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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 5, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-12497
DAIRY MART CONVENIENCE STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2497894
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE DAIRY MART WAY, 300 EXECUTIVE PARKWAY WEST, HUDSON, OHIO 44236
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (330) 342-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
SHARES OF COMMON STOCK OUTSTANDING JUNE 6, 2001 - 5,004,592
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PART I. FINANCIAL INFORMATION
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FIRST FISCAL
QUARTER ENDED
-------------
MAY 5, APRIL 29 ,
2001 2000
---- ----
Revenues..................................................... $ 161,737 $ 172,934
Cost of goods sold and expenses:
Cost of goods sold........................................ 127,921 137,411
Operating and administrative expenses..................... 37,425 37,736
Interest expense.......................................... 3,974 3,126
---------- -------------
169,320 178,273
Income (loss) before incomes taxes........................... (7,583) (5,339)
Benefit from (provision for) income taxes.................... (150) 2,458
----------- -------------
Net income (loss)............................................ $ (7,733) $ (2,881)
=========== =============
Earnings (loss) per share - Basic............................ $ (1.55) $ (0.59)
Earnings (loss) per share - Diluted.......................... $ (1.55) $ (0.59)
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
MAY 5, FEBRUARY 3,
2001 2001
---- ----
ASSETS
Current assets:
Cash..................................................................... $ 7,048 $ 5,667
Short-term investments................................................... 3,388 3,000
Accounts and notes receivable, net....................................... 13,208 13,462
Inventory................................................................ 25,269 24,424
Prepaid expenses and other current assets................................ 4,007 3,612
-------------- --------------
Total current assets................................................... 52,920 50,165
Property and equipment, net................................................. 109,141 111,448
Intangible assets, net...................................................... 13,547 13,731
Other assets, net........................................................... 15,132 15,373
-------------- --------------
Total assets................................................................... $ 190,740 $ 190,717
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations.............................. $ 7,287 $ 6,043
Accounts payable......................................................... 45,724 44,361
Accrued expenses......................................................... 16,310 15,835
Accrued interest......................................................... 1,506 3,638
-------------- --------------
Total current liabilities.............................................. 70,827 69,877
Long- term obligations, less current portion above.......................... 127,442 129,557
Other liabilities........................................................... 22,468 13,555
-------------- --------------
Total liabilities...................................................... 220,737 212,989
-------------- --------------
Stockholders' equity:
Common stock............................................................. 71 70
Paid-in capital.......................................................... 32,423 32,416
Retained deficit......................................................... (47,486) (39,753)
Treasury stock, at cost.................................................. (15,005) (15,005)
--------------- ---------------
Total stockholders' deficit............................................ (29,997) (22,272)
--------------- ---------------
Total liabilities and stockholders' deficit.................................... $ 190,740 $ 190,717
============== ==============
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE FIRST FISCAL QUARTER ENDED
MAY 5, APRIL 29,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss)........................................................... $ (7,733) $ (2,881)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 3,717 3,525
Deferred income taxes.................................................... 61 (3,373)
Loss on disposition of properties, net.................................. 39 10
Net change in assets and liabilities:
Accounts and notes receivable.......................................... 282 2,362
Inventory.............................................................. (845) 2,795
Accounts payable....................................................... 1,363 (1,235)
Accrued interest....................................................... (2,132) (1,849)
Other assets and liabilities, net...................................... 9,044 317
-------------- --------------
Net cash provided by (used in) operating activities............................ 3,796 (329)
-------------- ---------------
Cash flows used for investing activities:
Purchase of short-term investments.......................................... (388) (2,832)
Purchase of property and equipment.......................................... (1,469) (8,462)
Proceeds from sale of property and equipment................................ 374 3,640
-------------- --------------
Net cash (used for) investing activities....................................... (1,483) (7,654)
--------------- ---------------
Cash flows from financing activities:
Borrowings on revolving loan, net........................................... (4) 6,148
Borrowings of long-term obligations......................................... -- 600
Repayment of long-term obligations.......................................... (928) (717)
Issuance of Common Stock.................................................... -- 12
-------------- --------------
Net cash (used for) provided from financing activities......................... (932) 6,043
--------------- --------------
Increase (decrease) in cash.................................................... 1,381 (1,940)
Cash at beginning of fiscal year............................................... 5,667 7,702
-------------- --------------
Cash at end of first fiscal quarter............................................ $ 7,048 $ 5,762
============== ==============
Supplemental disclosures:
Interest paid .............................................................. $ 6,103 $ 5,094
Income Taxes Refunded ...................................................... $ -- $ 78
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 5, 2001
(UNAUDITED)
The unaudited consolidated financial statements for Dairy Mart Convenience
Stores, Inc. and Subsidiaries ("Dairy Mart" or the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented,
and which are of a normal, recurring nature. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K, filed with the Securities and Exchange
Commission for the fiscal year ended February 3, 2001.
1. ACCOUNTING POLICIES
The financial statements included herein have been prepared in accordance with
the accounting policies described in Note 1 to the February 3, 2001 audited
consolidated financial statements included in the Company's Form 10-K. Certain
prior year amounts have been reclassified to conform to the presentation used
for the current year.
2. CHANGES IN CAPITAL ACCOUNTS
An analysis of the capital stock accounts for the first fiscal quarter ended May
5, 2001 follows:
COMMON STOCK ISSUED PAID-IN CAPITAL IN
AT EXCESS OF
$.01 PAR VALUE AMOUNT PAR VALUE
-------------------------- -------------------- -----------------------
Balance February 3, 2001 7,059,205 $70,583 $32,415,823
Employee stock purchase plan 2,566 26 6,780
Stock options exercised - - -
Stock awards - - -
-------------------------- -------------------- -----------------------
Balance May 5, 2001 7,061,771 $70,609 $32,422,603
-------------------------- -------------------- -----------------------
As of May 5, 2001, there were 2,057,178 shares of Common Stock held as treasury
stock at an aggregate cost of $15,004,847, leaving 5,004,593 shares outstanding.
3. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate,
during each period. The weighted average number of shares used in the
calculation of basic earnings per share was 5,002,882 and 4,895,594 for the
first fiscal quarter ended May 5, 2001 and April 29, 2000, respectively. The
weighted average number of shares used in the calculation of diluted earnings
per share was 5,002,882 and 4,895,594 for the first fiscal quarter ended May 5,
2001 and April 29, 2000, respectively.
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4. SEASONALITY
The results of operations for the first fiscal quarter ended May 5, 2001 are not
necessarily indicative of results to be expected for the full fiscal year. The
convenience store industry in Dairy Mart's marketing areas experiences a higher
percentage of revenues and gross profits during the summer months than during
the winter months. Historically, Dairy Mart has achieved more favorable
financial results in its second and third fiscal quarters, as compared to its
first and fourth fiscal quarters.
5. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
On December 31, 200, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment to FASB Statement No.
133." These statements, which establish the accounting and financial reporting
requirements for derivative instruments, require companies to recognize
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. The adoption of this standard did not have a
material impact on the Company's consolidated financial statements.
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
Dairy Mart's payment obligations under the Series A and Series B Senior
Subordinated Notes are guaranteed by certain of Dairy Mart's subsidiaries
("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed
on an unsecured, senior subordinated, joint and several basis by each of the
Guarantor Subsidiaries. The following supplemental financial information sets
forth, on a consolidating basis, statements of operations, balance sheets and
cash flow information for Dairy Mart Convenience Stores, Inc. ("Parent
Company"), for the Guarantor Subsidiaries and for Financial Opportunities, Inc.
("FINOP"), Dairy Mart's non-guarantor subsidiary. Separate complete financial
statements of the respective Guarantor Subsidiaries would not provide additional
information which would be useful in assessing the financial condition of the
Guarantor Subsidiaries, and are omitted accordingly.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and inter-company balances and
transactions.
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SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FIRST FISCAL QUARTER ENDED MAY 5, 2001
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
Revenues........................................... $ 2 $ 161,513 $ 222 $ - $ 161,737
Cost of goods sold and expenses:
Cost of goods sold.............................. - 127,921 - - 127,921
Operating and administrative expenses .......... 89 37,315 21 - 37,425
Interest expense................................ 3,910 28 36 - 3,974
------------ ------------ ---------- --------- -----------
3,999 165,264 57 - 169,320
------------ ------------ ---------- --------- -----------
Loss before income taxes
and equity in income (loss) of
consolidated subsidiaries.................... (3,997) (3,751) 165 - (7,583)
Benefit from (provision for) income taxes.... - (150) - - (150)
------------ ------------- ---------- --------- ------------
Income (loss) before equity in
income (loss) of consolidated subsidiaries...... (3,997) (3,901) 165 - (7,733)
Equity in income (loss) of consolidated
subsidiaries.................................... (3,736) 165 - 3,571 -
------------- ------------ ---------- --------- -----------
Net income (loss) ........................... $ (7,733) $ (3,736) $ 165 $ 3,571 $ (7,733)
============= ============= ========== ========= ============
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SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
AS OF MAY 5, 2001
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
ASSETS
Current assets:
Cash ....................................... $ 1,731 $ 4,832 $ 485 $ - $ 7,048
Short-term investments...................... - 452 2,936 - 3,388
Accounts and notes receivable, net.......... 13 12,409 786 - 13,208
Inventory................................... - 25,269 - - 25,269
Prepaid expenses and other current assets... 44 3,963 - - 4,007
----------- ----------- --------- ------------- -----------
Total current assets................... 1,788 46,925 4,207 - 52,920
Property and equipment, net.................... - 109,141 - - 109,141
Intangible assets, net......................... - 13,547 - - 13,547
Other assets, net.............................. 1,720 12,771 641 - 15,132
Investment in and (advances to) subsidiaries... 112,026 1,745 248 (114,019) -
----------- ----------- --------- ----------- -----------
Total assets................................... $ 115,534 $ 184,129 $ 5,096 $ (114,019) $ 190,740
=========== =========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations.............................. $ 6,338 $ 949 $ - $ - $ 7,287
Accounts payable............................ 25,809 19,915 - - 45,724
Accrued expenses............................ 755 15,536 19 - 16,310
Accrued interest............................ 1,371 - 135 - 1,506
----------- ----------- --------- ----------- -----------
Total current liabilities................ 34,273 36,400 154 - 70,827
Long-term obligations, less
current portion above....................... 111,258 13,054 3,130 - 127,442
Other liabilities.............................. - 22,468 - - 22,468
Stockholders' equity (deficit)................. (29,997) 112,207 1,812 (114,019) (29,997)
----------- ----------- --------- ------------ -----------
Total liabilities and stockholders
equity (deficit)............................ $ 115,534 $ 184,129 $ 5,096 $ (114,019) $ 190,740
=========== =========== ========= ============ ===========
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SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FIRST FISCAL QUARTER ENDED MAY 5, 2001
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
Net cash (used in) provided by
operating activities........................ $ (6,875) $ 10,555 $ 116 $ - $ 3,796
------------ ------------- ----------- ---------- -----------
Cash flows from investing activities:
Purchase of and change in short-term
investments.............................. - (452) 64 - (388)
Purchase of property and equipment.......... - (1,469) - - (1,469)
Net proceeds from sale of property,
equipment and assets held for sale....... - 374 - - 374
Investment in and (advances to)
subsidiaries............................ 5,278 (5,156) (122) - -
----------- ------------- ----------- ---------- -----------
Net cash (used in) provided by
investing activities..................... 5,278 (6,703) (58) - (1,483)
----------- -------------- ------------ ---------- ------------
Cash flows from financing activities:
Increase in revolving loan, net............. - (4) - - (4)
Borrowings of long term obligations......... - - - - -
Repayment of long-term obligations............. (400) (528) - - (928)
Issuance of common stock.................... 7 (7) - - -
----------- -------------- ----------- ---------- -----------
Net cash provided by
financing activities....................... (393) (539) - - (932)
------------ -------------- ----------- ---------- ------------
Increase (decrease) in cash.................... (1,990) 3,313 58 - 1,381
Cash at beginning of fiscal year............... 3,721 1,519 427 - 5,667
----------- ------------- ----------- ---------- -----------
Cash at end of first fiscal quarter............ $ 1,731 $ 4,832 $ 485 $ - $ 7,048
=========== ============= =========== ========== ===========
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SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FIRST FISCAL QUARTER ENDED APRIL 29, 2000
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
Revenues........................................... $ 120 $ 172,763 $ 51 $ - $ 172,934
Cost of goods sold and expenses:
Cost of goods sold.............................. - 137,411 - - 137,411
Operating and administrative expenses .......... 85 37,645 6 - 37,736
Interest expense................................ 2,676 389 61 - 3,126
------------ ------------ ---------- --------- -----------
2,761 175,445 67 - 178,273
------------ ------------ ---------- --------- -----------
Income (loss) before income taxes
and equity in income (loss) of
consolidated subsidiaries.................... (2,641) (2,682) (16) - (5,339)
Benefit from (provision for)
income taxes.................................... (1,215) 3,680 (7) - 2,458
------------- ------------ ---------- --------- -----------
Income (loss) before equity in
income (loss) of consolidated subsidiaries...... (3,856) 998 (23) - (2,881)
Equity in income (loss) of consolidated
subsidiaries.................................... 975 (23) - (952) -
------------ ------------- ---------- ---------- -----------
Net income (loss)........................... $ (2,881) $ 975 $ (23) $ (952) $ (2,881)
============= ============ ========== ========== ============
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SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
AS OF FEBRUARY 3, 2001
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
ASSETS
Current assets:
Cash ....................................... $ 3,721 $ 1,519 $ 427 $ - $ 5,667
Short-term investments...................... - - 3,000 - 3,000
Accounts and notes receivable, net.......... 60 12,546 856 - 13,462
Inventory................................... - 24,424 - - 24,424
Prepaid expenses and other current assets... 66 3,546 - - 3,612
----------- ------------- ----------- ------------- -----------
Total current assets..................... 3,847 42,035 4,283 - 50,165
Property and equipment, net.................... - 111,448 - - 111,448
Intangible assets, net......................... - 13,731 - - 13,731
Other assets, net.............................. 1,809 12,921 643 - 15,373
Investment in and (advances to)
subsidiaries................................ 118,966 1,699 244 (120,909) -
----------- ------------- ----------- ------------- -----------
Total assets................................... $ 124,622 $ 181,834 $ 5,170 $ (120,909) $ 190,717
=========== ============= =========== ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term obligations.................... $ 5,230 $ 813 $ - $ - $ 6,043
Accounts payable............................ 25,544 18,817 - - 44,361
Accrued expenses............................ 599 15,213 23 - 15,835
Accrued interest............................ 3,564 - 74 - 3,638
----------- ------------- ----------- ------------- -----------
Total current liabilities................ 34,937 34,843 97 - 69,877
Long-term obligations, less
current portion above....................... 111,957 14,470 3,130 - 129,557
Other liabilities.............................. - 13,555 - - 13,555
Stockholders' equity (deficit)................. (22,272) 118,966 1,943 (120,909) (22,272)
------------ ------------- ----------- ------------- ------------
Total liabilities and
stockholders' equity (deficit).............. $ 124,622 $ 181,834 $ 5,170 $ (120,909) $ 190,717
=========== ============= =========== ============= ===========
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SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FIRST FISCAL QUARTER ENDED APRIL 29, 2000
(UNAUDITED)
(IN THOUSANDS)
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
Net cash (used in) provided by
operating activities........................ $ (7,797) $ 7,391 $ 77 $ - $ (329)
Cash flows from investing activities:
Purchase of and change in short-term
investments.............................. - 128 (2,960) (2,832)
Purchase of property and equipment.......... - (8,462) - - (8,462)
Proceeds from sale of property
and equipment ........................... - 3,640 - - 3,640
Investment in and (advances to)
subsidiaries............................. 4,886 (4,731) (155) - -
----------- -------------- ------------ ---------- -----------
Net cash provided by (used in)
investing activities..................... 4,886 (9,425) (3,115) - (7,654)
----------- -------------- ------------ ---------- ------------
Cash flows from financing activities:
Borrowings on revolving loan, net........... 6,148 - - - 6,148
Borrowings of long-term obligations............ - 600 - - 600
Repayment of long-term obligations............. (324) (393) - - (717)
Issuance of Common Stock....................... 12 - - - 12
----------- ------------- ----------- ---------- -----------
Net cash provided by
financing activities....................... 5,836 207 - - 6,043
----------- ------------- ----------- ---------- -----------
(Decrease) increase in cash.................... 2,925 (1,827) (3,038) - (1,940)
Cash at beginning of fiscal year............... 206 4,458 3,038 - 7,702
----------- ------------- ----------- ---------- -----------
Cash at end of first fiscal quarter............ $ 3,131 $ 2,631 $ - $ - $ 5,762
=========== ============= =========== ========== ===========
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
FIRST QUARTER FISCAL YEAR 2002 RESULTS COMPARED TO FIRST QUARTER FISCAL YEAR
2001 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FIRST FISCAL
QUARTER ENDED
-------------
MAY 5, APRIL 29 ,
2001 2000
----- ----
Revenues.......................................... $ 161,737 $ 172,934
Cost of goods sold and expenses:
Cost of goods sold............................. 127,921 137,411
Operating & administrative expenses........... 37,425 37,736
Interest expense............................... 3,974 3,126
---------- ----------
169,320 178,273
---------- ----------
Income (loss) before income taxes................. (7,583) (5,339)
Benefit from (provision for) income taxes......... (150) 2,458
---------- ----------
Net income (loss)................................. $ (7,733) $ (2,881)
========== ==========
Earnings (loss) per share- Basic.................. $ (1.55) $ (0.59)
Earnings (loss) per share- Diluted................ $ (1.55) $ (0.59)
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REVENUES
Revenues for the first fiscal quarter decreased $11.2 million compared to the
same period for the prior fiscal year. A summary of revenues by functional area
is shown below:
FOR THE FIRST FISCAL
QUARTER ENDED
(IN MILLIONS)
MAY 5, APRIL 29,
2001 2000
---- ----
Convenience Stores............................... $ 84.7 $ 89.8
Gasoline......................................... 76.9 83.0
Other ........................................... 0.1 0.1
-------- --------
Total ........................................... $ 161.7 $ 172.9
======== ========
Convenience store revenues decreased $5.1 million, or 5.7%, for the first fiscal
quarter compared to the same period for the prior fiscal year. This decrease was
primarily due to the sale or closing of 29 underperforming stores, a 0.2%
decrease in comparable convenience store merchandise sales, and the closing of
11 branded quick serve restaurant operations. Although the reduction in stores
had a negative impact on revenues, it did not have a material adverse impact on
results of operations, since the majority of stores closed or sold had been
operating at a loss.
Gasoline revenues decreased $6.1 million for the first fiscal quarter compared
to the same period for the prior fiscal year. Gasoline revenues decreased as a
result of a 7.4 million gallon decrease in the number of gallons sold in the
first quarter as compared to last year, partially offset by an increase in the
average selling price of gasoline of 7.9 cents per gallon compared to the same
period for the prior fiscal year. Gasoline gallons decreased as a result of
unfavorable weather conditions during the quarter as compared to last year, the
general downturn in the U.S. economy and the higher retail price of gasoline.
GROSS PROFITS
Gross profits decreased $1.7 million for the first fiscal quarter compared to
the same period for the prior fiscal year. A summary of gross profits by
functional area is shown below:
FOR THE FIRST FISCAL
QUARTER ENDED
(IN MILLIONS)
MAY 5, APRIL 29,
2001 2000
---- ----
Convenience Stores............................... $ 28.2 $ 30.2
Gasoline......................................... 5.5 5.2
Other ........................................... 0.1 0.1
-------- --------
Total ........................................... $ 33.8 $ 35.5
======== ========
Convenience store gross profits decreased $2.0 million, or 6.6%, for the first
fiscal quarter compared to the same period for the prior fiscal year. This
decrease was primarily due to the decrease in convenience store revenues as
described above. Convenience store gross profit margins were relatively
unchanged.
Gasoline gross profits increased $0.3 million for the first fiscal quarter
compared to the same period for the prior fiscal year. This increase was
primarily attributable to an increase in the average gasoline gross profit of
1.8 cents per gallon compared to the same period for the prior fiscal year. The
increase in average gasoline gross profit was partially offset by the decrease
in gasoline gallons sold, as discussed above.
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OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses decreased $0.3 million for the first
fiscal quarter compared to the same period for the prior fiscal year. A summary
of operating and administrative expenses is shown below:
FOR THE FIRST FISCAL
QUARTER ENDED
(IN MILLIONS)
MAY 5, APRIL 29,
2001 2000
----- ----
Operating Expenses............................... $ 29.0 $ 30.0
General & Administrative Expenses................ 8.4 7.7
-------- --------
Total ........................................... $ 37.4 $ 37.7
======== ========
Operating expenses decreased $1.0 million for the first fiscal quarter compared
to the same period for the prior fiscal year. This decrease was primarily due to
the sale or closing of 29 underperforming stores, partially offset by an
increase in depreciation and occupancy expenses.
General and administrative expenses increased $0.7 million for the first fiscal
quarter compared to the same period for the prior fiscal year. This increase was
primarily due to severance and related costs associated with a reduction in
corporate headquarter positions, expenses related to the acquisition of the
Company by DM Acquisition Corp., and an increase in insurance costs, partially
offset by reductions in wages and store closing costs.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense increased $0.8 million for the first fiscal quarter compared
to the same period for the prior fiscal year. The increase for the first fiscal
quarter as compared to the same period for the prior fiscal year was primarily
attributable to an increase in the average outstanding balance of the revolving
credit facility and an increase in bank fees, partially offset by a decrease in
interest rates.
Inflation did not have a material effect on the Company's revenues, gross
profit, and operating and administrative expenses in the first quarters of
fiscal 2002 and 2001, other than the increase in the selling price and cost of
gasoline, as identified above.
The Company did not record a tax benefit in the current year first quarter
because of the uncertainty as to its ability to utilize current operating losses
to offset potential future income tax liabilities. The Company recorded a tax
benefit at the effective rate of 46.0% for the first quarter of fiscal year
2001. The effective rate was higher than the statutory rate because of the
non-deductible amortization of acquired assets.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has a $30.0 million senior revolving credit facility (the "Credit
Facility"). The Company can issue up to $15.0 million of letters of credit under
the facility. The facility is due and payable on September 15, 2002. As of May
5, 2001, the Company had $24.4 million in outstanding revolving credit loans and
had $4.4 million in outstanding letters of credit under the facility. As of May
5, 2001, the Company was in compliance with the terms of the Credit Facility,
including required financial ratio covenants.
As discussed in Item 1. Business--General of the Company's Form 10-K filed with
the Securities and Exchange Commission for the fiscal year ended February 3,
2001, the Company has implemented the previously disclosed Business
Restructuring Plan and Business Segmentation Plan. The Company is also seeking
alternative sources of financing to repay its outstanding obligations under the
Credit Facility. These sources include, for example, the execution of long-term
vendor supply agreements that would involve the receipt by the Company of monies
due upon the execution of such agreements. During the first quarter of fiscal
year 2002, the Company executed a long-term vendor supply agreement and received
$8.7 million in cash in connection therewith. These proceeds were used to reduce
outstanding borrowings under the Credit Facility. The Company is also seeking to
consummate the previously disclosed merger that would result in the sale of the
Company in its entirety and a refinancing of the Credit Facility and its senior
subordinated notes. However, because the merger agreement is subject to certain
conditions, including completion of necessary financing arrangements and
stockholder approval, no assurances can be given that the merger will be
consummated. Currently, the Company has not yet mailed its definitive Proxy
Statement to its stockholders nor has it mailed its Exchange Offer to its
noteholders. Furthermore, DM Acquisition Corp. has not completed definitive
financing documents with respect to those entities that are providing financing
for the transaction. If the merger is not completed and the Company is unable to
successfully implement the Business Restructuring Plan, the Business
Segmentation Plan and otherwise realize an improvement in operating results
during fiscal year 2002, the Company may not be in compliance with certain
amended financial ratio covenants as required by the Credit Facility. If the
Company is not in compliance with these certain financial ratio covenant
requirements in the future and the Credit Facility lenders do not waive these
requirements or otherwise amend the Credit Facility, the Company would be in
default and the Credit Facility lenders could cause repayment of the Credit
Facility to be accelerated in which case amounts outstanding under the Credit
Facility would become immediately due and payable. In addition, certain other
indebtedness and obligations of the Company, including the senior subordinated
notes, certain mortgage notes payable and certain operating leases, material to
the Company's operations, would become immediately due and payable upon an
acceleration of the Company's Credit Facility. The Company is not currently in
default under any of these arrangements. Management anticipates that the cash
flow from operations, the proceeds from the sale of certain assets and the
execution of long-term vendor supply agreements will provide the Company with
adequate liquidity to fund operations and meet its ongoing debt service
requirements.
At May 5, 2001, the Company had $87.7 million, net of original issue discount of
$0.7 million, outstanding in 10.25% senior subordinated notes due March 15,
2004.
CASH FLOW FROM OPERATING ACTIVITIES
During the current year's first quarter, net cash provided by operating
activities increased $4.1 million compared to the same period of the prior year.
This increase was primarily a result of the increase in other assets and
liabilities, net, due to the receipt of $8.7 million upon the execution of a
long-term vendor supply agreement, partially offset by decreased earnings of the
Company and unfavorable changes in working capital accounts in relation to the
first quarter of the prior fiscal year.
CASH USED BY INVESTING ACTIVITIES
Net cash used in investing activities decreased $6.2 million in the current year
first quarter compared to the prior year primarily as a result of decreased
purchases of property and equipment and short-term investments partially offset
by lower proceeds from the sale of property and equipment in the current year
first quarter compared to the prior year first quarter.
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CASH PROVIDED BY FINANCING ACTIVITIES
Net cash used by financing activities was $.9 million for the current year first
quarter compared to $6.0 million net cash provided by financing activities for
the same period of the prior year. During the current year first quarter the
Company repaid $.9 million of long-term obligations compared with borrowings of
$6.1 million on its revolving credit facility during the first quarter of the
prior year.
CAPITAL EXPENDITURES
The Company's capital expenditures were $7.0 million lower in the first quarter
of fiscal year 2002 than in the first quarter of the previous year. In the first
quarter of fiscal year 2001, the Company purchased $8.5 million of property and
equipment, primarily for the construction of nine new stores that opened in
fiscal year 2001. The Company has suspended its new store expansion program and
the related capital expenditures pending its ability to consummate the merger.
Management estimates that capital expenditures will be required in the range of
$2.0 million to $.30 million annually to replace existing property, plant and
equipment that becomes obsolete and worn out in the ordinary course of business.
ENVIRONMENTAL RESPONSIBILITY
The Company's financial statements are prepared in conformity with the American
Institute of Certified Public Accountants' Statement of Position ("SOP") No.
96-1, "Environmental Remediation Liabilities," which provides guidance on
specific accounting issues that are present in the recognition, measurement and
disclosure of environmental remediation liabilities. The Company accrues its
estimate of all costs to be incurred for assessment and remediation with respect
to release of regulated substances from existing and previously operated retail
gasoline facilities.
SIGNIFICANT EVENTS
As previously disclosed, on March 15, 2001, in connection with the Company's
review of its strategic alternatives, including a possible sale, the Company
executed a merger agreement (the "Merger Agreement") pursuant to which DM
Acquisition Corp. agreed to acquire the Company in a cash merger for $4.50 per
share. DM Acquisition Corp. is controlled by Robert B. Stein, Jr., the Chairman,
President and Chief Executive Officer of the Company. The Merger Agreement
provides that DM Acquisition Corp. will be merged with and into the Company and
that each share of the Company's Common Stock outstanding immediately prior to
the merger, other than those owned by Mr. Stein and his affiliates, will be
converted into the right to receive $4.50 per share in cash. The Company's board
of directors, based on the unanimous recommendation of a special committee of
independent directors, has approved the transaction and recommended that the
Company's stockholders approve the transaction. In connection with the merger,
the Company will solicit its senior subordinated noteholders to exchange their
subordinated notes of the Company and receive, for each $10,000 in principal
amount of the old notes, $3,870 in principal amount of new notes of the Company,
$6,191.30 in cash and a warrant to purchase Common Stock of the Company that
will not become exercisable until after the merger is completed. The Company has
entered into an exchange and voting agreement pursuant to which holders of
approximately 70% of the senior subordinated notes have agreed to participate in
the exchange. The Merger Agreement is subject to customary conditions, including
completion of necessary financing arrangements and approval of holders of a
majority (excluding those shares held by persons who will have an interest in
the buyout entity) of the shares of the Company's Common Stock voting at a
special meeting. If the merger is completed, the Company will no longer be a
public company. There can be no assurance, however, that the Company or DM
Acquisition Corp. will be able to complete the merger.
In addition, the Company has reinitiated and modified a previously announced
comprehensive program to improve the Company's profitability and reduce debt
(the "Business Segmentation Plan"). Under the Business Segmentation Plan, the
Company will attempt to sell or otherwise close approximately 200 stores that do
not meet internal profitability criteria, reduce corporate and field overhead
and apply proceeds from the sale of stores to reduce outstanding borrowings.
However, as a result of experiencing further losses from operations, the Company
has modified and accelerated the portion of the
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Business Segmentation Plan that relates to a reduction in corporate overhead.
Under this modification, the Company has commenced a business restructuring plan
(the "Business Restructuring Plan") pursuant to which certain general and
administrative overhead costs have been reduced in advance of those cost
reductions which can only be achieved after the underperforming stores are sold
or closed. Accordingly, in the first quarter of fiscal year 2002, approximately
30 executive, managerial and administrative positions were eliminated. These
staff reductions and associated costs are expected to result in savings of
approximately $3.0 million per year. The Company has commenced implementing each
of these plans and intends to complete them whether or not the merger is
completed. There can be no assurance, however, that either of these plans will
be successfully completed as contemplated.
FORWARD LOOKING STATEMENTS
This Form 10-Q 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 statements relating to the
Company's plans and objectives to complete a merger, implement business
segmentation and restructuring plans, upgrade and remodel store locations, build
new stores and increase gasoline sales, reduce the impact of under-performing
stores, sell or lease certain assets, the Company's availability of supplies of
gasoline, the estimated costs for environmental remediation, successful
implementation of tax planning strategies, 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 complete the merger or otherwise pursue the Company's alternative
business strategy, each 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 areas,
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. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE MARKET RISK
The Company does not have any instruments that it believes would be materially
affected by any future interest rate changes.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in an action brought by a former supplier of certain
dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and
Dairy Mart, Inc., Civil Action No. 397CU00894 (US District Court, CT). The
defendants are contesting the claims and, at this time, the Company is not able
to determine what the results of this litigation will be. The trial was
completed on December 7, 2000 and it is not known when the judge will issue his
ruling. The Company has recognized no provision for any possible loss in the
accompanying financial statements. The action is more fully described in the
Company's Form 10-K for the fiscal year ended February 3, 2001, as filed with
the Securities and Exchange Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
1. Exhibit (11) - Statement re Computation of
Per-Share Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
b) Reports on Form 8-K
On March 16, 2001, the Company filed a Current Report on Form
8-K, under Item 5, disclosing the Fourth Amendment to the
Company's Amended and Restated Credit Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
DATE: June 19, 2001 /s/ GREGORY G. LANDRY
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Gregory G. Landry
Vice Chairman and
Chief Financial Officer
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