FORM 10-K
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 fiscal year ended FEBRUARY 3, 1996
[_] 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 (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
_______________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (Par Value $.01)
Class B Common Stock (Par Value $.01)
(Titles of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of April 1, 1996, 2,804,671 shares of Class A Common Stock and 2,783,060
shares of Class B Common Stock were outstanding, and the aggregate market value
of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES,
INC., held by nonaffiliates was approximately $22,027,309.00.
-2-
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1996 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal
year are incorporated by reference in Part III.
The Section entitled "INFORMATION REGARDING DM ASSOCIATES AND THE NIRENBERG
TRANSACTION" on pages 19 through 21 of the Registrant's Proxy Statement dated
December 26, 1995 is incorporated by reference into Part I of this Form 10-K.
PART I
------
ITEM 1. BUSINESS
GENERAL
Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or
"Dairy Mart"), operates one of the nation's largest convenience store chains.
Founded in 1957, the Company operates or franchises approximately 877 stores
under the "Dairy Mart" name in 11 states located in the Northeast, Midwest and
Southeast. Approximately 375 stores sell gasoline and approximately 290 stores
are franchised.
Dairy Mart stores offer a wide range of products and services which cater
to the convenience needs of its customers, including milk, ice cream, groceries,
beverages, snack foods, candy, deli products, publications, health and beauty
aids, tobacco products, lottery tickets and money orders. The stores are
typically located in densely populated, suburban areas on sites which are easily
accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli items,
coffee, fountain drinks and other fast food items.
The Company is incorporated in Delaware and maintains its principal
executive offices at One Vision Drive, Enfield, Connecticut 06082. The Company's
telephone number is (860) 741-4444.
STORES
The Company's stores are generally located in densely populated suburban
areas, and are situated close to single-family homes and apartments to attract
neighborhood shoppers. Store location, design, lighting and layout are intended
to cater to customers' desire for fast and convenient access. Approximately 375
locations also sell gasoline, which the Company believes is an important
convenience for customers. Shelving and displays, including refrigeration units,
deli and other fast food counters and displays, are designed to encourage
customers to purchase high profit margin products including impulse purchase
items such as candy, fountain drinks and ice cream novelties. Stores are located
on sites which are well-lit, easily accessible by customers and provide ample
parking. All of the Company's stores also offer extended hours for additional
convenience, with over one-half of the stores open 24 hours per day. A typical
Dairy Mart store ranges between 2,400 and 2,700 square feet and is a free
standing structure.
-3-
As of February 3, 1996, the Company operated and franchised retail
convenience stores in the following three regions of the United States:
NUMBER OF
NORTHEAST REGION STORES
---------
Massachusetts..................................................... 61
Connecticut....................................................... 56
New York.......................................................... 37
Rhode Island...................................................... 18
--------
Total Northeast Stores......................................... 172
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MIDWEST REGION
Ohio.............................................................. 448
Michigan.......................................................... 36
Pennsylvania...................................................... 27
--------
Total Midwest Stores........................................... 511
--------
SOUTHEAST REGION
Kentucky.......................................................... 151
Indiana........................................................... 20
Tennessee......................................................... 14
North Carolina.................................................... 9
--------
Total Southeast Stores......................................... 194
--------
Total Stores............................................... 877
========
UPGRADE AND REMODEL OF EXISTING STORE BASE AND CLOSING
UNDERPERFORMING STORES
The Company has an ongoing program to upgrade and remodel the Company's
retail and gasoline locations to cater to the always changing convenience needs
of today's customer. The program includes modernizing and re-imaging the store's
appearance, upgrading the gasoline facilities and installing the most modern
environmental protection equipment. Remodeled stores will also have more space
devoted to higher profit margin items and certain stores will install branded
fast food concepts, such as Taco Bell(R), Subway(R) and Pizza Hut(R), to attract
customers and enhance performance.
The Company has historically evaluated the performance of each of its
stores in order to determine its contribution to the Company's overall
profitability. Management has raised the acceptable level that a store's
performance must meet in order for the store to be eligible for on-going capital
expenditure support from the Company. Accordingly, in fiscal year 1996, the
Company closed 92 of its retail convenience stores and 38 of its retail gasoline
facilities due to their inability to meet the Company's economic and non-
economic criteria for long-term stability and growth.
-4-
NEW STORES
A major component in the Company's growth strategy is to continue to build
new stores and increase its level of gasoline sales. All new store locations
have significantly expanded gasoline retailing capacity and devote a greater
amount of selling space to high profit margin products.
TECHNOLOGICAL UPGRADE
The Company's Information Systems group is continuing to evaluate several
technological upgrades and procedural enhancement opportunities to increase the
efficiency of the existing store operations and corporate support functions.
These enhancements will provide more detailed and timely information regarding
store operations, including composition of sales, inventory levels and product
pricing and profit analysis.
GASOLINE OPERATIONS
Gasoline sales enable the Company to significantly increase a store's total
level of sales without a commensurate increase in overhead. Gasoline sales
accounted for approximately 40% of total revenues of the Company in fiscal year
1996 and approximately 35% for fiscal years 1995 and 1994. As of February 3,
1996, 376 stores sold gasoline. Financial information related to the Company's
gasoline operations for the last three fiscal years is set forth in Note 11 to
the Consolidated Financial Statements.
The Company's gasoline pricing strategy is designed, in part, to provide
value to customers by offering the same quality gasoline offered by major oil
companies at prices which are generally below nationally advertised brands and
comparable to other convenience store chains. The Company obtains its gasoline
from major oil company suppliers, primarily through spot market purchases, and
believes that there are adequate supplies of fuel available from a number of
sources at competitive prices.
Gasoline profit margins have a significant impact on the Company's income.
Such profit margins could be adversely influenced by factors beyond the
Company's control, such as volatility in the wholesale gasoline market due to
supply interruptions. In addition, gasoline profit margins are continually
influenced by competition in each local market area.
PRODUCT SELECTION
All stores generally offer more than 3,000 food and non-food items limited
to a few, well-known brand names as well as the Company's private label
products. Most of these items would typically be offered in supermarkets. Food
items include a wide variety of products, including canned foods and groceries,
dairy products, beverages, snack items, candy, baked goods and food service
items, such as fountain soft drinks, coffee, hot dogs, deli meats and deli
sandwiches and similar foods. Non-food products and services include gasoline,
cigarettes, health and beauty aids, publications, lottery tickets and money
orders. In addition to selling well-known brand name products, the stores offer
many products
-5-
that bear the "Dairy Mart" private label, including milk, bakery products,
juices and other non-carbonated beverages, ice cream and other dairy products
such as dips and cheeses.
In recent years, the Company has been altering the mix of products to
emphasize the sale of items carrying higher profit margins. Fast food items not
only carry higher profit margins but also tend to lead to the purchase of other
high profit margin products and impulse items, including salty-snacks, candy and
beverages. Dairy Mart has introduced a number of private label products, which
generally carry a higher gross profit margin than the Company's average gross
profit margin on comparable products.
FRANCHISE OPERATIONS
The Company franchises 290 stores throughout its three geographic regions.
Franchise stores generally follow the same operating policies as Company stores,
and are subject to Company supervision under franchise agreements. Company
operated and franchise stores are of the same basic store design and sell
substantially the same products. Most franchisees purchase their products
through the same supplier used by the Company.
The Company offers two types of franchising arrangements- the "full"
franchise and the "limited" franchise. Under a full franchise agreement, the
franchisee purchases and owns both the merchandise inventory and the equipment
located in the store, and leases or subleases the store from the Company. Under
a limited franchise agreement, the franchisee owns only the merchandise
inventory while the Company retains ownership of the store equipment. Franchise
fees are higher for limited franchisees. As of February 3, 1996, there were 131
full franchise locations and 159 limited franchise locations.
The Company's franchising strategy seeks to: (i) improve the level of
retail experience of its new franchisees; and (ii) increase the level of
financial commitment by new franchisees. As part of this strategy, new
franchisees are now required to undergo more rigorous and thorough interviews
and background checks, receive increased levels of financial and retail
training, and typically make larger initial cash payments.
The following table sets forth the number of stores, on both a Company
operated and franchise operated basis, that were opened or acquired, closed or
sold, and transferred between Company operated and franchise operated, during
the last three fiscal years:
February 3, 1996 January 28, 1995 January 29, 1994
--------------------------------- -------------------------------- --------------------------------
Company Franchise Company Franchise Company Franchise
Operated Operated Total Operated Operated Total Operated Operated Total
-------- --------- ----- -------- --------- ----- --------- --------- ------
At beginning of period.. 644 317 961 687 335 1,022 709 370 1,079
Opened or acquired...... 8 - 8 10 1 11 4 - 4
Closed or sold.......... (68) (24) (92) (57) (15) (72) (50) (11) (61)
Transferred (net)....... 3 (3) -- 4 (4) -- 24 (24) --
----- ----- ----- ----- ----- ----- ----- ----- -----
At end of period........ 587 290 877 644 317 961 687 335 1,022
===== ===== ===== ===== ===== ===== ===== ===== =====
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INTERNATIONAL OPERATIONS
The Company conducts business outside the United States as a joint-
venturer, licensor or consultant. Currently, the Company is a party to two
agreements with convenience store operators in South Korea and Mexico. As with
the Company's prior international arrangements, both such agreements require a
specified commitment of Company personnel, but do not require any significant
commitment of capital.
ADVERTISING
To promote a uniform image for all stores, the Company designs and
coordinates advertising for all stores to complement its marketing strategy,
which is derived, in part, from market surveys and research. In-store,
newspaper, and direct-mail advertising, special promotions and seasonal radio
and television advertising usually feature certain items which can be purchased
at the stores, and frequently include national brand items for which advertising
costs are often supplemented by the national brand suppliers. Sales promotions
are generally established and maintained on a bi-weekly or monthly basis.
COMPETITION
The convenience store and retail gasoline industries are highly
competitive. The number and type of competitors vary by location. The Company
presently competes with other convenience stores, large integrated gasoline
service station operators, supermarket chains, neighborhood grocery stores,
independent gasoline service stations, fast food operations and other similar
retail outlets, some of which are well recognized national or regional retail
chains. Some of the Company's competitors have greater financial resources than
the Company. Key competitive factors include, among others, location, ease of
access, store management, product selection, pricing, hours of operation, store
safety, cleanliness, product promotions and marketing.
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 fall within
the Company's second and third fiscal quarters.
EMPLOYEES
As of February 3, 1996 exclusive of franchisees and franchisees' employees,
the Company employed, on a full-time or part-time basis, approximately 4,100
employees.
-7-
ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing USTs to prevent future releases; (v)keeping appropriate
records; and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. A number of states in which the Company operates
also have adopted UST regulatory programs.
In the ordinary course of business, the Company periodically detects
releases of gasoline or other regulated substances from USTs it owns or
operates. As part of its program to manage USTs, 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
facilities. The Company accrues its estimates of all costs to be incurred for
assessment and remediation for known releases. These accruals are adjusted if
and when new information becomes known. Additionally, the Company records as
receivables the estimated reimbursements of a portion of the total costs 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 such funds. Due to the nature of
such releases, the actual costs of assessment and remediation activities may
vary significantly from year to year. Under current federal and state regulatory
programs, the Company also will be obligated by December 22, 1998 to upgrade or
replace most existing USTs it owns or operates to meet certain corrosion,
overfill- and spill-protection and leak-detection requirements. The Company has
been evaluating each site on an individual basis to determine the type of
expenditures required to comply with these and other requirements under the
federal and state UST regulatory programs.
In addition to ongoing assessment and remediation costs, the Company
presently estimates that it will be required to make capital expenditures,
including those requiring upgrading or replacing of existing USTs, ranging from
approximately $10.0 to $12.0 million in the aggregate over the next three fiscal
years to comply with current federal and state UST regulations, which capital
expenditures could be reduced for locations (especially low volume locations)
which may be closed in lieu of the capital costs of compliance (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources -Environmental Responsibility").
The Company's estimate of costs to be incurred for environmental assessment
and remediation and for UST upgrading and other regulatory compliance 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
significantly from the estimate noted above .
-8-
BUSINESS OUTLOOK
This Form 10-K contains forward-looking statements within the meaning of
the "safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include plans and objectives to upgrade
and remodel store locations, to build new stores and increase gasoline sales, to
improve certain aspects of the franchisee program, to sell or lease certain
assets, as well as the availability of supplies of gasoline, the estimated costs
for environmental remediation and the sufficiency of the Company's liquidity and
the availability of capital. 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 described in the forward-
looking statements. Such factors and uncertainties include, but are not limited
to, the availability of financing and additional capital to fund the Company's
business strategy on acceptable terms, if at all, the future profitability of
the Company, the availability of desirable store locations, the Company's
ability to negotiate and enter into lease, acquisition and supply agreements on
acceptable terms, competition and pricing in the Company's market area,
volatility in the wholesale gasoline market due to supply interruptions,
modifications of environmental regulatory requirements, detection of
unanticipated 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.
ITEM 2. PROPERTIES
Of the 877 stores in operation as of February 3, 1996, 103 store locations
were owned by the Company and 774 were leased. In addition, the Company owns 20
locations and is the primary lessee for 86 locations not currently operated as
Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such
locations to third parties. From time to time the Company enters into sale-
leaseback transactions whereby the Company sells retail locations and leases
such locations back from the purchasers.
The Company owns its corporate headquarters facility in Enfield,
Connecticut. This facility has approximately 77,000 square feet and is located
on eighty-eight acres of land. The Company also owns its former Northeast region
operating office building and former manufacturing and processing plant located
in a 33,000 square foot building, and its 200,000 square foot former Midwest
processing plant and current regional administrative office located in Cuyahoga
Falls, Ohio. The Company also leases administrative offices for its Southeast
regional offices. In an effort to redirect capital from within the business to
enhance overall returns and increase liquidity, management has identified
certain assets which it intends to sell. Management has established an internal
rate of return criteria to evaluate assets in order to optimize the return on
the Company's capital investment. The Company is attempting to sell its
corporate headquarters facility in Enfield, Connecticut, the former Northeast
regional operating office, and the buildings and real estate that formerly
comprised its Connecticut and Ohio manufacturing and distribution facilities.
-9-
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a nominal defendant, along with certain of
those persons who were directors of the Company in fiscal 1996, in two
shareholder derivative actions captioned Kahn v. Nirenberg (C.A. No. 14893)
-----------------
and Uni-Marts, Inc. v. Stein (C.A. No. 14713), both of which are pending in the
------------------------
Delaware Court of Chancery of New Castle County. The plaintiffs allege, among
other things, that in connection with the settlement of the dispute between
Charles Nirenberg and the Company's management with respect to control of the
Company (the "Nirenberg Settlement"), the directors violated their fiduciary
duty to the Company and its stockholders, violated provisions of Delaware
corporate law and wasted corporate assets. Mr. Nirenberg is a former
shareholder, director and officer of the Company. The plaintiffs seek, among
other things, a declaration that the current structure of the general partner of
DM Associates Limited Partnership ("DM Associates") is invalid and that certain
voting rights with respect to the Class B Common Stock held by DM Associates
should be vested in the Company. The Company is contesting these claims and, at
this time is not able to determine what the outcome of this litigation will be.
The Company was party to a legal proceeding with Mr. Nirenberg (the
"Nirenberg Litigation") that was dismissed with prejudice during the fourth
quarter of fiscal 1996. A description of the Nirenberg Litigation and the
Nirenberg Settlement is located in the section entitled "INFORMATION REGARDING
DM ASSOCIATES AND THE NIRENBERG TRANSACTION" on pages 19 through 21 of the
Company's Proxy Statement dated December 26, 1995, which section is incorporated
herein by reference. Subsequent to fiscal 1996, the interest of one of the
partners of New DM Management Associates I was repurchased by such Partnership.
As a result, the remaining partners of New DM Management Associates I are
Messrs. Stein and Landry, each of whom owns one-half of the partnership
interests of New DM Management Associates I. New DM Management Associates I is
the sole general partner of DM Associates. DM Associates is the owner of record
of approximately 60% of the total voting power of both classes of Common Stock
of the Company.
In the ordinary course of business, the Company is party to various other
actions which the Company believes are routine in nature and incidental to the
operation of its business. The Company believes that the outcome of the
proceedings to which the Company currently is party will not have a material
adverse effect upon its future results of operations or financial condition.
-10-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 19, 1996, the Company held its Annual Meeting of its
stockholders. The following matters were voted on at the Annual Meeting:
1. The election of Thomas W. Janes and Truby G. Proctor, Jr. as Class A
Directors and Frank W. Barrett, J. Kermit Birchfield, John W. Everets,
Jr., Gregory G. Landry and Robert B. Stein, Jr. as Class B Directors;
2. The adoption of the Company's 1995 Stock Option Plan for Outside
Directors;
3. The adoption of the Company's 1995 Stock Option and Incentive Award
Plan; and
4. The ratification of the appointment of Arthur Andersen LLP as the
Company's independent accountants for the fiscal year ending February
3, 1996.
The following chart shows the number of votes cast for or against, as well as
the number of abstentions and broker nonvotes, as to each matter voted on at the
Annual Meeting:
Broker
For Against Abstain Nonvotes
------- ------- ------- --------
1. Election of Mr. Janes............ 169,738 51,450 - -
2. Election of Mr. Proctor.......... 169,745 51,443 - -
3. Election of Mr. Barrett.......... 2,422,600 42,856 - -
4. Election of Mr. Birchfield....... 2,422,600 42,856 - -
5. Election of Mr. Everets.......... 2,422,600 42,856 - -
6. Election of Mr. Landry........... 2,422,600 42,856 - -
7. Election of Mr. Stein............ 2,422,600 42,856 - -
8. Adoption of 1995 Stock Option
Plan for Outside Directors...... 1,613,536 435,691 5,982 631,835
9. Adoption of 1995 Stock Option
and Incentive Award Plan........ 1,803,430 524,465 2,790 355,959
10. Ratification of Independent
Accountants .................... 2,663,565 22,184 895 -
See item 3. Legal Proceeding for a description of the Nirenberg Settlement.
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PART II
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ITEM 5. MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company has not paid any cash dividends during the last two fiscal
years, and pursuant to loan covenants contained in the Company's new senior
revolving credit facility, is currently restricted from paying any dividends and
from repurchasing its capital stock. The Company's Class A Common Stock and
Class B Common Stock are traded on The NASDAQ Stock Market under the symbols
DMCVA and DMCVB. The following table sets forth the high and low sales prices
per share of both classes of the Company's Common Stock, as quoted on The NASDAQ
Stock Market, for the last two fiscal years.
Class A Class B
Common Common
Stock Stock
-------------------------------
High Low High Low
- - ------------------------------------------------------------------------
Fiscal Year Ended February 3,1996:
- - ------------------------------------------------------------------------
First Quarter 4 5/8 3 5/8 4 7/8 3 3/4
Second Quarter 5 4 3/4 5 1/2 4 3/4
Third Quarter 6 3/8 5 5/8 7 1/4 6 2/15
Fourth Quarter 6 1/4 5 1/2 6 3/4 5 1/2
- - ------------------------------------------------------------------------
Fiscal Year Ended January 28, 1995:
- - ------------------------------------------------------------------------
First Quarter 7 1/4 5 3/4 8 6 3/4
Second Quarter 6 1/2 3 3/4 6 3/4 4 1/4
Third Quarter 4 1/4 2 1/2 4 3/4 2 1/4
Fourth Quarter 4 2 5/8 4 1/4 2 7/8
- - ------------------------------------------------------------------------
There were approximately 3,000 stockholders as of April 1, 1996. Included in
this number are shares held in nominee or street names.
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ITEM 6. SELECTED FINANCIAL DATA
Five Years Ended February 3, 1996 1996(a) 1995(a) 1994(a) 1993(a) 1992
- - --------------------------------- ----------------------------------------------------------
(in thousands, except per share amounts)
OPERATING RESULTS:
Revenues..................................................................$ 571,311 $ 596,782 $ 591,500 $ 580,014 $ 572,761
----------------------------------------------------------
Earnings Before Interest Expense, Income Taxes,
Depreciation and Amortization (EBITDA)............................... 12,831 4,377 23,646 16,323 28,852
----------------------------------------------------------
Interest Expense.......................................................... 9,661 9,219 7,644 7,456 8,260
----------------------------------------------------------
Income (Loss) Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Changes.......................... (9,220) (17,319) 3,102 (4,797) 7,021
----------------------------------------------------------
Net Income (Loss)......................................................... (6,000) (11,150) 866 (6,850) 4,092
----------------------------------------------------------
Earnings (Loss) Per Share:
Before Extraordinary Item and Cumulative Effect of Accounting Changes (1.12) (1.94) .33 (.53) .75
----------------------------------------------------------
Net Earnings (Loss) Per Share........................................ (1.12) (2.01) .16 (1.26) .75
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BALANCE SHEET DATA:
Net Property and Equipment................................................$ 80,387 $ 70,578 $ 93,774 $ 93,076 $ 86,437
----------------------------------------------------------
Total Assets.............................................................. 164,938 172,228 169,442 175,178 165,555
----------------------------------------------------------
Long-Term Obligations (b)................................................. 100,881 90,268 77,343 81,035 79,119
----------------------------------------------------------
Stockholders' Equity...................................................... 9,208 22,817 33,870 32,732 39,100
----------------------------------------------------------
================================================================================
(a) The results for the years presented include
non-recurring and unusual charges as follows: 1996 1995 1994 1993 1992
- - -------------------------------------------------- ----------------------------------------------------------
(in thousands)
NONRECURRING PRE-TAX CHARGES:
Costs and Expenses Related to Settlement Agreement with Stockholder.......$ 6,487 $ - $ - $ - $ -
Costs to Divest of Dairy Manufacturing and Distribution Operations........ 1,313 2,500 - 5,200 -
Administrative Severance, Settlement and Related Costs.................... 1,211 2,800 - - -
Regulatory and Administrative Fees and Expenses........................... 1,287 1,216 - - -
Writedown of Non-operating Properties to Net Realizable Value............. 1,000 3,584 - - -
Costs of Store Closings and Restructuring................................. 902 3,900 - - -
----------------------------------------------------------
$ 12,200 $ 14,000 $ - $ 5,200 $ -
----------------------------------------------------------
OTHER UNUSUAL CHARGES, NET OF RELATED INCOME TAX EFFECT:
Extraordinary Loss on Extinguishment of Debt..............................$ - $ - $ 928 $ - $ -
Cumulative Effect of Accounting Changes................................... - 389 - 3,951 -
(b) Long-term obligations include the current portion of long-term obligations.
-13-
FINANCIAL HIGHLIGHTS
For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share and per
gallon amounts and number of locations)
Financial Data:
Revenues:
Merchandise Sales................................................ $341,526 $355,435 $355,808
Gasoline Sales................................................... 226,505 210,541 206,155
Dairy Sales...................................................... - (1) 28,563 27,075
Other............................................................ 3,280 2,243 2,462
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Total Revenues.................................. $571,311 $596,782 $591,500
----------------------------------------
Store Data:
Company Operated:
Gross Profit $................................................... $111,153 $110,577 $111,152
Average Sales Per Store.......................................... $550 $522 $489
Average Gross Profit Per Store................................... $189 $172 $162
Number of Stores at Year End..................................... 587 644 687
Franchise Operated:
Franchise Fee $.................................................. $18,805 $19,426 $19,612
Average Sales Per Store.......................................... $586 $556 $554
Average Gross Profit Per Store................................... $65 $61 $59
Number of Stores at Year End..................................... 290 317 335
Total Stores:
Gross Profit $................................................... $129,958 $130,003 $130,764
Average Sales Per Store.......................................... $562 $533 $510
Average Gross Profit Per Store................................... $148 $135 $128
Number of Stores at Year End..................................... 877 961 1,022
Gasoline Data:
Gallons Sold..................................................... 212,832 206,441 206,365
Gross Profit $................................................... $24,525 $24,079 $25,320
Average Gallons Sold Per Store................................... 566 508 493
Gross Profit $ Per Gallon........................................ $0.1152 $0.1166 $0.1227
Number of Gas Locations at Year End.............................. 376 406 419
Other Data:
Weighted Average Number of Shares.................................. 5,374 5,541 5,532
Book Value Per Share (2)........................................... $1.41 $4.02 $6.07
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(1) In fiscal 1996, the Company discontinued its manufacturing and distribution
operations. The losses resulting from this operation were reflected as a
nonrecurring charge.
(2) The calculation utilizes total shares outstanding including the dilutive
effect of stock options and warrants, as of February 3, 1996, January 28,
1995 and January 29, 1994.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY RESULTS OF OPERATIONS
The Company's net loss for fiscal 1996 was $6.0 million as compared to a
net loss of $11.2 million for fiscal 1995 and net income of $0.9 million for
fiscal 1994. Each years' results included nonrecurring or unusual items as
follows:
FISCAL YEARS
-------------------------------
(IN MILLIONS) 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------
NONRECURRING PRE-TAX CHARGES:
COSTS AND EXPENSES RELATED TO SETTLEMENT AGREEMENT WITH STOCKHOLDER $ 6.5 $ -- $ --
COSTS TO DIVEST OF DAIRY MANUFACTURING AND DISTRIBUTION OPERATIONS 1.3 2.5 --
ADMINISTRATIVE SEVERANCE, SETTLEMENT AND RELATED COSTS 1.2 2.8 --
REGULATORY AND ADMINISTRATIVE FEES AND EXPENSES 1.3 1.2 --
WRITEDOWN OF NON-OPERATING PROPERTIES TO NET REALIZABLE VALUE 1.0 3.6 --
COSTS OF STORE CLOSINGS AND RESTRUCTURING 0.9 3.9 --
-------------------------------
$12.2 $14.0 $ --
-------------------------------
OTHER UNUSUAL CHARGES, NET OF RELATED INCOME TAX EFFECT:
EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT $ -- $ -- $ 0.9
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 0.4 --
For a discussion of nonrecurring charges see Note 14 to the Consolidated
Financial Statements.
RESULTS OF OPERATIONS
REVENUES
Revenues for fiscal 1996 decreased $25.5 million from fiscal 1995 despite
the favorable effect on convenience store and gasoline revenues due to the
inclusion of 53 weeks in fiscal 1996 as compared to 52 weeks in fiscal 1995.
Revenues for fiscal 1995 increased $5.3 million from fiscal 1994. A summary of
revenues by functional area for the three fiscal years is shown below:
Fiscal Years
-------------------------------
(in millions) 1996 1995 1994
------------------------------------------------------------------
Convenience store $ 341.5 $355.4 $355.8
Gasoline 226.5 210.5 206.2
Manufacturing and distribution - 28.6 27.1
Other 3.3 2.3 2.4
-------------------------------
Total $ 571.3 $596.8 $591.5
===============================
Convenience store revenues decreased $13.9 million, or 3.9%, in fiscal 1996
as compared to fiscal 1995 due to a net reduction of 84 underperforming stores,
offset by a 1.3% 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 the results of operations, since the majority of stores closed or sold
had been operating at a loss. Convenience store revenues decreased $0.4 million
or 0.1%, in fiscal 1995 as compared to fiscal 1994 due to a net reduction of 61
underperforming stores, offset by a 2.8% increase in comparable store sales.
Gasoline revenues increased in fiscal 1996 as compared to fiscal 1995 due
to an increase in total gasoline gallons sold of 6,391,000, combined
-15-
with an increase in the average selling price of gasoline of 4.4 cents per
gallon. The increase in gasoline gallons sold was achieved despite the decrease
in gasoline retailing facilities from 406 sites at the end of fiscal 1995 to 376
sites at the end of fiscal 1996. On a per location basis, average gallonage
increased by approximately 11% in the current fiscal year as compared to the
prior fiscal year. These gallonage increases were due primarily to further
development of new stores having a major gasoline presence and the remodeling
and expansion of gasoline facilities at certain existing locations. Gasoline
revenues increased in fiscal 1995 as compared to fiscal 1994 due to an increase
in the average selling price of gasoline of 2.1 cents per gallon. Gasoline
gallons sold increased marginally in fiscal 1995 as compared to fiscal 1994
despite the decrease in gasoline facilities from 419 sites at the end of fiscal
1994 to 406 sites at the end of fiscal 1995. On a per location basis, average
gallonage increased by approximately 3% in fiscal 1995 as compared to fiscal
1994.
Manufacturing and distribution revenues are not reflected in the current
fiscal year due to the closing and divestiture of the dairy manufacturing and
distribution operations.
GROSS PROFITS
Gross profits for fiscal 1996 increased $0.8 million from fiscal 1995 and
gross profits for fiscal 1995 decreased $4.2 million from fiscal 1994. A summary
of the gross profits by functional area for the three fiscal years is shown
below:
Fiscal Years
------------------------------
(in millions) 1996 1995 1994
-----------------------------------------------------------------
Convenience store $130.0 $130.0 $130.8
Gasoline 24.5 24.1 25.3
Manufacturing and distribution - 0.6 2.7
Other 3.3 2.3 2.4
------------------------------
Total $157.8 $157.0 $161.2
==============================
Convenience store gross profit remained constant in fiscal 1996 as compared
to fiscal 1995. Improved product gross margins and higher lottery commissions
were offset by the overall reduction in the number of stores, as described
above. Convenience store gross profits decreased by $0.8 million in fiscal 1995
as compared to fiscal 1994 due to an increase in costs associated with the
Company's last in, first out (LIFO) inventory valuation method. The fiscal 1995
LIFO provision reflected a normal inflationary increase, while the fiscal 1994
LIFO provision was reduced due to a substantial decrease in cigarette prices,
which constitute one of the Company's major product categories.
Gasoline gross profits increased by $0.4 million in fiscal 1996 as compared
to fiscal 1995 due to an increase in gasoline gallons sold, as described above,
partially offset by a decrease of 0.14 cents in gross margin per gallon.
Gasoline profits decreased by $1.2 million in fiscal 1995 as compared to fiscal
1994 primarily due to a decrease of 0.61 cents in gross margin per gallon.
-16-
Manufacturing and distribution gross profits are not reflected in fiscal
1996 due to the closing and divestiture of the dairy manufacturing and
distribution operations. Manufacturing and distribution gross profits declined
in fiscal 1995 as compared to fiscal 1994 due to the underutilization of plant
capacity and the impact of competitive product pricing.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for fiscal 1996 decreased $6.0
million from fiscal 1995 and operating and administrative expenses for fiscal
1995 increased $0.6 million from fiscal 1994. A summary of expenses by
functional area for the three fiscal years is shown below:
Fiscal Years
------------------------------
(in millions) 1996 1995 1994
----------------------------------------------------------
Convenience stores $100.2 $104.3 $104.3
Gasoline 13.3 11.9 11.2
Administrative and Other 31.6 34.9 35.0
------------------------------
Total $145.1 $151.1 $150.5
------------------------------
Convenience store operating expenses decreased $4.1 million in fiscal 1996
as compared to fiscal 1995 primarily due to the closure or sale of
underperforming stores as described above, partially offset by higher labor,
rent and maintenance costs on a per store basis. The increase in maintenance
costs was primarily attributable to snow removal expenses caused by severe
weather conditions in certain geographic areas in which the Company operates.
Convenience store operating expenses remained constant in fiscal 1995 as
compared to fiscal 1994. Higher store labor and rent costs were offset by the
reduction in the overall number of stores.
Gasoline operating expenses increased $1.4 million in fiscal 1996 as
compared to fiscal 1995 primarily due to the operation of higher-volume new or
remodeled expanded facilities, as described above, partially offset by a
decrease in environmental expenses associated with the remediation of gasoline
locations after considering expected reimbursements from various state
environmental trust funds. Gasoline operating expenses increased $0.7 million in
fiscal 1995 as compared to fiscal 1994 primarily due to increased environmental
remediation costs.
Administrative and other expenses decreased $3.3 million in fiscal 1996 as
compared to fiscal 1995 primarily due to the full year impact of operating with
a reduced level of administrative support staff. Administrative and other
expenses decreased slightly in fiscal 1995 as compared to fiscal 1994 due to a
reduction of administrative staff in the fourth quarter of fiscal 1995.
INTEREST EXPENSES, INFLATION AND TAXES
Interest expense increased in fiscal 1996 as compared to fiscal 1995 and
fiscal 1994 due to an increased level of borrowing associated with the issuance
of the Series A Notes in March 1994 and Series B Notes in December 1995 (see
Note 6 to the Consolidated Financial Statements).
-17-
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administrative expenses in fiscal 1996, fiscal 1995 and
fiscal 1994, respectively, other than the effect of cigarette price reductions
discussed above.
The effective tax rate for the Company was a benefit of 35% and 38% for
fiscal year 1996 and fiscal year 1995, respectively, and a provision of 42% for
fiscal year 1994.
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
significantly exceeded the current debt service requirements of the Company's
long-term obligations. The fiscal 1996 capital expenditures of the Company were
funded by excess operating cash flow and by the cash flow generated from the
sale of certain assets. In addition, the Company has a revolving line of credit
available, although not utilized during fiscal 1996, 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 fiscal 1996, net cash generated by operations was $3.2 million
higher than the prior fiscal year. This increase was primarily due to the
improved results of operations in fiscal 1996 as compared to fiscal 1995 (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, partially offset by the cash
outflows in the current fiscal year related to certain nonrecurring charges
recorded in fiscal 1995 (see Note 14 to the Consolidated Financial Statements).
During fiscal 1996, the Company paid its trade payables in an average of 27
days, which compares to 24 days for fiscal 1995 and fiscal 1994. 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 February 3, 1996 and January 28, 1995, the amounts due the
issuer were $7.6 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
Net cash provided by financing activities decreased by $9.0 million from
the prior fiscal year. In fiscal 1995, the Company generated net cash of
approximately $10.4 million as a result of the recapitalization
-18-
of the Company's debt structure through the issuance of $75.0 million of 10.25%
Senior Subordinated Notes (the "Series A Notes"). The proceeds from the issuance
of the Series A Notes, net of offering costs of $2.3 million, were used to
retire substantially all of the Company's then existing bank term loan and bank
revolving loan and redeem in full the Company's 14.25% subordinated debentures
(see Note 6 to the Consolidated Financial Statements).
The recapitalization of the Company's debt structure in fiscal 1995 was
integral toward accomplishing management's overall objective of redirecting the
Company's capital for purpose of expanding its retail operations. As a result of
the recapitalization, the Company significantly reduced its near-term debt
service requirements thus improving the Company's financial and operating
flexibility.
In December 1995, the Company issued $13.5 million of 10.25% Senior
Subordinated Notes (the "Series B Notes") with substantially the same terms and
conditions as the Series A Notes (see Note 6 to the Consolidated Financial
Statements). The proceeds from the issuance of the Series B Notes were used to
purchase the interests held by the former Chairman of the Board of Directors and
certain of his affiliates in DM Associates Limited Partnership for $10.0 million
(see Note 9 to the Consolidated Financial Statements).
Subsequent to fiscal 1996, the Company entered into a new senior revolving
credit facility. Under the terms of the new $30.0 million senior revolving
credit facility, the Company has initially available up to $20.0 million in
aggregate extensions of credit 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 (see Note 6 to the
Consolidated Financial Statements).
CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities decreased by $16.0 million from the
prior fiscal year, primarily due to increased cash flows generated from the sale
of certain assets, including the sale of manufacturing and distribution
equipment and the sale and leaseback of 17 existing store properties. In
addition, the Company's investing activities were decreased due to the
maturation in fiscal 1996 of a U.S. Treasury Bill that was purchased in the
prior fiscal year. The above described increases in cash flow were partially
offset by an increased level of capital expenditures associated with new store
construction and the upgrading of existing store and gasoline facilities.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $25 million for capital
expenditures in fiscal 1997 by purchasing store and gasoline equipment for new
stores, remodeling approximately 40 to 50 existing stores, installing fast food
concepts, such as Taco Bell(R), Subway(R) and Pizza Hut(R) 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
-19-
lighting and to meet current environmental standards (see "Environmental
Responsibility"). These capital expenditures will be funded primarily by cash
generated from operations and from cash generated by the disposition of assets
held for sale as of February 3, 1996, supplemented by the availability of a
senior revolving line of credit. The Company intends to lease the real estate
for the majority of new store locations.
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 February 3, 1996, the
Company had recorded an accrual of $1,890,000 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 February 3, 1996, the Company
had recorded a net state trust fund reimbursement receivable of $1,137,000
(representing a gross receivable of $1,696,000 less an allowance of $559,000).
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 $10.0 to $12.0 million in the aggregate
through December 1998. These costs could be reduced for low volume retail
gasoline 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 is based on factors and assumptions that could change due
to modifications of regulatory requirements or detection of unanticipated
environmental conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries
and notes thereto, appear on Pages F-1 through F-15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
-20-
PART III
--------
Information required by Items 10, 11 and 12 (DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT, EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT) is incorporated herein by reference from the
sections entitled "ITEM 1-ELECTION OF DIRECTORS-Nominees for Election As
Directors," "INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS," "THE
BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND VOTING RIGHTS,"
"PRINCIPAL SHAREHOLDERS," AND "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS"
of the Company's definitive proxy statement to be filed pursuant to Regulation
14A within 120 days after the close of its 1996 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under "CERTAIN TRANSACTIONS"
in the Company's definitive proxy statement, and is incorporated herein by
reference.
-21-
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part of
this Form 10-K, see Page F-1.
(2) Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II - Valuation Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits:
Exhibit Number:
(3) Articles of Incorporation and Bylaws.
(3.1) The Company's Restated Certificate of Incorporation, as amended,
was filed as Exhibit 3.1 to the Company's Form 10-K for the
fiscal year ended February 1, 1992 and is incorporated herein by
reference.
(3.2) A Certificate of Designation was filed as Exhibit 1 of the
Company's Form 8-K for the January 19, 1996 event and is
incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed as Exhibit
3.2 to the Company's Form 10-Q for the fiscal quarter ended July
29, 1995 and are incorporated herein by reference.
(4) Instruments defining the rights of security holders, including
indentures.
(4.1) The instruments defining the rights of the holders of the
Company's Common Stock include the Company's Restated Certificate
of Incorporation, Certificate of Designation, Amended and
Restated Bylaws and Rights Agreement, filed as Exhibits 3.1, 3.2,
3.3 and 10.23 hereto, and those instruments filed as Exhibit 4.1
of the Company's Registration Statement on Form S-1 (Registration
No. 33-
-22-
639) dated November 5, 1985, which are incorporated herein by
reference.
(4.2) 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, was
filed as Exhibit 4.1 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated herein by
reference.
(4.3) The instruments defining the rights of the holder's of the
Company's Warrants include the Form of Stock Purchase Warrants
filed as Exhibits 10.13 and 10.14 hereto.
(10) Material Contracts.
(10.1) Credit Agreement dated as of April 24, 1996, among the Company,
Bank of Boston Connecticut as agent, and the banks from time to
time parties thereto is filed as Exhibit 10.1 attached hereto.
(10.2) 1985 Incentive Stock Option Plan, as amended, and form of
Incentive Stock Option Agreement, were filed as Exhibit 10.4 to
the Company's annual report on Form 10-K for the fiscal year
ended January 30, 1988, and are incorporated herein by reference.
(10.3) 1983 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement thereunder were filed as Exhibit 4.1 and 4.2,
respectively, to the Company's Registration Statement on Form S-8
(File No. 33-8209) filed on August 26, 1986, and are incorporated
herein by reference.
(10.4) 1990 Stock Option Plan and forms of qualified and non-qualified
stock option agreements thereunder were filed as Exhibit 10.4 to
the Company's Form 10-K for the fiscal year ended February 2,
1991, and are incorporated herein by reference.
(10.5) 1995 Stock Option and Incentive Award Plan was filed as Exhibit
10.1 of the Company's Form 10-Q for the fiscal quarter ended July
29,1995 and is incorporated herein by reference.
(10.6) 1995 Stock Option Plan for Outside Directors was filed as Exhibit
10.6 of the Company's Form 10-K for the fiscal year ended January
28, 1995 and is incorporated herein by reference.
(10.7) Employment agreement between the Company and Robert B. Stein, Jr.
dated June 8, 1995 was filed as Exhibit 10.2 of the Company's
Form 10-Q for the fiscal quarter ended July 29, 1995 and is
incorporated herein by reference.
-23-
(10.8) Employment agreement between the Company and Gregory G. Landry
dated June 8, 1995 was filed as Exhibit 10.3 of the Company's
Form 10-Q for the fiscal quarter ended July 29, 1995 and is
incorporated herein by reference.
(10.9) Employment agreement between the Company and Gary A. Payne dated
June 8, 1995 was filed as Exhibit 10.4 of the Company's Form 10-Q
for the fiscal quarter ended July 29, 1995 and is incorporated
herein by reference.
(10.10) Employment agreement between the Company and Gregg O. Guy dated
June 8, 1995 was filed as Exhibit 10.5 of the Company's Form 10-Q
for the fiscal quarter ended July 29, 1995 and is incorporated
herein by reference.
(10.11) Settlement agreement dated January 27, 1995 between the Company
and Frank Colaccino was filed as Exhibit 10.10 of the Company's
January 28, 1995 Form 10-K and is incorporated herein by
reference.
(10.12) 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, was filed as Exhibit 10.1 of the
Company's Form 10-Q for the fiscal quarter ended October 28, 1995
and is incorporated herein by reference.
(10.13) 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) was filed as Exhibit 10.2 of the Company's Form 10-
Q for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(10.14) 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) was filed as Exhibit 10.3 of the Company's Form 10-Q for
the fiscal quarter ended October 28, 1995 and is incorporated
herein by reference.
(10.15) 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 was filed as
Exhibit 10.4 of the Company's Form 10-Q for the fiscal quarter
ended October 28, 1995 and is incorporated herein by reference.
-24-
(10.16) Agreement dated as of October 30, 1995 among the Company, Charles
Nirenberg, FCN Properties Corporation and The Nirenberg Family
Charitable Foundation, Inc. was filed as Exhibit 10.1 of the
Company's Form 8-K/A Amendment No.1 for the October 30, 1995
event and is incorporated herein by reference.
(10.17) 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 was filed as Exhibit 10.6 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(10.18) Amended and Restated Letter Agreement, dated December 1, 1995, to
Mitchell J. Kupperman from the Company, Robert B. Stein, Jr., and
Gregory G. Landry was filed as Exhibit 10.7 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(10.19) 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.
(10.20) 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.
(10.21) 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.
(10.22) 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 was filed
as Exhibit 10.10 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated herein by
reference.
(10.23) Rights Agreement dated as of January 19, 1996 between the Company
and the First National Bank of Boston, as Rights
-25-
Agent, including form of Rights Certificate, was filed as Exhibit
1 of the Company's Form 8-K for the January 19, 1996 event and is
incorporated herein by reference.
(21) Subsidiaries of the Company.
(23) Consent of Arthur Andersen LLP to the incorporation of their
reports included in this Form 10-K, into the Company's previously
filed Registration Statements on Forms S-8.
(27) Financial Data Schedule.
(99) The Section entitled "Information regarding DM Associates and the
Nirenberg Transaction" on pages 19 through 21 of the Company's
Proxy Statement dated December 26, 1995.
(b) Reports on Form 8-K
On October 31, 1995, the Company filed a Current Report on Form 8-K,
as amended, with the Securities and Exchange Commission 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.
On January 31, 1996, the Company filed a Current Report on Form 8-K in
which the Company reported that the Company had adopted a Rights Plan.
No Financial Statements were filed with any of the Current Reports.
(c) See (3) above.
(d) See (2) above.
-26-
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 2, 1996
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Robert B. Stein, Jr.
---------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer
and Chairman of the Board of Directors
By /s/ Gregory G. Landry
---------------------------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
-27-
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: May 2, 1996 /s/ Robert B. Stein, Jr.
----------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: May 2, 1996 /s/ Gregory G. Landry
----------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: May 2, 1996 /s/ Frank W. Barrett
----------------------------------------
Frank W. Barrett
Director
Dated: May 2, 1996 /s/ J. Kermit Birchfield, Jr.
----------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: May 2, 1996 /s/ John W. Everets, Jr.
----------------------------------------
John W. Everets, Jr.
Director
Dated: May 2, 1996 /s/ Thomas W. Janes
----------------------------------------
Thomas W. Janes
Director
Dated: May 2, 1996 /s/ Truby G. Proctor, Jr.
----------------------------------------
Truby G. Proctor, Jr.
Director
-28-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Dairy Mart Convenience Stores, Inc. and
subsidiaries (the Company) included in this Form 10-K, and have issued our
report thereon dated April 11, 1996 (except with respect to the matter discussed
in Note 6, as to which the date is April 24, 1996). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
April 11, 1996
-29-
SCHEDULE II
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNTS
Column A Column B Column C Column D Column E
- - ---------------------------------- ---------- ------------------------ ------------ ------------
Additions
------------------------
Balance at Charge to Deductions Balance at
Beginning Costs and Other and Accounts End of
Description of period Expenses Recoveries Written off Period
- - ---------------------------------- ---------- ------------------------ ------------ -------------
Reserve for Doubtful Accounts:
Fiscal Year Ended January 29, 1994 $1,653,124 $ 958,336 $ -- $ (787,283) $1,824,177
Fiscal Year Ended January 28, 1995 1,824,177 1,053,818 14,057 (1,163,810) 1,728,242
Fiscal Year Ended February 3, 1996 1,728,242 1,220,153 -- (1,101,173) 1,847,222
-30-
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO FINANCIAL STATEMENTS
Form 10-K
Page
---------
Report of Independent Public Accountants F-2
Consolidated Statements of Operations and Stockholders'
Equity for the Fiscal Years Ended February 3, 1996,
January 28, 1995 and January 29, 1994 F-3
Consolidated Balance Sheets as of February 3, 1996
and January 28, 1995 F-4
Consolidated Statements of Cash Flows for the Fiscal
Years Ended February 3, 1996, January 28, 1995
and January 29, 1994 F-5
Notes to Consolidated Financial Statements for the
Fiscal Years Ended February 3, 1996, January 28, 1995
and January 29, 1994 F-6 to F-15
F - 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart
Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of
February 3, 1996 and January 28, 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended February 3, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Dairy Mart Convenience Stores,
Inc. and subsidiaries as of February 3, 1996 and January 28, 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended February 3, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
April 11, 1996 (except with respect
to the matter discussed in Note 6,
as to which the date is April 24, 1996)
F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- - ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues (including excise taxes of $36,331, $36,332 and $29,209).................. $ 571,311 $ 596,782 $ 591,500
-------------------------------------------
Cost of goods sold and expenses:
Cost of goods sold............................................................... 413,548 439,757 430,254
Operating and administrative expenses............................................ 145,122 151,125 150,500
Interest expense................................................................. 9,661 9,219 7,644
Nonrecurring charges............................................................. 12,200 14,000 -
-------------------------------------------
580,531 614,101 588,398
-------------------------------------------
Income (loss) before income taxes, extraordinary item and
cumulative effect of accounting change....................................... (9,220) (17,319) 3,102
Benefit from (provision for) income taxes.......................................... 3,220 6,558 (1,308)
-------------------------------------------
Income (loss) before extraordinary item and cumulative effect
of accounting change......................................................... (6,000) (10,761) 1,794
Extraordinary loss on extinguishment of debt (net of income tax benefit of $677)... - - (928)
-------------------------------------------
Income (loss) before cumulative effect of accounting change.................... (6,000) (10,761) 866
Cumulative effect of accounting change............................................. - (389) -
-------------------------------------------
Net income (loss) ............................................................ $ (6,000) $ (11,150) $ 866
====================================================================================================================================
Earnings (loss) per share:
Before extraordinary item and cumulative effect of accounting change............. $ (1.12) $ (1.94) $ .33
Extraordinary loss on extinguishment of debt..................................... - - (.17)
Cumulative effect of accounting change........................................... - (.07) -
-------------------------------------------
Earnings (loss) per share.......................................................... $ (1.12) $ (2.01) $ .16
====================================================================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------------------
For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
- - -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Common Stock
---------------------------------- Retained
Class A Class B Paid-in Earning
Shares Shares Amount Capital (Deficit)
----------------------------------------------------------------------------
Balance January 30, 1993....................... 3,174 2,971 $ 62 $ 27,212 $ 10,463
Issuance of common stock....................... 30 50 1 271 -
Exchange of Class B shares for Class A shares.. 65 (65) - - -
Net income (loss).............................. - - - - 866
----------------------------------------------------------------------------
Balance January 29, 1994....................... 3,269 2,956 63 27,483 11,329
Issuance of common stock....................... 21 6 - 97 -
Exchange of Class B shares for Class A shares.. - - - - -
Net income (loss).............................. - - - - (11,150)
----------------------------------------------------------------------------
Balance January 28, 1995....................... 3,290 2,962 63 27,580 179
Issuance of common stock....................... 33 - - 110 -
Exchange of Class B shares for Class A shares.. 3 (3) - - -
Issuance of warrants........................... - - - 2,281 -
Purchased interest in stockholder.............. - - - - -
Net income (loss).............................. - - - - (6,000)
----------------------------------------------------------------------------
Balance February 3, 1996....................... 3,326 2,959 $ 63 $ 29,971 $ (5,821)
=============================================================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - -------------------------------------------------------------------------------------------------
For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
- - -------------------------------------------------------------------------------------------------
Purchased
Treasury Shares Interest In
------------------------
Shares Amount Stockholder
-------------------------------------------
Balance January 30, 1993....................... 698 $ (5,005) $ -
Issuance of common stock....................... - - -
Exchange of Class B shares for Class A shares.. - - -
Net income (loss).............................. - - -
-------------------------------------------
Balance January 29, 1994....................... 698 (5,005) -
Issuance of common stock....................... - - -
Exchange of Class B shares for Class A shares.. - - -
Net income (loss).............................. - - -
-------------------------------------------
Balance January 28, 1995....................... 698 (5,005) -
Issuance of common stock....................... - - -
Exchange of Class B shares for Class A shares.. - - -
Issuance of warrants........................... - - -
Purchased interest in stockholder.............. - - (10,000)
Net income (loss).............................. - - -
-------------------------------------------
Balance February 3, 1996....................... 698 $ (5,005) $ (10,000)
=================================================================================================
The accompanying notes are an integral part of these financial statements.
F-3
CONSOLIDATED BALANCE SHEETS Dairy Mart Convenience Stores, Inc. and Sudsidiaries
- - ------------------------------------------------------------------------------------------------------------------------------------
February 3, 1996 and January 28, 1995 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except
share amounts)
ASSETS
Current Assets:
Cash...............................................................................................$ 12,654 $ 4,512
Short-term investment.............................................................................. - 2,053
Accounts and notes receivable...................................................................... 9,752 12,398
Inventory.......................................................................................... 20,928 26,044
Prepaid expenses and other current assets.......................................................... 3,454 1,945
Deferred income taxes.............................................................................. 2,669 3,537
-------------------------------
Total current assets ............................................................................. 49,457 50,489
-------------------------------
Assets Held For Sale................................................................................ 8,685 23,378
Property and Equipment, net......................................................................... 80,387 70,578
Intangible Assets, net.............................................................................. 17,277 17,961
Other Assets, net................................................................................... 9,132 9,822
-------------------------------
Total assets........................................................................................$ 164,938 $ 172,228
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations........................................................$ 1,430 $ 1,570
Accounts payable................................................................................... 30,803 28,942
Accrued expenses................................................................................... 14,437 17,214
Accrued interest................................................................................... 3,355 3,052
-------------------------------
Total current liabilities......................................................................... 50,025 50,778
-------------------------------
Long-Term Obligations, less current portion above................................................... 99,451 88,698
-------------------------------
Other Liabilities................................................................................... 6,254 9,935
-------------------------------
Commitments and Contingencies (Note 6, 7, and 13)
Stockholders' Equity:
Preferred Stock (serial), par value $.01, 1,000,000 shares authorized, no shares issued............ - -
Class A Common Stock, par value $.01, 20,000,000 shares authorized, 3,326,296 and 3,290,460 issued. 33 33
Class B Common Stock, par value $.01, 10,000,000 shares authorized, 2,959,017 and 2,961,953 issued. 30 30
Paid-in capital.................................................................................... 29,971 27,580
Retained earnings (deficit)........................................................................ (5,821) 179
Treasury stock, at cost............................................................................ (5,005) (5,005)
Purchased interest in stockholder.................................................................. (10,000) -
-------------------------------
Total stockholders' equity........................................................................ 9,208 22,817
-------------------------------
Total liabilities and stockholders' equity..........................................................$ 164,938 $ 172,228
===============================
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS Dairy Mart Convenience Stores, Inc. and Subsidiaries
====================================================================================================================================
For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss)......................................................................... $ (6,000) $ (11,150) $ 866
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change................................................... - 389 -
Extraordinary loss on extinguishment of debt............................................. - - 928
Cash flow effect of nonrecurring items................................................... 550 9,953 (4,833)
Depreciation and amortization............................................................ 12,390 12,477 12,900
Change in deferred income taxes.......................................................... (2,873) (5,160) (95)
(Gain) loss on other disposition of properties, net...................................... (376) 880 494
Net change in assets and liabilities:
Accounts and notes receivable.......................................................... 2,646 (628) (152)
Inventory.............................................................................. 5,116 225 588
Accounts payable....................................................................... 1,861 242 932
Accrued interest....................................................................... 303 1,961 45
Other assets and liabilities........................................................... (3,722) (2,497) 2,612
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities................................................... 9,895 6,692 14,285
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments........................................................ - (3,953) -
Proceeds from sale of short-term investments.............................................. 2,053 1,900 -
Purchase of property and equipment........................................................ (20,232) (17,772) (13,749)
Proceeds from sale of property, equipment and assets held for sale........................ 14,741 1,120 1,925
Increase in long-term notes receivable.................................................... (1,579) (1,621) (291)
Proceeds from collection of long-term notes receivable.................................... 1,706 1,394 1,631
Decrease (increase) in intangibles and other assets....................................... 79 (334) 15
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities....................................................... (3,232) (19,266) (10,469)
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations and related warrants.................................... 13,500 74,064 4,915
Repayment of long-term obligations........................................................ (2,131) (63,707) (8,854)
Purchased interest in stockholder......................................................... (10,000) - -
Issuance of common stock.................................................................. 110 97 272
- - ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities......................................... 1,479 10,454 (3,667)
- - ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash................................................................. 8,142 (2,120) 149
Cash at beginning of year................................................................... 4,512 6,632 6,483
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year......................................................................... $ 12,654 $ 4,512 $ 6,632
====================================================================================================================================
Supplemental disclosures:
Cash paid during the year -
Interest.................................................................................. $ 9,359 $ 8,293 $ 7,700
Income taxes (refunded) paid.............................................................. (1,172) 879 1,199
Noncash investing and financing activities -
Issuance of warrants...................................................................... 665 - -
Capital lease obligations................................................................. 828 - 330
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
Dairy Mart Convenience Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 3, 1996, January 28, 1995 and January 29, 1994
1. SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND CONSOLIDATION - The accompanying financial
statements include the accounts of Dairy Mart Convenience Stores, Inc. and its
subsidiaries (the Company). All intercompany transactions have been eliminated.
NATURE OF THE BUSINESS - The Company owns, operates and franchises convenience
retail stores, a number of which also sell gasoline. The convenience stores are
primarily located in eleven states located in the Midwest, Northeast and
Southeast. As of February 3, 1996, 58% of the convenience stores were located in
the Midwest. The stores offer a wide range of products including groceries,
tobacco products, beverages, general merchandise, health and beauty aids and
deli products. The Company also manufactured and distributed certain dairy and
other products for sale at the majority of these locations, which operations
were discountinued in fiscal 1996 (see Note 14).
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January
31. There were 53 weeks included in the fiscal year ended February 3, 1996 and
52 weeks included in the fiscal years ended January 28, 1995 and January 29,
1994.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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 as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
SHORT-TERM INVESTMENT - As of January 28, 1995, the Company's short-term
investment consisted of a U.S. Treasury Bill with a maturity of less than one
year. The Company accounted for this investment as being available for sale in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". As of
January 28, 1995, the fair market value of the U.S. Treasury Bill approximated
its cost.
INVENTORY - Store inventory is stated primarily at the lower of last-in,
first-out (LIFO) cost or market. Gasoline inventory is stated at the lower of
first-in, first-out (FIFO) cost or market.
ASSETS HELD FOR SALE - Assets held for sale represent operating and
non-operating assets which the Company intends to sell in the near term and are
carried at the lower of cost or estimated net realizable value. The Company
reduced the carrying value of certain of these assets to their estimated net
realizable value by taking a nonrecurring charge to earnings in fiscal years
1996 and 1995 (see Note 14). The amounts the Company will realize could differ
materially from the amounts assumed in arriving at the carrying value.
PROPERTY, EQUIPMENT AND DEPRECIATION - Property is stated at cost and is
depreciated on the straight-line basis for financial reporting purposes over the
following estimated useful lives:
- - --------------------------------------------------------------------------------
Buildings 30-40 years
- - --------------------------------------------------------------------------------
Equipment 5-20 years
- - --------------------------------------------------------------------------------
Leasehold improvements are amortized primarily over the lesser of 10 years or
the term of the lease.
INCOME TAXES - The Company calculates income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements and tax returns.
SELF INSURANCE RESERVES - The Company is self-insured for certain property and
liability, and accident and health insurance risks and establishes reserves for
estimated outstanding claims based on its historical claims experience and
reviews by third-party loss reserve specialists. The Company has purchased
insurance coverage for losses that may occur above certain levels. As of
February 3, 1996 and January 28, 1995, the Company had established reserves for
these risks of $7,305,000 and $8,702,000, respectively, which are recorded on a
present value basis. The Company historically has recorded its self insurance
reserves using a discount rate based upon the Company's incremental borrowing
rate which was 8% as of January 29, 1994. As of January 30, 1994, the Company
changed its method of accounting to discount its self insurance reserves at a
risk free rate of return. The cumulative effect of this change in accounting
method was a charge to income of $389,000, net of the applicable income tax
benefit of $271,000. While management believes these reserves are adequate, the
ultimate amount of these liabilities could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", the Company has
disclosed the fair value, related carrying value and method for determining fair
value for the following financial instruments in the accompanying notes as
referenced: short-term investments (see Note 1), accounts and notes receivable
(see Note 2) and long-term obligations (see Note 6).
REVENUE RECOGNITION - The Company recognizes revenues as earned, including
franchise revenues and interest income. Franchise revenues represent a
percentage of franchise store sales remitted to the Company on a weekly or
monthly basis, as well as revenues derived from initial fees and the gain on
sale of store assets to franchisees.
STORE PREOPENING AND CLOSING COSTS - Expenditures of a non-capital nature
associated with opening a new store are expensed as incurred. At the time the
decision is made to close a store, estimated unrecoverable costs are charged to
expense. Such costs include the net book value of abandoned fixtures, equipment,
leasehold improvements and a provision for the present value of future lease
obligations, less estimated sub-rental income.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share have been calculated
based on the weighted average number of shares of common stock outstanding and
the effect of stock options, if dilutive, during each year. The Company's
interest in DM Associates Limited Partnership ("DM Associates")(see Note 9) is
treated similar to treasury stock for earnings (loss) per share purposes. The
number of shares used in the calculation for earnings (loss) per share was
5,373,784, 5,540,874, and 5,532,201 ended February 3, 1996, January 28, 1995 and
January 29, 1994, respectively.
RECLASSIFICATIONS - Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used for the
current year.
F-6
Dairy Mart Convenience Stores, Inc. and Subsidiaries
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of February 3, 1996 and January
28, 1995 is as follows:
1996 1995
- - --------------------------------------------------------------------------------------------------
(in thousands)
Franchise accounts receivable........................................ $ 4,349 $ 5,067
Franchise notes receivable........................................... 3,134 3,010
Marketing allowances and other....................................... 6,483 8,543
-----------------------
13,966 16,620
Less allowance for doubtful accounts and notes receivable............ 1,847 1,728
-----------------------
Net accounts and notes receivable.................................... 12,119 14,892
Less noncurrent notes receivable (included in other assets).......... 2,367 2,494
-----------------------
Current accounts and notes receivable................................ $ 9,752 $ 12,398
==================================================================================================
The carrying amount of current accounts and notes receivable approximates fair
value because of the short maturity of those receivables. The fair value of the
Company's noncurrent notes receivable is estimated by discounting the future
cash flows using the rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. As of
February 3, 1996, the fair value of the noncurrent notes receivable exceeded the
carrying value of $2,367,000 by approximately $87,000. As of January 28, 1995,
the fair value of the noncurrent notes receivable exceeded the carrying value of
$2,494,000 by approximately $140,000.
________________________________________________________________________________
3. INVENTORY:
A summary of inventory as of February 3, 1996, January 28, 1995 and January 29,
1994 is as follows:
1996 1995 1994
- - --------------------------------------------------------------------------------------------------
(in thousands)
Inventory valued at FIFO cost.............................. $25,435 $30,800 $30,852
LIFO reserve............................................... (4,507) (4,756) (4,583)
------------------------------------
Inventory primarily valued at LIFO cost.................... $20,928 $26,044 $26,269
==================================================================================================
The LIFO reserve reflects the difference between stating the inventory at
historical LIFO cost and the more current FIFO cost. Had the FIFO method been
used, cost of goods sold would have been increased by $249,000 in 1996,
decreased by $173,000 in 1995 and increased by $825,000 in 1994. Loss per share
would have been increased by $.03 in 1996, reduced by $.02 in 1995 and earnings
per share would have have been decreased by $.09 in 1994, had the FIFO method
been used.
During 1996 and 1995, the Company liquidated certain LIFO inventory that was
carried at lower costs prevailing in prior years. The effect of the liquidation
was to decrease net loss by approximately $488,000 ($.09 per share) and $56,000
($.01 per share) in 1996 and 1995, respectively. During 1994, the Company
liquidated certain LIFO inventory that was carried at higher costs prevailing in
prior years. The effect of the liquidation was to decrease net income by
approximately $45,000 ($.01 per share).
F-7
Dairy Mart Convenience Stores, Inc. and Subsidiaries
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of February 3, 1996 and January 28, 1995
is as follows:
1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Land and improvements.......................................................................... $ 9,529 $ 9,180
Building and leasehold improvements............................................................ 32,970 31,370
Equipment...................................................................................... 73,686 59,358
Assets under capital leases.................................................................... 3,432 2,632
----------------------------
119,617 102,540
Less accumulated depreciation and amortization................................................. (39,230) (31,962)
----------------------------
Property and equipment, net.................................................................... $ 80,387 $ 70,578
- - -----------------------------------------------------------------------------------------------------------------------------
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $1,937,000 and
$1,617,000 as of February 3, 1996 and January 28, 1995, respectively.
- - --------------------------------------------------------------------------------
5. INTANGIBLE ASSETS:
A summary of intangibles as of February 3, 1996 and January 28, 1995 is as
follows:
1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Goodwill....................................................................................... $ 13,874 $ 13,865
Franchise and operating rights................................................................. 10,144 10,144
----------------------------
24,018 24,009
Less accumulated amortization.................................................................. (6,741) (6,048)
----------------------------
Intangible assets, net......................................................................... $ 17,277 $ 17,961
- - -----------------------------------------------------------------------------------------------------------------------------
Goodwill represents the excess of cost over fair value of net assets purchased
and is being amortized on a straight-line basis over a period of 40 years.
Franchise and operating rights represent the value of franchise relationships
purchased in connection with past acquisitions and are being amortized on a
straight-line basis over 30 years. The Company assesses the recoverability of
these intangibles by determining whether the amortization of the goodwill and
franchise and operating rights over the remaining lives can be recovered through
projected future operating results. The Company's management anticipates a
return to profitability in fiscal year 1997 and therefore no provision for
impairment was recorded in any period.
During 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets". The statement establishes
accounting standards for the impairment of long-lived assets to be held and used
and for long-lived assets to be disposed of. The Company is continuing to assess
the impact of adopting SFAS No. 121 which is required in fiscal 1997, however,
management believes adoption of this statement will not have a material adverse
effect on the Company's financial position or results of operations.
F-8
Dairy Mart Convenience Stores, Inc. and Subsidiaries
6. LONG-TERM OBLIGATIONS:
The Company had the following long-term obligations as of February 3, 1996:
Interest Maturity February 3, 1996
------------------------------------
Rate (Fiscal Year) Current Long-Term Total
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Senior subordinated notes (Series A Notes)................. 10.25% 2005 $ - $ 75,000 $ 75,000
Senior subordinated notes (Series B Notes), net of original
issue discount of $1,584.................................. 10.25% 2005 - 11,916 11,916
Revolving credit facility.................................. Various 2000 - - -
Real estate mortgage notes payable......................... 6.25%-12.0 1998-2012 293 5,174 5,467
Small Business Administration debentures................... 6.9%-9.6% 1998-2006 - 4,230 4,230
Equipment financing........................................ Various 1998-2000 720 1,505 2,225
Capital leases, net of interest and executory costs
of $643................................................... Various 1998-2009 417 1,626 2,043
-------------------------------------
$ 1,430 $ 99,451 $ 100,881
- - ---------------------------------------------------------------------------------------------------------------------------------
In March 1994, the Company issued $75,000,000 principal amount of 10.25% senior
subordinated notes (the "Series A Notes") due March 15, 2004. The proceeds
received from the sale of the Series A Notes, net of offering costs of
$2,298,000, were used to repay the entire outstanding indebtedness under the
then existing bank term loan and bank revolving loan and to redeem in full the
Company's 14.25% subordinated debentures due November, 2000. In connection with
this transaction, the Company paid a premium of 2.8%, or $761,000, related to
the redemption of the 14.25% subordinated debentures and recorded a charge of
$844,000 representing the write-off of the remaining deferred financing costs
related to the indebtedness repaid. The Company accounted for the total of the
premium paid and the charge for deferred financing costs as an extraordinary
loss of $928,000, net of related income tax benefit of $677,000, in the fiscal
year ended January 29, 1994.
In December 1995, the Company issued an additional $13,500,000 principal amount
of 10.25% senior subordinated notes (the "Series B Notes") due March 15, 2004.
The proceeds received from the sale of the Series B Notes were used primarily to
purchase the interests held by the former Chairman of the Board of Directors and
certain of his affiliates in DM Associates (see Notes 9 and 14). The Indenture
pursuant to which the Company issued the Series A Notes was amended and restated
to 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
Class A Common Stock of the Company. In addition, the Company issued to the
holders of the Series A Notes warrants to purchase 500,000 shares of the Class A
Common Stock of the Company. The warrants may be exercised any time during the
next six 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 current market
value of the Company's Class A Common Stock.
The Series A and Series B Notes,(collectively, the "Notes") are redeemable, at
the option of the Company, after March 15, 1999 at rates starting at 104.75% of
principal amount reduced annually through March 15, 2002 at which time they
become redeemable at 100% of principal amount. The terms of the Notes may
restrict, among other things, the payment of dividends and other distributions,
investments, the repurchase of capital stock and the making of certain other
restricted payments by the Company and its subsidiaries, the incurrence of
additional indebtedness and new operating lease obligations by the Company or
any of its subsidiaries, and certain mergers, consolidations and dispositions of
assets. Additionally, according to the terms of the Notes, if a change of
control occurs, as defined, each holder of Notes will have the right to require
the Company to repurchase such holder's Notes at 101% of the principal amount
thereof.
In April 1996, the Company entered into a new $30,000,000 senior revolving
credit facility which provides for the availability initially of up to
$20,000,000 of aggregate extensions of credit, of which up to $15,000,000 will
be available for the issuance of letters of credit. The outstanding balance is
due and payable on April, 30, 1999; however, the Company may extend such due
date for up to two additional one-year periods, with the consent of the lenders.
Revolving credit loans under the credit agreement bear interest, at the
Company's option, at an applicable margin over the agent bank's base rate or the
LIBOR rate. The applicable margin, if any, is based upon the ratio of
consolidated indebtedness to consolidated EBITDA, as defined below. The credit
agreement also provides for a commitment fee of 1/2% on any unused portion of
the revolving credit facility. Among other restrictions, the credit agreement
contains financial covenants relating to specified levels of: indebtedness to
earnings before interest expense, taxes, depreciation and amortization (EBITDA);
EBITDA to interest expense; earnings before interest expense, taxes,
depreciation, amortization and rent, less taxes paid in cash to interest
expense, rent expense and principal payments required to be made on
indebtedness; and the maintenance of a minimum net worth. In connection with the
credit agreement, the Company granted a security interest in substantially all
of its non-real estate assets and pledged as collateral the shares of capital
stock of certain subsidiary corporations of the Company.
The Company is limited in the amount of cash dividends that it may pay and the
amount of capital stock and subordinated indebtedness that it may repurchase by
applicable covenants contained in the senior revolving credit facility and
Notes. As of February 3, 1996, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of February 3, 1996 and January 28, 1995, the fair value of the real estate
mortgage notes payable and Small Business Administration debentures approximated
the carrying amount. As of February 3, 1996, the fair value of the Series B
Notes, net of original issue discount, approximated the carrying amount. As of
February 3, 1996 and January 28, 1995, the fair value of the Series A Notes was
$65,500,000 and $56,250,000, respectively.
F-9
Dairy Mart Convenience Stores, Inc. and Subsidiaries
As of February 3, 1996, maturities on long-term obligations for the next five
years, were as follows:
- - ------------------------------------------------------------------------------------------------------------------------------------
February 3,
Fiscal Year 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1997...................................................................................................................... $1,430
1998...................................................................................................................... 1,412
1999...................................................................................................................... 2,226
2000...................................................................................................................... 4,262
2001...................................................................................................................... 333
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
7. OPERATING LEASES:
The Company leases operating properties, including store locations and office
space, under various lease agreements expiring through 2020. Certain of these
locations are sublet to the Company's franchisees. The future minimum lease
payments related to these properties are included in the following summary.
A summary of future minimum lease payments and sublease receipts as of February
3, 1996 is as follows:
Net
Operating Operating Operating
Payable/Receivable in Fiscal Year Ending Leases Subleases Leases
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
1997........................................................................................... $14,704 $ 2,980 $11,724
1998........................................................................................... 11,761 2,375 9,386
1999........................................................................................... 9,086 1,642 7,444
2000........................................................................................... 6,876 966 5,910
2001........................................................................................... 4,597 550 4,047
Thereafter..................................................................................... 19,627 452 19,175
-----------------------------------
Total.......................................................................................... $66,651 $ 8,965 $57,686
- - -----------------------------------------------------------------------------------------------------------------------------------
Rental expense for all operating leases was as follows:
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Leases....................................................................................... $15,297 $15,321 $14,803
Less subleases............................................................................... 4,169 4,631 4,396
-------------------------------------
Net.......................................................................................... $11,128 $10,690 $10,407
- - ------------------------------------------------------------------------------------------------------------------------------------
F-10
8. FEDERAL AND STATE INCOME TAXES:
The benefit from (provision for) income taxes for the fiscal years ended
February 3, 1996, January 28, 1995 and January 29, 1994 was as follows:
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
(in thousands)
Current benefit (provision)
Federal............................................. 495 2,015 (188)
State and local..................................... (148) (346) (447)
--------------------------------------------------
Total current benefit (provision)................. 347 1,669 (635)
--------------------------------------------------
Deferred benefit (provision)
Federal............................................. 2,101 3,423 115
State and local..................................... 772 1,737 (111)
--------------------------------------------------
Total deferred benefit (provision)................ 2,873 5,160 4
--------------------------------------------------
Total benefit (provision)............................. 3,220 6,829 (631)
============================================================================================================
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. These minimum taxes are
included in the current provision for state and local income taxes. In addition,
the Company records a reduction in the provision (increase in the benefit) for
income taxes for the benefit to be realized from targeted jobs credits in the
year in which they arise. A reconciliation of the difference between the
statutory federal income tax rate and the effective income tax rate follows:
Percent of Pretax Income
--------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate..................... 34 % 34 % (34)
(Increase) decrease from:
State income tax benefit (provision), net of
federal tax effect................................. 5 5 (24)
Nondeductible expenses and amortization of
acquired assets.................................... (5) (1) (8)
Targeted jobs credit................................ 1 2 27
Regulatory audit settlement......................... - (2) -
Other............................................... - - (3)
---------------------------------------------------
Effective income tax rate............................. 35 % 38 % (42)
=============================================================================================================
F-11
In November 1994, the Company reached an agreement with the Internal Revenue
Service to settle certain disputed items, primarily related to the deductibility
of certain intangible assets associated with prior acquisitions. The impact of
the settlement required the Company to pay approximately $1,587,000, of which
$681,000 represents pretax interest charges (see Note 14), and to reduce the
deductibility of the remaining basis of certain intangible assets by $3,300,000.
The Company reflected the impact of this settlement through the fiscal 1995 tax
benefit and adjusted deferred tax assets and liabilities accordingly.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Significant deferred tax assets (liabilities) as of February 3, 1996
and January 28, 1995 were as follows:
1996 1995
- - --------------------------------------------------------------------------------------------------------------
(in thousands)
Capitalized leases......................................................... 182 182
Depreciation and amortization.............................................. (13,307) (13,337)
Vacation accrual........................................................... 324 310
Inventory (LIFO)........................................................... (1,337) (1,582)
Reserve for asset valuations............................................... 803 744
Insurance reserves not deductible for tax purposes........................ 1,989 2,091
Income deferred for financial statement purposes........................... 365 127
Reserve for closed stores and renovations.................................. 937 1,649
Accrued restructuring and severance reserves............................... 875 607
Financial statement expenses deferred for tax purposes..................... 379 477
Writedown of non-operating properties...................................... 1,591 1,455
Divestiture of dairy manufacturing and distribution operations............. 124 997
Tax credits and net operating loss carryforwards........................... 9,927 6,272
Other...................................................................... 460 447
---------------------------------
Net deferred tax asset (liability)......................................... 3,312 439
==============================================================================================================
As of February 3, 1996, the Company had alternative minimum tax credits
aggregating $330,000 which carryforward indefinitely for federal income tax
purposes. These credits can be used in the future to the extent that the
Company's regular tax liability exceeds its liability calculated under the
alternative minimum tax method. In addition, the Company had $1,979,000 of
targeted jobs credit carryforwards that expire, if unused, from fiscal 2007 to
2011 and $518,000 of foreign tax credit carryforwards that expire, if unused,
in fiscal 1997 to 2001. The Company and its subsidiaries file a consolidated
federal income tax return but generally file separate state income tax returns.
As of February 3, 1996, the Company had regular federal income tax net operating
loss carryforwards of $15,903,000 which expire, if unused, from fiscal 2009 to
2011 and net operating loss carryforwards for state income tax purposes of
$25,641,000 which expire, if unused from fiscal 1997 to 2011. Realization of the
net operating loss carryforwards is dependent on generating sufficient taxable
income prior to the expiration of the operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, would be reduced in the near term if
management's estimate of future taxable income during the carryforward period
are reduced. No valuation allowance for deferred tax assets was provided as of
February 3, 1996 and January 28, 1995.
F-12
Dairy Mart Convenience Stores, Inc. and Subsidiaries
9. CAPITAL STOCK:
In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under
the SRP, each holder of Class A and Class B Common Stock was declared a dividend
of one Preferred Stock Purchase Right (the "Rights"). The Rights are to purchase
one one-hundredth (1/100) of a share of Series A Junior Preferred Stock at a
price of $30 subject to certain adjustments. The Rights are exercisable under
certain circumstances, and expire on January 19, 2006.
In December 1995, the Company completed the purchase of the interests of the
former Chairman of the Board of Directors and certain of his affiliates in DM
Associates (see Note 6). Under the terms of this agreement, the Company
purchased for $10,000,000 all of the former Chairman's interest in DM
Associates, which entity owns 1,858,743 shares of the Company's Class B Common
Stock. The former Chaiman's interest in DM Associates included a limited
partnership interest and a promissory note from DM Associates secured by
1,220,000 shares of the Company's Class B Common Stock. As a result, the amount
paid has been reflected as a reduction of stockholders' equity in the
accompanying balance sheets.
Dividends may be declared and paid on Class A Common Stock without being paid on
Class B Common Stock. No dividend may be paid on Class B Common Stock without
equal amounts paid concurrently on Class A Common Stock (see Note 6). Holders of
Class A Common Stock have one-tenth vote per share and are entitled to elect 25%
of the Board of Directors so long as the number of outstanding shares of Class A
Common Stock is at least 10% of the total of all shares of Common Stock
outstanding. Holders of Class B Common Stock have one vote per share. Holders of
Class B Common Stock have the right to convert their shares at any time for an
equivalent number of shares of Class A Common Stock.
In June 1986, the stockholders approved an Employee Stock Purchase Plan. The
plan, as amended in June, 1992, provides that employees may purchase quarterly,
through payroll deductions, up to 250 shares of Class A Common Stock at 85% of
the market value. Of the original 1,250,000 shares provided for under this plan,
1,052,611 shares remained available for issuance as of February 3, 1996.
As of February 3, 1996, January 28, 1995 and January 29, 1994, the Company held
521,625 shares of Class A Common Stock and 175,957 shares of Class B Common
Stock as treasury shares.
________________________________________________________________________________
10. STOCK OPTION PLANS, GRANTS AND WARRANTS:
The Company adopted Stock Option Plans in 1983, 1985 and 1990 providing for the
granting of options to employees up to an aggregate of 226,875 shares of Class B
Common Stock and 750,000 shares of Class A Common Stock. The Company granted
incentive stock options pursuant to these Plans totalling 177,887, 158,363 and
100,500 in fiscal 1996, 1995 and 1994, respectively. As of February 3, 1996, the
Company had available for grant under the 1990 Plan options to purchase 41,893
shares of Class A Common Stock, after considering the lapse of options
previously granted. In addition to the incentive stock options granted under the
above Plans, the Company has granted non-qualified stock options, including
options for 97,500 and 160,500 in fiscal 1996 and 1995, respectively, which are
not part of a specific plan.
In January 1996, the Company adopted a Stock Option and Incentive Award Plan
(the "Award Plan") and a non-qualified Stock Option Plan for Outside Directors
("Outside Directors Plan"). The Award Plan provides for the granting of options
to employees up to a total of 650,000 shares of either Class A or Class B Common
Stock. As of February 3, 1996 the Company had granted options for 82,500 shares
of the Company's Class A Stock under the Award Plan. The Outside Directors Plan
provides for an option to purchase 3,500 shares of the Company's Class A Common
Stock to all non-employee directors and an option of 3,500 shares annually
thereafter for a period of ten years. The maximum number of shares reserved for
issuance under this plan is 50,000. The Company granted 17,500 non-qualified
stock options to Outside Directors in fiscal year 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock issued to
Employees". The Company has elected to remain with the accounting in Opinion No.
25 and is required to make pro forma disclosures of net income, as if the fair
value based method of accounting defined in the statement, had been applied. The
Company is required to adopt this new accounting standard on February 4, 1996.
A summary of activity for all stock options during the fiscal year ended
February 3, 1996 is as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
Options Net Options Options
Outstanding Options Outstanding Exercisable
Plan or Fiscal Stock Option January 28, Granted Options February 3, February 3,
Year Type Price 1995 (Lapsed) Exercised 1996 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Incentive Stock Options:
1983 Plan Class B $5.50 5,250 (5,250) - - -
1985 Plan Class A $2.75 to $2.88 384,125 28,080 (7,875) 404,330 178,606
1990 Plan Class A $2.75 to $2.88 134,063 40,607 (8,750) 165,920 75,860
1995 Plan Class A $5.50 - 82,500 - 82,500 -
- - ---------------------------------------------------------------------------------------------------------------------------
Total Incentive Stock Options 523,438 145,937 (16,625) 652,750 254,466
- - ---------------------------------------------------------------------------------------------------------------------------
Non-qualified Stock Options:
1986 Class B $4.00 6,750 (6,750) - - -
1987 Class A $8.80 10,000 - - 10,000 10,000
1991 Class A $4.60 5,000 - - 5,000 5,000
1995 Class B $5.50 10,000 - - 10,000 10,000
1995 Class A $4.60 to $7.25 140,000 - - 140,000 140,000
1996 Class A $2.75 to $2.88 - 97,500 - 97,500 97,500
1996 Class A $4.00 to $5.75 10,500 17,500 - 28,000 10,500
- - ---------------------------------------------------------------------------------------------------------------------------
Total Non-qualified Stock Options 182,250 108,250 - 290,500 273,000
- - ---------------------------------------------------------------------------------------------------------------------------
Total Stock Options 705,688 254,187 (16,625) 943,250 527,466
===========================================================================================================================
In January 1996, the Company awarded, pursuant to the Award Plan, restricted
stock grants consisting of an aggregate of 100,000 shares of the Company's Class
A Common Stock. The restricted shares will vest equally over a three year period
if the closing price of the Company's Class A Common Stock, as reported on the
NASDAQ National Market System for a consecutive ten day period, is equal to at
least $9.00 in the first year, $11.00 in the second year and $13.00 in the third
year from the date of the grant.
In December 1995, the Company issued warrants to purchase 1,715,000 shares of
Class A Common Stock which may be exercised at any time during the next six
years (see Notes 6 and 14) at an exercise price of $6.95 per share at February
3, 1996. The issuance of the warrants were recorded as an increase in paid-in-
capital totalling approximately $2,281,000.
F-13
Dairy Mart Convenience Stores, Inc. and Subsidiaries
11. GASOLINE OPERATIONS:
A summary of gasoline operations for the years ended February 3, 1996, January
28, 1995 and January 29, 1994 is as follows:
- - --------------------------------------------------------------------------------
1996 1995 1994
- - --------------------------------------------------------------------------------
(in thousands)
Gasoline gallons sold.......................... 212,832 206,441 206,365
Gasoline revenues.............................. $226,505 $210,541 $206,155
Cost of gasoline sold.......................... 201,980 186,462 180,835
Depreciation................................... 2,461 2,080 2,025
Capital expenditures........................... 7,585 3,702 952
Net book value of gasoline equipment........... 19,054 13,068 11,300
- - --------------------------------------------------------------------------------
________________________________________________________________________________
12. EMPLOYEE BENEFIT PLANS:
The Company provides benefits to qualified employees through a defined
contribution profit sharing plan. Contributions under this plan are made
annually in amounts determined by the Company's Board of Directors. No
discretionary contributions to this plan were made in fiscal 1996 or 1995 and
the Company recorded a provision of $100,000 for contributions under this plan
in fiscal 1994.
Effective January 1, 1993, the profit sharing plan was amended pursuant to
section 401(k) of the Internal Revenue Code enabling eligible employees to
contribute up to 15% of their annual compensation to the plan, with the Company
matching 25% of such contributions up to 6% of the employees' annual
compensation. Matching contributions from the Company for fiscal years 1996,
1995 and 1994 were $128,000, $163,000 and $181,000, respectively. The Company
does not offer any additional postretirement and postemployment benefits to its
employees.
________________________________________________________________________________
13. COMMITMENTS AND CONTINGENCIES:
As of February 3, 1996, the Company was contingently liable for outstanding
letters of credit amounting to $13,475,000. The Company was also contingently
liable as guarantor on certain loans obtained by convenience store operators to
finance the purchase of equipment and initial inventory in the approximate
amount of $97,000 as of February 3, 1996. In consideration of these guarantees,
the Company participates with the lending institutions in the interest paid on
these obligations which are secured by inventory and equipment owned by the
convenience store operators.
The Company has certain environmental contingencies related to the 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 gasoline 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 existing and
previously operated retail gasoline facilities. The Company accrues its estimate
of all costs to be incurred for assessment and remediation for known releases.
These accruals are adjusted if and when new information becomes known. Due to
the nature of such releases, the actual costs of assessment and remediation may
vary significantly from year to year. As of February 3, 1996 and January 28,
1995, the Company had recorded an accrual of $1,890,000 and $2,300,000,
respectively, for such costs. 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 funds. As of February 3,
1996 and January 28, 1995, the Company had recorded a reimbursement receivable
of $1,137,000 and $1,031,000, respectively. For the fiscal years ended February
3, 1996, January 28, 1995 and January 29, 1994, the Company recorded a provision
for environmental expenses of $1,048,000, $1,160,000 and $343,000, respectively.
Additionally, under current federal and state regulatory programs, the Company
will be obligated by December 1998 to upgrade or replace most of its existing
underground storage tanks ("USTs"). The Company presently estimates that it will
be required to make capital expenditures related to the upgrading or replacing
of USTs ranging from approximately $10.0 to $12.0 million in the aggregate
through December 1998, which capital expenditures could be reduced for locations
which may be closed in lieu of the capital costs of compliance. The Company's
estimate of costs to be incurred for environmental assessment and remediation
and for UST upgrading and other regulatory compliance are based on factors and
assumptions that could change due to modifications of regulatory requirements,
detection of unanticipated environmental conditions or other unexpected
circumstances. Due to the nature of such information, the actual costs incurred
may vary from their estimates, and the ongoing costs of assessment and
remediation activities may vary significantly from year to year.
In fiscal 1989, the Company entered into agreements for the wholesale supply of
various grocery items to its Northeast and Midwest region stores. Under the
supply agreement, the Company is obligated to annually purchase a minimum amount
of merchandise for a period of ten years. The level of purchases was achieved
during the first eight years of the agreement and management believes it is
readily achievable for the balance of the agreement. Prices to be charged by the
supplier must be competitive.
The Company has been named as a nominal defendant, along with those persons who
were directors of the Company in fiscal 1996, in two shareholder derivative
actions. The plaintiffs allege, among other things, that in connection with the
settlement of the dispute between the former Chairman of the Board of Directors
and certain of his affiliates and the Company's management with respect to
control of the Company, the directors violated their fiduciary duty to the
Company and its stockholders, violated provisions of Delaware corporate law and
wasted corporate assets. The plaintiffs seek, among other things, a declaration
that the current structure of the general partner of DM Associates is invalid
and that certain voting rights, with respect to the Class B Common Stock held by
DM Associates should be vested in the Company. DM Associates owns approximately
60% of the total voting power of both classes of the Company's Common Stock. The
Company is contesting these claims and at this time is not able to determine
what the outcome of this litigation will be.
The Company is party to a number of other lawsuits which have arisen in the
ordinary course of business. Management does not believe the outcome of this
litigation will have a material impact on the Company's future results of
operations or financial position.
F-14
Dairy Mart Convenience Stores, Inc. and Subsidiaries
14. NONRECURRING CHARGES:
A summary of nonrecurring charges for fiscal years ended February 3, 1996 and
January 28, 1995 is as follows:
1996 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Costs and expenses related to settlement agreement with stockholder................................. $ 6,487 $ -
Costs to divest of dairy manufacturing and distribution operations.................................. 1,313 2,500
Administrative severance, settlement and related costs.............................................. 1,211 2,800
Regulatory and administrative fees and expenses..................................................... 1,287 1,216
Writedown of non-operating properties to net realizable value....................................... 1,000 3,584
Costs of store closings and restructuring........................................................... 902 3,900
--------------------------
Total nonrecurring charges..................................................................... $12,200 $14,000
- - ---------------------------------------------------------------------------------------------------------------------------------
During fiscal 1996, the Company recorded nonrecurring charges of $5,822,000
related to the settlement agreement with a former stockholder. These costs and
expenses consist of legal fees, execution of non-compete and other agreements
and reimbursement of certain fees and expenses incurred by the former
stockholder in connection with activities relating to the Company. In addition,
the Company issued warrants to holders of the Company's Series A Notes to
purchase 500,000 shares of the Company's Class A Common Stock, in order to
obtain the consent from such holders for the Company to purchase the interests
held by the former stockholder and a waiver of certain alleged events of default
under the terms of the Series A Notes. The issuance of the warrants resulted in
a nonrecurring charge of $665,000.
During fiscal 1996 and 1995, the Company recorded nonrecurring charges of
$1,313,000 and $2,500,000, respectively, for costs associated with the sale and
closing of its manufacturing and distribution operations.
During fiscal 1996, the Company recorded a nonrecurring charge of $1,211,000
relating to the severance and other related costs associated with the
termination of an officer of the Company. During fiscal 1995, the Company
recorded nonrecurring charges of $2,800,000 for costs, including legal expenses,
associated with the removal of the Company's former President and Chief
Executive Officer, 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.
During fiscal 1996, the Company incurred $1,287,000 in nonrecurring regulatory
and administrative fees and expenses which consisted primarily of financing fees
incurred to amend the Company's senior revolving credit facility with respect to
the purchase of a stockholder's interest in DM Associates including the issuance
of the Series B Notes (see Note 6).
During fiscal 1995, the Company incurred $535,000 in duplicative interest
expense and in administrative fees associated with the Company's financing
activities. Interest expense, net of interest income, and fees were incurred due
to the issuance of the Company's Series A Notes on March 5, 1994, the retirement
of the Company's 14.25% subordinated debentures on April 4, 1994 and a
subsequent amendment of the Company's senior revolving credit facility (see Note
6). In addition, in fiscal 1995, the Company reached agreement with the Internal
Revenue Service to settle certain disputed items. The terms of the settlement
required the Company to pay $681,000 of interest charges (see Note 8).
During fiscal 1996 and 1995, the Company recorded nonrecurring charges of
$1,000,000 and $3,584,000, respectively, for the writedown of non-operating
office and plant facilities to net realizable value in conjunction with the
anticipated sale of these properties.
During fiscal 1996 and 1995, the Company recorded nonrecurring charges of
$902,000 and $3,900,000, respectively, for costs associated with the sale or
closing initiated in fiscal 1995, of 143 of its retail convenience stores and
the closing of 81 of its retail gasoline facilities in fiscal 1995. 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.
F-15