year third fiscal quarter. These increases were
primarily due to the operation of new or remodeled expanded facilities as
described above combined with increased environmental expenses associated with
the remediation of gasoline locations after considering expected reimbursements
from various state environmental trust funds.
General and administrative expenses decreased in the current year first
three fiscal quarters and the current year third fiscal quarter as compared to
the corresponding periods of the prior year primarily due to a reduced level of
administrative support staff.
INTEREST EXPENSE AND TAXES
Interest expense remained relatively constant in the current year first
three fiscal quarters as compared to the prior year first three fiscal quarters.
The effective tax rate for the Company was a provision of 45% for the
current year first three fiscal quarters as compared to a benefit of 40% for
prior year first three fiscal quarters, and a benefit of 40% for the current
year third fiscal quarter as compared to a provision of 41% 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 debt and capital lease
obligations. Additional cash flow was generated in the current fiscal year from
the sale of certain assets, including the sale and leaseback of 17 existing
store properties. In addition, the Company has a revolving line of credit
available, although not currently utilized, to address the timing of certain
working capital disbursements. Management believes that the cash flow from
operations and the sale of certain underperforming and non-operating assets will
provide the Company with ample liquidity and the capital necessary to achieve
the anticipated expansion in its retail operations (see Capital Expenditures).
For information with respect to the issuance of $13,500,000 aggregate principal
amount of the Company's 10-1/4% Senior Subordinated Notes (Series B) due 2004,
see Part II - OTHER INFORMATION.
CASH PROVIDED BY OPERATING ACTIVITIES
During the current year first three fiscal quarters, net cash generated by
operations was $6.8 million higher than the prior year first three fiscal
quarters. This increase was primarily due to the improved results of operations
in the current year first three fiscal quarters as compared to the prior year
first three fiscal quarters (see RESULTS OF OPERATIONS) and to cash provided
from working capital through the collection of certain accounts receivable and
the liquidation of certain inventories associated with asset divestitures.
During the current year first three fiscal quarters, the Company paid its
trade payables in an average of 25 days, which compares to 24 days for the
fiscal year ended January 28, 1995 and 25 days 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 October 28, 1995 and January 28,
1995, the amounts due the issuer of the money orders were $6.7 million and $5.3
million, respectively. The Company's remittance obligation to the issuer of the
money orders is primarily secured by an outstanding letter of credit in the
amount of $7.5 million.
CASH PROVIDED BY FINANCING ACTIVITIES
During the current year first three fiscal quarters, net cash of $1.4
million was used primarily to repay long-term debt and capital lease
obligations. During the prior year first three fiscal quarters, net cash of
$10.8 million was provided from the issuance of the Notes and the subsequent
repayment of the indebtedness under a bank term loan and bank revolving loan and
to redeem in full the Company's 14.25% subordinated debentures.
During the current year first fiscal quarter, management finalized an
amendment of the Company's senior credit facility temporarily reducing the total
availability to $20.0 million with $15.0 million available for the issuance of
letters of credit. As of October 28, 1995, the Company had no outstanding
revolving credit loans under the amended credit facility, but did have $13.8
million of letters of credit outstanding thereunder. The Company may utilize the
amended credit facility as needed for working capital and general corporate
purposes.
CASH USED BY INVESTING ACTIVITIES
During the current year first three fiscal quarters, net cash of $122,000
was used by investing activities. The receipt of $13.8 million in proceeds from
the sale of certain assets, as described above, offset the use of $13.8 million
to fund the Company's capital expenditures. Consistent with the Company's
overall objective to strengthen its investment in retail operations, proceeds
from the sale of assets and cash generated from operations will be used to fund
future capital expenditures of the Company including the development of new
stores and the upgrading and remodeling of existing stores.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $18 million for capital
expenditures in the current fiscal year ending February 3, 1996 by purchasing
store and gasoline equipment for new store locations, remodeling a limited
number of its existing stores, introducing certain branded fast food concepts in
a
number of stores, and significantly upgrading certain gasoline locations to
include the installation of credit card readers at the pump, to improve outdoor
lighting and to meet current environmental standards (see Environmental
Responsibility).
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 October 28,
1995, the Company had recorded an accrual of $2,086,000 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 October 28, 1995, the Company
has recorded a net state trust fund reimbursement receivable of $1,066,000
(representing a gross receivable of $1,244,000 less an allowance of $178,000).
Although there are no assurances as to the timing, the Company anticipates
receiving reimbursements from the state environmental trust funds 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 $12.0 to $16.0 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 5. OTHER INFORMATION
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a. ISSUANCE OF $13.5 MILLION OF NOTES. On December 1, 1995, the Company
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issued $13.5 million aggregate principal amount of its 10-1/4% Senior
Subordinated Notes (Series B) due 2004 (the "Series B Notes"). The Series B
Notes have substantially the same terms and conditions as the Company's current
$75,000,000 10-1/4% Senior Subordinated Notes (Series A) due 2004 (the "Series A
Notes"). The Indenture pursuant to which the Company issued the Series A Notes
has been amended and restated so as to also apply to the Series B Notes.
In conjunction with the issuance of the Series B Notes, the Company issued
to the purchasers of the Series B Notes, warrants to purchase 1,215,000 shares
of the Class A Common Stock of the Company (the "Warrants"). The Warrants may be
exercised at any time during the next 6 years. The initial exercise price of the
Warrants is $6.95 per share, but the exercise price may be adjusted to 110% of
the market price of the Company's Class A Common Stock one year after the
issuance of the Warrants, if such adjustment results in a decrease of the
exercise price. The exercise price will also be adjusted upon the occurrence of
various events, including stock dividends and issuances of Common Stock by the
Company for a per share price less than the exercise price of the Warrants or
less than the then current market value of the Company's Class A Common Stock.
The Company has also agreed to register the Warrants and the underlying
Class A Common Stock for sale with the Securities and Exchange Commission, at
the Company's expense. Failure to so register the Warrants and underlying Class
A Common Stock may cause the interest rate to increase in increments to a
maximum rate of 11-3/4%.
b. PURCHASE BY THE COMPANY OF INTERESTS IN DM ASSOCIATES. The proceeds
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of the Series B Notes were primarily used to fund the obligations of the Company
under an Agreement dated October 30, 1995, as amended December 1, 1995 (the
"Nirenberg Agreement"), by and among the Company, Charles Nirenberg, and certain
of his affiliates (collectively, "Nirenberg"),
pursuant to which, among other things, the Company purchased for $10 million (i)
all of Nirenberg's limited partnership interests in DM Associates Limited
Partnership ("DM Associates"), and (ii) a promissory note of DM Associates
payable to Nirenberg in the principal amount of $7.1 million, which note is
secured by a pledge of 1,220,000 shares of Class B Common Stock of the
Company owned by DM Associates. DM Associates owns 1,858,743 shares, or 60.7%,
of the Class B Common Stock of the Company.
Pursuant to the Nirenberg Agreement, the Company also paid to Nirenberg
$2.3 million in consideration of certain matters, including, Nirenberg's waiver
of certain alleged claims against the Company, Nirenberg allowing the Company to
use his name and likeness in advertising materials and Nirenberg's agreement
that he will not for a period of five years compete with the Company, solicit
employment of any employee of the Company, or interfere in a material manner
with any material business relationship between the Company and any third party.
The Company has also agreed to reimburse Nirenberg for up to $850,000 of
previously unreimbursed fees and expenses incurred in connection with the
activities relating to the Company.
Under the terms of the Nirenberg Agreement, Nirenberg withdrew as a
partner of New DM Management Associates I ("DM Management I") and New DM
Management Associates II ("DM Management II"), which were the general partners
of DM Associates. As a result, the remaining partners of DM Management I are
Robert B. Stein, Jr., the President and a director of the Company; Gregory G.
Landry, the Executive Vice President and a director of the Company; and Mitchell
J. Kupperman, a former officer and director of the Company, each of whom owns
one-third of the partnership interest of DM Management I. The remaining partners
of DM Management II dissolved DM Management II and therefore DM Management I is
the sole remaining general partner of DM Associates.
Mr. Kupperman's employment with the Company was terminated on December 1,
1995. In connection with the termination of Mr. Kupperman's employment and
Mr. Kupperman's waiver of certain alleged claims against the Company, the
Company paid $1,036,412 to Mr. Kupperman.
Effective December 1, 1995, Mr. Nirenberg and Mr. Kupperman each resigned
as officers and directors of the Company, and M. Harold Jacobsen and Thomas
O'Brien, temporary directors appointed by the Company pursuant to the Nirenberg
Agreement, also resigned as directors. Thomas W. Janes, a principal of Triumph
Capital Group, Inc., a holder of the Series B Notes, was appointed a director to
fill the vacancy created by Mr. Kupperman's registration.
Pursuant to the Partnership Agreement of DM Associates, DM Management I
has the right to vote all of the shares of Class B Common Stock owned by DM
Associates. Pursuant to the Partnership Agreement of DM Management I, the
holders of a majority of the partnership interest of DM Management I determines
how to vote 638,743 of the shares owned by DM Associates, and the remaining
1,220,000 shares will be voted for or against any motion or proposal in the same
proportion that the other Class B shares (including the 638,743 of DM
Associates) are voted.
The Company has agreed to indemnify Nirenberg against any liability or
expense incurred by them as a result of or in connection with the
transactions consummated pursuant to the Nirenberg Agreement.
c. ISSUANCE OF ADDITIONAL WARRANTS TO NOTEHOLDERS. In addition to the
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Warrants to purchase 1,215,000 shares of Class A Common Stock issued in
connection with the sale of the Series B Notes, as described above, the Company
issued Warrants to purchase 500,000 shares of Class A Common Stock to the
holders of the Series A Notes, in consideration of their waiving any rights that
they may have had as a result of any Change of Control, as defined in the
Indenture, that they may have occurred, and in consideration of their agreement
to certain amendments of the Indenture. Such Warrants to purchase 500,000 shares
of Class A Common Stock have substantially the same provisions as the Warrants
to purchase 1,215,000 shares of Class A Common Stock discussed above.
d. AMENDED CREDIT AGREEMENT. Contemporaneously with the consummation of
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the Nirenberg Agreement and the issuance of the Series B Notes, the Credit
Agreement among the Company, Society National Bank, and Fleet Bank, N.A. was
amended and restated. The Credit Agreement provides that the issuance of the
Series B Notes and the transactions provided for in the Nirenberg Agreement will
not constitute defaults under the Credit Agreement. The financial covenants in
the Credit Agreement have also been amended so as to reflect the anticipated
effect of the Company of the transactions provided for the Nirenberg Agreement.
Item 6. Exhibits and Reports on Form 8-K
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The following exhibits are filed as part of this report pursuant to Item
601 of Regulation S-K:
(a) EXHIBITS:
(4.1) Amended and Restated Indenture, dated as of December 1, 1995, by
and among the Company, Certain Subsidiaries of the Company, as
Guarantors, and First Bank National Association, as Trustee, is
filed as Exhibit 4.1 attached hereto.
(10.1) Note Purchase Agreement, dated as of December 1, 1995, between
the Company and the Purchasers Listed in the Schedule of
Purchasers therein, relating to 10-1/4% Senior Subordinated Notes
(Series B) due March 15, 2004, is filed as Exhibit 10-1 attached
hereto.
(10.2) Form of Stock Purchase Warrant to Subscribe for and Purchase
Shares of Class A Common Stock of the Company (Initially
Exercisable for an Aggregate of 1,215,000 Shares of Class A
Common Stock) is filed as Exhibit 10.2 attached hereto.
(10.3) Form of Stock Purchase Warrant to Subscribe for and Purchase
Shares of Class A Common Stock of the Company (Initially
Exercisable for an Aggregate of 500,000 Shares of Class A Common
Stock) is filed as Exhibit 10.3 attached hereto.
(10.4) Registration Rights Agreement, dated December 1, 1995, by and
among the Company and the Holders of (i) 10-1/4% Senior
Subordinated Notes (Series B) of the Company, due March 15, 2004,
and (ii) Warrants to Purchase 1,715,000 shares of Class A Common
Stock, par value $.01 per share, of the Company is filed as
Exhibit 10.4 attached hereto.
(10.5) Credit Agreement, dated as of February 25, 1994, Amending and
Restating the Credit Agreement, dated as of February 25, 1994, as
Amended to Date, by and among the Company, Society National Bank,
the Banks and Other Financial Institutions Listed on Schedule I
therein, and Society National Bank, as Successor Trustee, is
filed as Exhibit 10.5 attached hereto.
(10.6) Modification Agreement, dated as of December 1, 1995, by and
among the Company, Charles Nirenberg, FCN Properties Corporation,
The Nirenberg Foundation, Inc., formerly known as The Nirenberg
Family Charitable Foundation, Inc., Robert B.
Stein, Jr., and Gregory G. Landry is filed as Exhibit 10.6
attached hereto.
(10.7) Amended and Restated Letter Agreement, dated December 1, 1995, to
Mitchell J. Kupperman from the Company, Robert B. Stein, Jr., and
Gregory G. Landry is filed as Exhibit 10.7 attached hereto.
(10.8) DM Associates Limited Partnership Agreement, dated March 12,
1992. Incorporated herein by reference to Exhibit E of the
Schedule 13D, dated March 12, 1992, filed by DM Associates
Limited Partnership, DM Management Associates and Frank
Colaccino.
(10.9) First Amendment to Partnership Agreement of DM Associates Limited
Partnership, dated as of September 8, 1994. Incorporated herein
by reference to Exhibit F of the Schedule 13D, Amendment No. 4,
dated January 27, 1995, filed by DM Associates Limited
Partnership, New DM Management Associates I, New DM Management
Associates II, Charles Nirenberg, Robert B. Stein, Jr., Gregory
G. Landry, Mitchell J. Kupperman and Frank Colaccino.
(10.10) First Amendment to Partnership Agreement of New DM Management
Associates I, dated as of December 1, 1995, between Robert B.
Stein, Jr., Gregory G. Landry and Mitchell J. Kupperman is filed
as Exhibit 10.10 attached hereto.
(10.11) Partnership Agreement of New DM Management Associates I, dated
as of September 8, 1994. Incorporated herein by reference to
Exhibit G of the Schedule 13D, Amendment No. 4, dated January 27,
1995, filed by DM Associates Limited Partnership, New DM
Management Associates I, New DM Management Associates II, Charles
Nirenberg, Robert B. Stein, Jr., Gregory G. Landry, Mitchell J.
Kupperman and Frank Colaccino.
(27) Financial Data Schedule is filed as Exhibit 27 attached hereto.
(b) REPORTS ON FORM 8-K:
On August 28, 1995, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") in which the Company reported
certain matters related to litigation commenced by Charles Nirenberg and
Mitchell J. Kupperman against the Company and the Company's other directors in
the Delaware Chancery Court.
On September 29, 1995, the Company filed a Current Report on Form 8-K with
the SEC in which the Company reported that it had received notices from holders
of a majority of the outstanding principal amount of its 10 1/4% Senior
Subordinated Notes due 2004, stating that such holders believed a change of
control of the Company and a consequent event of default had occurred under the
indenture governing such Notes.
On October 31, 1995, the Company filed a Current Report on Form 8-K with
the SEC in which the Company reported that the Company, Charles Nirenberg, the
former Chairman of the Board of Directors and a Director of the Company, and
certain other parties executed Agreements settling certain disputes and
litigation between the parties.
No financial statements were filed with any of the Current Reports.
SIGNATURES
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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 12, 1995 /s/ Gregory G. Landry
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Gregory G. Landry
Executive Vice President
Chief Financial Officer