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 NOVEMBER 3, 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
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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 DECEMBER 11, 2001 - 5,006,039
-1-
PART 1. FINANCIAL INFORMATION.
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
FOR THE FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------------ ----------------------------
NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28,
2001 2000 2001 2000
------ ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------
Revenues.................................. $ 167,944 $ 180,723 $ 508,763 $ 549,467
Cost of goods sold and expenses:
Cost of goods sold...................... 134,298 144,276 405,724 435,631
Operating and administrative expenses. 38,161 39,986 114,167 116,138
Impairment charge....................... - - 14,824 -
Chapter 11 related professional fees.... 1,234 - 1,234 -
Interest expense........................ 3,724 3,372 11,042 9,794
--------- --------- ---------- ----------
177,417 187,634 546,991 561,563
--------- --------- ---------- ----------
Loss before income taxes and (9,473) (6,911) (38,228) (12,096)
extraordinary item......................
Benefit from (provision for) income
taxes................................... - 2,763 (248) 5,157
----------- ---------- ----------- ----------
Loss before extraordinary item............ (9,473) (4,148) (38,476) (6,939)
Extraordinary loss on early retirement
of debt (Note 9)........................ (1,029) - (1,029) -
--------- --------- ---------- ----------
Net loss ............................... $ (10,502) $ (4,148) $ (39,505) $ (6,939)
- ------------------------------------------------------------------------------------------------------------------------------
Loss per share - Basic $ (2.10) $ (0.83) $ (7.89) $ (1.41)
Loss per share - Diluted $ (2.10) $ (0.83) $ (7.89) $ (1.41)
The accompanying notes are an integral part of these financial statements.
-2-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
NOVEMBER 3, 2001 FEBRUARY 3, 2001
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 16,081 $ 5,667
Short-term investments . . . . . . . . . . . . . . 484 3,000
Accounts and notes receivable. . . . . . . . . . . 16,366 13,462
Inventory. . . . . . . . . . . . . . . . . . . . . 24,091 24,424
Prepaid expenses and other current assets. . . . . 2,326 3,612
----------- ------------
Total current assets. . . . . . . . . . . . . . 59,348 50,165
Property and equipment, net. . . . . . . . . . . . . . 103,665 111,448
Intangible assets, net . . . . . . . . . . . . . . . . - 13,731
Other assets, net. . . . . . . . . . . . . . . . . . . 14,916 15,373
-------------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 177,929 $ 190,717
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations. . . . $ 2,210 $ 6,043
Accounts payable . . . . . . . . . . . . . . . . . 2,947 44,361
Accrued expenses . . . . . . . . . . . . . . . . . 12,203 15,835
Accrued interest . . . . . . . . . . . . . . . . . 929 3,638
-------------- ------------
Total current liabilities. . . . . . . . . . . . 18,289 69,877
Long Term obligations, less current portion above . . 40,931 129,557
Other liabilities. . . . . . . . . . . . . . . . . . . 5,813 13,555
LIABILITIES SUBJECT TO COMPROMISE (Note 1) . . . . . . . 174,662 (a) -
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . 70 70
Paid-in capital. . . . . . . . . . . . . . . . . . 32,427 32,416
Retained deficit . . . . . . . . . . . . . . . . . (79,258) (39,753)
Treasury stock, at cost. . . . . . . . . . . . . . (15,005) (15,005)
-------------- -------------
Total stockholders' equity. . . . . . . . . . . (61,766) (22,272)
--------------- -------------
Total liabilities and stockholders' equity . . . . . . $ 177,929 $ 190,717
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
(a) Liabilities subject to compromise consist of the following:
Trade and other miscellaneous claims . . . . . . . . . . . . . $ 59,104
Secured debt . . . . . . . . . . . . . . . . . . . . . . . . . 19,141
Unsecured debentures . . . . . . . . . . . . . . . . . . . . . 87,886
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 5,140
Unsecured notes. . . . . . . . . . . . . . . . . . . . . . . . 241
Priority claims. . . . . . . . . . . . . . . . . . . . . . . . 3,150
----------
$ 174,662
----------
-3-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
FOR THE THREE FISCAL
QUARTERS ENDED
NOVEMBER 3, OCTOBER 28,
2001 2000
---- ----
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (39,505) $ (6,939)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 11,278 10,711
Impairment charge . . . . . . . . . . . . . . . . . . . . 14,824 -
Change in deferred income taxes . . . . . . . . . . . . . - (2,771)
Loss on disposition of properties, net. . . . . . . . . . 314 310
Net change in assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . . (2,733) 2,910
Inventory . . . . . . . . . . . . . . . . . . . . . . . 333 8,717
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,957 (4,899)
Accrued interest. . . . . . . . . . . . . . . . . . . . 2,431 (1,865)
Other assets and liabilities. . . . . . . . . . . . . . 8,572 (4,764)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities . . . . . (2,529) 1,410
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments . . . . . . . . . . . . 2,516 (2,700)
Purchase of property and equipment . . . . . . . . . . . . (3,928) (15,363)
Net proceeds from sale of property, equipment and
assets held for sale . . . . . . . . . . . . . . . . . . 1,303 5,158
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . (109) (12,905)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net. . . . . . . . . . . . . . 5,854 4,014
Borrowings of long-term obligations. . . . . . . . . . . . 40,931 4,827
Repayment of long-term obligations . . . . . . . . . . . . (33,744) (2,486)
Issuance of common stock . . . . . . . . . . . . . . . . . 11 245
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities . . . . . . . . . . 13,052 6,600
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . 10,414 (4,895)
Cash at beginning of fiscal year. . . . . . . . . . . . . . . 5,667 7,702
- ------------------------------------------------------------------------------------------------------
Cash at end of third fiscal quarter . . . . . . . . . . . . . $ 16,081 $ 2,807
- ------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid ............................................. $ 7,369 $ 11,654
Income taxes refunded...................................... $ - $ -
The accompanying notes are an integral part of these financial statements.
-4-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 3, 2001
(Unaudited)
1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On September 24, 2001 (the "Petition Date"), the Company and substantially all
of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for
protection (the "Filing") under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The Debtors are currently
operating their business as debtors-in-possession in accordance with provisions
of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") are being jointly administered under Case No. 01-42400
(AJG). The Chapter 11 Cases do not include Financial Opportunities, Inc., a
subsidiary of the Company.
CONSEQUENCE OF FILING
As a consequence of the Filing, all pending litigation against the Debtors is
stayed automatically by section 362 of the Bankruptcy Code and, absent further
order of the Bankruptcy Court, no party may take any action to recover on
pre-petition claims against the Debtors. In addition, pursuant to section 365 of
the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
contracts and unexpired leases, and parties to contracts or leases that are
rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
On September 26, 2001, the Debtors received interim approval of their
Debtor-In-Possession ("DIP") credit facility, and on October 19, 2001, the
Company received approval on its entire $46 million DIP credit facility. The DIP
credit facility has an initial term of twelve months with an option to extend
the term of the facility upon the satisfaction of certain conditions. As a
result, the Company expects to continue to pay for employee salaries and
benefits, ongoing operations (including payments to vendors) and other working
capital needs.
-5-
FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, such realization of assets and liquidation
of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code,
and subject to Bankruptcy Court approval or otherwise as permitted in the
ordinary course of business, the Debtors may sell or otherwise dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the unaudited consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications reported
in the consolidated historical financial statements.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying unaudited consolidated
financial statements present the Debtors' pre-petition debt under the caption
"Liabilities Subject to Compromise." As required by SOP 90-7, the Company,
beginning in the third quarter of fiscal year 2002, recorded the Debtors'
pre-petition debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the unaudited consolidated financial statements, "Liabilities
Subject to Compromise" refer to Debtor's liabilities incurred prior to the
commencement of the Chapter 11 Cases. The amounts of the various liabilities
that are subject to compromise are reflected in the attached balance sheet.
These amounts represent the Company's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such
claims remain subject to future adjustments. Adjustments may result from (1)
negotiations; (2) actions of the Bankruptcy Court; (3) further developments with
respect to disputed claims; (4) rejection of executory contracts and unexpired
leases; (5) the determination as to the value of any collateral security claims;
(6) proofs of claim; or (7) other events. Payment terms for these amounts will
be established in connection with the Chapter 11 Cases.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtor as
of the date of the Filing. Differences between amounts recorded by the
-6-
Debtors and claims filed by creditors will be investigated and resolved as part
of the proceedings of the Chapter 11 Cases. No bar dates have been set for the
filing of proofs of claim against the Debtors. Accordingly, the ultimate number
and allowed amount of such claims are not presently known.
The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including employee wages,
salaries, benefits and other employee obligations, gasoline and sales taxes held
in trust, and certain other pre-petition claims.
The Company believes, based on information presently available to it, that cash
available from operations and the DIP Financing will provide sufficient
liquidity to allow it to continue to operate through the initial term of the DIP
credit facility. However, the ability of the Company to continue operation on a
going concern basis (including its ability to meet post-petition obligations of
the Debtors) and the appropriateness of using the going concern basis for its
financial statements are dependent upon, among other things, (i) the Company's
ability to comply with the terms of the DIP Financing and any cash management
order entered by the Bankruptcy Court in connection with the Chapter 11 Cases,
(ii) the ability of the Company to maintain adequate cash on hand, (iii) the
ability of the Company to generate cash from operations, (iv) confirmation of a
plan or plans of reorganization under the Bankruptcy Code, and (v) the ability
of the Company to maintain profitability following such confirmation.
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.
DEBTOR-IN-POSSESSION FINANCIAL STATEMENTS
The condensed financial statements of the Debtors are presented as follows:
-7-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
September 24,
2001-
November 3,
2001
- --------------------------------------------------------------------------------
Revenues . . . . . . . . . . . . . . . . . . . . . $ 68,930
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . . . . . . . 54,615
Operating and administrative expenses. . . . . . 15,473
Interest expense . . . . . . . . . . . . . . . . 1,591
---------
71,679
---------
Loss before income taxes and extraordinary item. . (2,749)
Benefit from (provision for) income taxes. . . . . -
--------
Loss before extraordinary item . . . . . . . . . . (2,749)
Extraordinary loss on early retirement of
debt (Note 9). . . . . . . . . . . . . . . . . . (1,029)
----------
Net loss . . . . . . . . . . . . . . . . . . . . $ (3,778)
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
-8-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION BALANCE SHEET
(Unaudited)
(in thousands)
NOVEMBER 3, 2001
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 14,162
Accounts and notes receivable. . . . . . . . . . . 16,059
Inventory. . . . . . . . . . . . . . . . . . . . . 24,091
Prepaid expenses and other current assets. . . . . 2,326
-----------
Total current assets. . . . . . . . . . . . . . 56,638
Property and equipment, net. . . . . . . . . . . . . . 103,665
Other assets, net. . . . . . . . . . . . . . . . . . . 13,473
-----------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 173,776
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 2,947
Accrued expenses . . . . . . . . . . . . . . . . . 12,195
Accrued interest . . . . . . . . . . . . . . . . . 866
------------
Total current liabilities. . . . . . . . . . . . 16,008
Long Term obligations . . . . . . . . . . . . . . . . 40,931
Other liabilities. . . . . . . . . . . . . . . . . . . 5,813
LIABILITIES SUBJECT TO COMPROMISE. . . . . . . . . . . 174,662 (a)
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . 70
Paid-in capital. . . . . . . . . . . . . . . . . . 32,427
Retained deficit . . . . . . . . . . . . . . . . . (81,130)
Treasury stock, at cost. . . . . . . . . . . . . . (15,005)
------------
Total stockholders' equity. . . . . . . . . . . (63,638)
------------
Total liabilities and stockholders' equity . . . . . . $ 173,776
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
(a) Liabilities subject to compromise consist of the following:
Trade and other miscellaneous claims . . . . . . . . . . . . . $ 59,104
Secured debt . . . . . . . . . . . . . . . . . . . . . . . . . 19,141
Unsecured debentures . . . . . . . . . . . . . . . . . . . . . 87,886
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 5,140
Unsecured notes. . . . . . . . . . . . . . . . . . . . . . . . 241
Priority claims. . . . . . . . . . . . . . . . . . . . . . . . 3,150
------------
$ 174,662
------------
-9-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
NOVEMBER 3,
2001
----
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,778)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,701
Loss on disposition of properties, net. . . . . . . . . . 22
Net change in assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . . (2,528)
Inventory . . . . . . . . . . . . . . . . . . . . . . . (98)
Accounts payable. . . . . . . . . . . . . . . . . . . . (3,597)
Accrued interest. . . . . . . . . . . . . . . . . . . . 866
Other assets and liabilities. . . . . . . . . . . . . . (381)
- --------------------------------------------------------------------------------
Net cash used in operating activities . . . . . . . . . . . . (7,793)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . (94)
Net proceeds from sale of property, equipment and
assets held for sale . . . . . . . . . . . . . . . . . . 54
- --------------------------------------------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . (40)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net. . . . . . . . . . . . . . 903
Borrowings of long-term obligations. . . . . . . . . . . . 40,931
Repayment of long-term obligations . . . . . . . . . . . . (30,237)
- --------------------------------------------------------------------------------
Net cash provided by financing activities . . . . . . . . . . 11,597
- --------------------------------------------------------------------------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . 3,764
Cash at beginning of period . . . . . . . . . . . . . . . . . 10,398
- --------------------------------------------------------------------------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . $ 14,162
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
-10-
2. CHANGES IN CAPITAL ACCOUNTS
An analysis of the capital stock accounts for the first three fiscal quarters
ended November 3, 2001 follows:
COMMON STOCK ISSUED AT PAID-IN CAPITAL IN
AT EXCESS OF
$.01 PAR VALUE AMOUNT PAR VALUE
-------------------------- -------------- ---------------------
Balance February 3, 2001 7,059,205 $ 70,592 $32,415,803
Employee stock purchase plan 4,012 40 11,006
Stock options exercised - - -
Stock awards - - -
-------------------------- -------------------------------------
Balance November 3, 2001 7,063,217 $ 70,632 $32,426,809
-------------------------- -------------------------------------
As of November 3, 2001, there were 2,057,178 shares of Common Stock held as
treasury stock at an aggregate cost of $15,004,847 leaving 5,006,039 shares
outstanding.
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate,
during each period. The weighted average number of shares used in the
calculation of basic earnings per share were 5,006,039 and 4,978,813 for the
third fiscal quarters ended November 3, 2001 and October 28, 2000, respectively,
and 5,004,668 and 4,931,212 for the first three fiscal quarters ended November
3, 2001 and October 28, 2000, respectively. The weighted average number of
shares used in the calculation of diluted earnings per share were 5,006,039 and
4,979,813 for the third fiscal quarters ended November 3, 2001 and October 28,
2000, respectively, and 5,004,668 and 4,913,212 for the first three fiscal
quarters ended November 3, 2001 and October 28, 2000, respectively.
4. SEASONALITY
The results of operations for the first three fiscal quarters ended November 3,
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 profit margins 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. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
-11-
The Company's payment obligations under the Series A and Series B Senior
Subordinated Notes (the "Notes") are guaranteed by certain of the Company's
subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and unconditionally
guaranteed on an unsecured, senior subordinated, joint and several basis by each
of the Guarantor Subsidiaries. The following supplemental financial information
sets forth, on 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"), the Company's non-guarantor subsidiary. Separate complete financial
statements of the respective Guarantor Subsidiaries would not provide additional
information which would be useful in assessing the financial condition of the
Guarantor Subsidiaries, and are 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.
-12-
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended November 3, 2001
(in thousands)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Revenues. . . . . . . . . . . . . . . . $ 235 $ 508,442 $ 86 $ - $ 508,763
Cost of goods sold and expenses:
Cost of goods sold. . . . . . . . . . - 405,724 - - 405,724
Operating and administrative expenses 380 113,780 7 - 114,167
Impairment charge . . . . . . . . . . - 14,824 - - 14,824
Chapter 11 related professional fees. - 1,234 - - 1,234
Interest expense. . . . . . . . . . . 10,853 17 172 - 11,042
----------------------------------------------------------------------------
11,233 535,579 179 - 546,991
----------------------------------------------------------------------------
Income (loss) before income taxes,
equity in income (loss) of
consolidated subsidiaries and (10,998) (27,137) (93) - (38,228)
extraordinary items. . . . . . . . .
Benefit from (provision for)
income taxes. . . . . . . . . . . . - (248) - - (248)
----------------------------------------------------------------------------
Income (loss) before equity in
income of consolidated subsidiaries
and extraordinary items . . . . . . (10,998) (27,385) (93) - (38,476)
Equity in income (loss) of consolidated
subsidiaries. . . . . . . . . . . . (28,507) (93) - 28,600 -
Extraordinary loss on early retirement
of debt . . . . . . . . . . . . . . - (1,029) - - (1,029)
----------------------------------------------------------------------------
Net income (loss). . .. . . . . . . $(39,505) $ (28,507) $ (93) $ 28,600 $ (39,505)
===============================================================================================================================
-13-
Supplemental Consolidating Balance Sheet
as of November 3, 2001
(in thousands)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . $ 2,781 $ 11,381 $ 1,919 $ - $ 16,081
Short-term investments . . . . . . . - - 484 - 484
Accounts and notes receivable. . . . - 16,059 307 - 16,366
Inventory. . . . . . . . . . . . . . - 24,091 - - 24,091
Prepaid expenses and other
current assets . . . . . . . . . . 23 2,303 - - 2,326
-------------- ---------------- -------------- ---------------- --------------
Total current assets . . . . . . . 2,804 53,834 2,710 - 59,348
Property and equipment, net . . . . . . - 103,665 - - 103,665
Other assets, net . . . . . . . . . . . 1,608 12,677 631 - 14,916
Investment in and advances to
subsidiaries . . . . . . . . . . . . 156,825 1,060 812 (158,697) -
-------------- ---------------- -------------- ---------------- --------------
Total assets. . . . . . . . . . . . . . $ 161,237 $ 171,236 $ 4,153 $ (158,697) $ 177,929
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
Obligations. . . . . . . . . . . . $ - $ - $ 2,210 $ - $ 2,210
Accounts payable . . . . . . . . . . 2,947 - - - 2,947
Accrued expenses . . . . . . . . . . 1,306 10,889 8 - 12,203
Accrued interest . . . . . . . . . . 866 - 63 - 929
-------------- ---------------- -------------- ---------------- --------------
Total current liabilities. . . . . 5,119 10,889 2,281 - 18,289
-------------- ---------------- -------------- ---------------- --------------
Long-term obligations, less
Current portion above. . . . . . . . 39,760 1,171 - - 40,931
Liabilities Subject to Compromise . . . 178,124 (3,462) - - 174,662
Other liabilities . . . . . . . . . . . - 5,813 - - 5,813
Stockholders' equity. . . . . . . . . . (61,766) 156,825 1,872 (158,697) (61,766)
-------------- ---------------- -------------- ---------------- --------------
Total liabilities and
stockholders' equity . . . . . . . . $ 161,237 $ 171,236 $ 4,153 $ (158,697) $ 177,929
==================================================================================================================================
-14-
Supplemental Consolidating Statement of Cash Flows
for the Three Fiscal Quarters Ended November 3, 2001
(in thousands)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Net cash provided by (used in) operating
activities . . . . . . . . $ (13,616) $ 11,596 $ (509) $ - $ (2,529)
------------- ---------------- --------------- --------------- ------------
Cash flows from investing activities:
Purchase of and change in short-term
Investments. . . . . . . . . . . . - 1 2,515 - 2,516
Purchase of property and equipment . - (3,928) - - (3,928)
Proceeds from sale of property,
Equipment and assets held for sale - 1,303 - - 1,303
Investment in and advances to
subsidiaries . . . . . . . . . . . 2,934 (2,847) (87) - -
------------- ---------------- --------------- --------------- ------------
Net cash provided by (used in)
investing activities . . . . . . . 2,934 (5,471) 2,428 - (109)
------------- ---------------- --------------- --------------- ------------
Cash flows from financing activities:
Borrowings of long-term obligations 39,760 1,171 - - 40,931
Increase in revolving loan, net. . . 5,854 - - - 5,854
Repayment of long-term obligations . (32,681) (1,063) - - (33,744)
Issuance of common stock . . . . . . 11 - - - 11
------------- ---------------- --------------- --------------- ------------
Net cash provided by (used in)
financing activities . . . . . . . . 12,944 108 - - 13,052
------------- ---------------- --------------- --------------- ------------
Increase (decrease) in cash . . . . . 2,262 6,233 1,919 - 10,414
Cash at beginning of fiscal year . . . 519 5,148 - - 5,667
------------- ---------------- --------------- --------------- ------------
Cash at end of third fiscal quarter. . $ 2,781 $ 11,381 $ 1,919 $ - $ 16,081
=================================================================================================================================
-15-
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended October 28, 2000
(in thousands)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Revenues. . . . . . . . . . . . . . . . $ 211 $ 549,085 $ 171 $ - $ 549,467
Cost of goods sold and expenses:
Cost of goods sold. . . . . . . . . . - 435,631 - - 435,631
Operating and administrative expenses 262 115,860 16 - 116,138
Interest expense. . . . . . . . . . . 9,297 316 181 - 9,794
------------ ---------------- --------------- ---------------- -------------
9,559 551,807 197 - 561,563
------------ ---------------- --------------- ---------------- -------------
Income (loss) before income taxes
And equity in income (loss) of
Consolidated subsidiaries. . . . . . (9,348) (2,722) (26) - (12,096)
Benefit from (provision for)
Income taxes. . . . . . . . . . . . 4,300 845 12 - 5,157
-
------------ ---------------- --------------- ---------------- -------------
Income (loss) before equity in
Income of consolidated subsidiaries (5,048) (1,877) (14) - (6,939)
Equity in income (loss) of consolidated
Subsidiaries. . . . . . . . . . . . . (1,891) (14) - 1,905 -
------------ ---------------- --------------- ---------------- -------------
Net income (loss) . . . . . . . . . $(6,939) $ (1,891) $ (14) $ 1,905 $ (6,939)
================================================================================================================================
-16-
Supplemental Consolidating Balance Sheet
As Of February 3, 2001
(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
Deferred income taxes......................... - - - -
-------------------------------------------------------------------
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............................. (22,272) 118,966 1,943 (120,909) (22,272)
-------------------------------------------------------------------
Total liabilities and
stockholders' equity............................ $ 124,622 $ 181,834 $ 5,170 $ (120,909) $ 190,717
- ------------------------------------------------------------------------------------------------------------------------
-17-
Supplemental Consolidating Statement of Cash Flows
for the Three Fiscal Quarters Ended October 28, 2000
(in thousands)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Net cash provided by (used in)
operating activities . . . . . . . . $ (9,760) $ 10,938 $ 232 $ - $ 1,410
------------- ---------------- --------------- --------------- -----------
Cash flows from investing activities:
Decrease in short-term
Investments. . . . . . . . . . . . - 154 (2,854) - (2,700)
Purchase of property and equipment . - (15,363) - - (15,363)
Net proceeds from sale of property,
Equipment and assets held for sale - 5,158 - - 5,158
Investment in and (advances to)
Subsidiaries . . . . . . . . . . . 5,351 (4,941) (410) - -
------------- ---------------- --------------- --------------- -----------
Net cash provided by (used in)
Investing activities . . . . . . . . 5,351 (14,992) (3,264) - (12,905)
------------- ---------------- --------------- --------------- -----------
Cash flows from financing activities:
Borrowings of long-term obligations - 4,827 - - 4,827
Increase in revolving loan, net. . . 2,266 1,748 - - 4,014
Repayment of long-term obligations . 1,693 (4,179) - - (2,486)
Issuance of common stock . . . . . . 244 1 - - 245
------------- ---------------- --------------- --------------- -----------
Net cash provided by (used in)
financing activities . . . . . . . . 4,203 2,397 - - 6,600
------------- ---------------- --------------- --------------- -----------
Decrease in cash . . . . . (206) (1,657) (3,032) - (4,895)
Cash at beginning of fiscal year . . . 206 4,458 3,038 - 7,702
------------- ---------------- --------------- --------------- -----------
Cash at end of third fiscal quarter . $ - $ 2,801 $ 6 $ - $ 2,807
==============================================================================================================================
-18-
6. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
On February 4, 2001, 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.
7. ACCOUNTING STANDARDS NOT YET ADOPTED
In July, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In August, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," and, in October, 2001, the FASB issued SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets."
SFAS No. 141 requires all business combinations completed after June 30, 2001,
to be accounted for under the purchase method. This standard also establishes,
for all business combinations made after June 30, 2001, specific criteria for
the recognition of intangible assets separately from goodwill. SFAS No. 141 also
requires that the excess of the fair value of acquired assets over cost
(negative goodwill) be recognized immediately as an extraordinary gain, rather
than deferred and amortized. The Company will account for all future business
combinations under SFAS No. 141.
SFAS No. 142 addresses the accounting for goodwill and other intangible assets
after an acquisition. Goodwill and other intangibles that have indefinite lives
will no longer be amortized, but will be subject to annual impairment tests. All
other intangible assets will continue to be amortized over their estimated
useful lives, which is no longer limited to 40 years. The Company will adopt
this statement effective February 3, 2002, as required. The adoption should have
no impact on the Company as a result of the impairment charge recorded during
the second quarter as discussed in Note 8.
SFAS No. 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including: (i) the timing of
liability recognition; (ii) initial measurement of the liability; (iii)
-19-
allocation of asset retirement cost to expense; (iv) subsequent measurement of
the liability; and (v) financial statement disclosures. SFAS No. 143 requires
that an asset retirement cost should be capitalized as part of the cost of the
related long-lived asset and subsequently allocated to expense using a
systematic and rational method. This standard becomes effective for fiscal years
beginning after June 15, 2002. The Company will adopt the statement effective
February 2, 2003. The transition adjustment, if any, resulting from the adoption
of SFAS No. 143 will be reported as a cumulative effect of a change in
accounting principle. At this time, the Company has not yet determined what
impact, if any, the adoption of this statement will have on either its financial
position or results of operations.
SFAS No. 144 addresses the financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business, as
previously defined in that Opinion. SFAS No. 144 provides a single accounting
model, based on the framework established in SFAS No. 121, for long-lived assets
to be disposed of by sale. Many of the provisions of SFAS No. 121 are retained,
however, SFAS No. 144 clarifies some of the implementation issues related to
SFAS No. 121. SFAS No. 144 also broadens the presentation of discontinued
operations to include more disposal transactions. This statement is effective
for fiscal years beginning after December 15, 2001, with early adoption
encouraged. The Company will adopt this statement no later than February 3,
2002. At this time, the Company has not yet determined what impact, if any, the
adoption of this statement will have on either its financial position or results
of operations.
8. IMPAIRMENT CHARGE
Management reviews long-lived assets and certain identifiable intangible assets
for impairment whenever circumstances indicate that the carrying account may not
be recoverable. As a result of the termination of the merger agreement with DM
Acquisition Corp., the Company recognized an impairment charge of $14.8 million
in the second quarter of fiscal year 2002 in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived
-20-
Assets to be Disposed Of." The impairment charge related to goodwill and other
intangible assets including franchise rights and favorable leases.
9. EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT
On October 19, 2001, the Company retired the outstanding balance of
approximately $26.5 million on its existing $30 million Revolving Credit
Agreement. This debt became due when the Company defaulted by, among other
things, not paying a $250,000 amendment fee to its lenders. On October 19,
2001, the Company received court approval of its entire $46 million DIP credit
facility, and the Company retired its Revolving Credit Agreement with proceeds
from the DIP credit facility. An extraordinary loss of approximately $1.0
million was incurred as a result of the early retirement which represented the
write-off of remaining unamortized deferred financing costs at that date. No
tax benefit has been recorded due to the uncertainty as to the Company's
ability to utilize current operating losses to offset future income tax
liabilities.
-21-
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11
On September 24, 2001 (the "Petition Date"), the Company and substantially all
of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for
protection (the "Filing") under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The Debtors are currently
operating their business as debtors-in-possession in accordance with provisions
of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") are being jointly administered under Case No. 01-42400
(AJG). The Chapter 11 Cases do not include Financial Opportunities, Inc., a
subsidiary of the Company.
CONSEQUENCE OF FILING
As a consequence of the Filing, all pending litigation against the Debtors is
stayed automatically by section 362 of the Bankruptcy Code and, absent further
order of the Bankruptcy Court, no party may take any action to recover on
pre-petition claims against the Debtors. In addition, pursuant to section 365 of
the Bankruptcy Code, the Debtors may reject or assume pre-petition executory
contracts and unexpired leases, and parties to contracts or leases that are
rejected may assert rejection damages claims as permitted by the Bankruptcy
Code.
On September 26, 2001, the Debtors received interim approval of its
Debtor-In-Possession ("DIP") credit facility, and on October 19, 2001, the
Company received approval on its entire $46 million DIP credit facility. The DIP
credit facility has an initial term of twelve months, with an option to extend
the term of the facility upon satisfaction of certain conditions. As a result,
the Company expects to continue to pay for employee salaries and benefits,
ongoing operations (including payments to vendors) and other working capital
needs.
Substantially all of the Company's pre-petition debt is now in default due to
the Filing. As described below, the accompanying unaudited consolidated
-22-
financial statements present the Debtors' pre-petition debt under the caption
"Liabilities Subject to Compromise." As required by SOP 90-7, the Company,
beginning in the third quarter of fiscal year 2002, recorded the Debtors'
pre-petition debt instruments at the allowed amount, as defined by SOP 90-7.
As reflected in the unaudited consolidated financial statements, "Liabilities
Subject to Compromise" refer to Debtor's liabilities incurred prior to the
commencement of the Chapter 11 Cases. The amounts of the various liabilities
that are subject to compromise are reflected in the attached balance sheet.
These amounts represent the Company's estimate of known or potential
pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such
claims remain subject to future adjustments. Adjustments may result from (1)
negotiations; (2) actions of the Bankruptcy Court; (3) further developments with
respect to disputed claims; (4) rejection of executory contracts and unexpired
leases; (5) the determination as to the value of any collateral security claims;
(6) proofs of claim; or (7) other events. Payment terms for these amounts will
be established in connection with the Chapter 11 Cases.
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with
the Bankruptcy Court setting forth the assets and liabilities of the Debtor as
of the date of the Filing. Differences between amounts recorded by the Debtors
and claims filed by creditors will be investigated and resolved as part of the
proceedings of the Chapter 11 Cases. No bar dates have been set for the filing
of proofs of claim against the Debtors. Accordingly, the ultimate number and
allowed amount of such claims are not presently known.
The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including employee wages,
salaries, benefits and other employee obligations, gasoline and sales taxes held
in trust, and certain other pre-petition claims.
The Company believes, based on information presently available to it, that cash
available from operations and the DIP Financing will provide sufficient
liquidity to allow it to continue to operate through the initial term of the DIP
credit facility. However, the ability of the Company to continue operation on a
going concern basis (including its ability to meet post-petition obligations of
the Debtors) and the appropriateness of using the going concern basis for its
financial statements are dependent upon, among other things, (i) the Company's
ability to comply with the terms of the DIP Financing and any cash management
order entered by the Bankruptcy Court in connection with the Chapter 11 Cases,
(ii) the ability of the Company to maintain adequate cash on hand, (iii) the
ability of the Company to generate cash from operations, (iv) confirmation of
-23-
a plan or plans of reorganization under the Bankruptcy Code, and (v) the ability
of the Company to maintain profitability following such confirmation.
RESULTS OF OPERATIONS:
THIRD QUARTER FISCAL YEAR 2002 RESULTS COMPARED TO THIRD QUARTER FISCAL YEAR
2001 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
----------------------------- -----------------------------
NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28,
2001 2000 2001 2000
---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues . . . . . . . . . . . . . . . . $ 167,944 $ 180,723 $ 508,763 $ 549,467
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . . 134,298 144,276 405,724 435,631
Operating and administrative expenses. 38,161 39,986 114,167 116,138
Impairment charge. . . . . . . . . . . - - 14,824 -
Chapter 11 related professional fees . 1,234 - 1,234 -
Interest expense . . . . . . . . . . . 3,724 3,372 11,042 9,794
--------- --------- ---------- ----------
177,417 187,634 546,991 561,563
--------- --------- ---------- ----------
Income (loss) before income taxes and (9,473) (6,911) (38,228) (12,096)
extraordinary items . . . . . . . . .
Benefit from (provision for) income
taxes. . . . . . . . . . . . . . . . . - 2,763 (248) 5,157
----------- ---------- ----------- ----------
Income (loss) before extraordinary
items. . . . . . . . . . . . . . . . . (9,473) (4,148) (38,476) (6,939)
Extraordinary loss on early retirement
of debt (Note 9) . . . . . . . . . . . (1,029) - (1,029) -
----------- ---------- ----------- ----------
Net income (loss). . . . . . . . . . . $ (10,502) $ (4,148) $ (39,505) $ (6,939)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - Basic $ (2.10) $ (0.83) $ (7.89) $ (1.41)
Earnings (loss) per share - Diluted $ (2.10) $ (0.83) $ (7.89) $ (1.41)
-24-
REVENUES
Revenues for the third fiscal quarter decreased $12.8 million compared to the
same period for the prior fiscal year. Revenues for the first three fiscal
quarters decreased $40.7 million compared to the same period for the prior
fiscal year. A summary of revenues by functional area is shown below:
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
-------------------------------------------- -------------------------------------
November 3, October 28, November October
2001 2000 3, 2001 28, 2000
------------------ ----------------- ---------------- ---------------
(in millions)
Convenience Stores $ 93.3 $94.9 $274.3 $285.7
Gasoline 74.5 85.6 233.9 263.0
Other .1 .2 .6 .8
------------------ ----------------- ---------------- ---------------
Total $167.9 $180.7 $508.8 $549.5
=================== ================= ================ ===============
Convenience store revenues decreased $1.6 million or 1.7%, for the third fiscal
quarter compared to the same period for the prior fiscal year. This decrease was
primarily due to a 1.1% increase in comparable convenience store merchandise
sales and the sale, closure or franchising of eighteen underperforming
company-operated stores during the four quarters ended November 3, 2001,
partially offset by the opening of one new store during the same period.
Convenience store revenues decreased $11.4 million, or 4.0%, for the first three
fiscal quarters compared to the same period for the prior fiscal year. This
decrease was primarily due to a 1.0% decrease in comparable convenience store
merchandise sales and the sale, closure, or franchising of underperforming
stores, as described above, partially offset by the opening of one new store
during the same period.
Gasoline revenues decreased $11.1 million for the third fiscal quarter compared
to the same period for the prior fiscal year. This decrease was the result of a
4.6 million gallon decrease in the number of gallons sold in the third fiscal
quarter and a decrease in the average selling price of gasoline of 8.2 cents per
gallon in the third fiscal quarter, as compared to the same period for the prior
fiscal year.
Gasoline revenues decreased $29.1 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. This decrease was
primarily the result of a 16.4 million gallon decrease in the number of gallons
sold in the first three fiscal quarters, which included a decrease of 10.3
million gallons in comparable gasoline locations, a decrease in the average
selling price of gasoline of 3.1 cents per gallon, and the sale or closure of
twelve underperforming gasoline locations during the four quarters ended
November 3, 2001, partially offset by the opening of one new gasoline location
during the same period.
-25-
GROSS PROFIT
Gross profits decreased $2.8 million for the third fiscal quarter compared to
the same period for the prior fiscal year. Gross profits decreased $10.8 million
for the first three fiscal quarters compared to the same period for the prior
fiscal year. A summary of gross profits by functional area is shown below:
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
------------------------------------------- -------------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
(in millions)
Convenience Stores $28.6 $31.4 $87.8 $95.6
Gasoline 4.9 4.8 14.7 17.4
Other .1 .2 .6 .8
---------------- ----------------- ---------------- -----------------
Total $33.6 $36.4 $103.1 $113.8
================ ================= ================ =================
Convenience store gross profits decreased $2.8 million, or 8.9%, for the third
fiscal quarter compared to the same period for the prior fiscal year. This
decrease was primarily attributable to the decrease in convenience store
revenues, as described above, and an increase in the cost of dairy and tobacco
products.
Convenience store gross profits decreased $7.8 million, or 8.2%, for the first
three fiscal quarters compared to the same period for the prior fiscal year.
This decrease was primarily attributable to the decrease in convenience store
revenues for the first three fiscal quarters, as described above, and an
increase in the cost of dairy and tobacco products, partially offset by income
generated from the implementation of an ATM surcharge during the prior fiscal
year.
Gasoline gross profits increased $0.1 million for the third fiscal quarter
compared to the same period for the prior fiscal year. This increase was
primarily attributable to an increase in the average gasoline profit margin of
0.9 cents per gallon, partially offset by the decrease in gasoline gallons sold
described above, as compared to the same period for the prior fiscal year.
Gasoline gross profits decreased $2.7 million for the first three fiscal
quarters compared to the same period for the prior fiscal year. This decrease
was primarily attributable to the reduction in gallons sold as described above,
and a 0.7 cent per gallon decrease in the average gasoline profit margin, as
compared to the same period for the prior fiscal year.
-26-
OPERATING EXPENSES, ADMINISTRATIVE EXPENSES AND THE IMPAIRMENT CHARGE
Operating expenses, administrative expenses and the impairment charge decreased
$0.6 million for the third fiscal quarter compared to the same period for the
prior fiscal year. Operating expenses, administrative expenses and the
impairment charge increased $14.1 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. A summary of operating
expenses, administrative expenses and the impairment charge is shown below:
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
----------------------------------------- -------------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
------------------- -------------------- ------------------ -----------------
(in millions)
Operating Expenses $30.8 $31.0 $90.8 $92.0
Impairment Charge - - 14.8 -
General & Administrative
Expenses 8.6 9.0 24.6 24.1
------------------ ----------------- ---------------- -----------------
Total $39.4 $40.0 $130.2 $116.1
================== ================= ================ =================
Operating expenses reflected little change for the third fiscal quarter, as
compared to the same period for the prior fiscal year. Savings realized from the
sale, closure or franchising of eighteen underperforming stores, as described
above, were offset by increases in store labor costs, equipment depreciation,
and occupancy expenses.
Operating expenses decreased $1.2 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. This decrease was
primarily attributed to store dispositions, as described above, and a $0.7
million reduction in store cash losses, partially offset by an increase in
equipment depreciation and occupancy expenses.
An impairment charge of $14.8 million was recorded during the second quarter of
the current fiscal year. This impairment charge is described in greater detail
in Note 8 of the Notes to Consolidated Financial Statements.
General and administrative expenses decreased $0.4 million for the third fiscal
quarter, as compared to the same period of the prior fiscal year. Savings
realized from a decrease in labor costs of $0.7 million was partially offset by
an increase in deferred financing costs and Chapter 11 related professional
fees.
General and administrative expenses increased $0.5 million for the first three
fiscal quarters compared to the same period for the prior fiscal year. This
increase was primarily attributable to an increase in severance and related
costs associated with a reduction in corporate headquarter positions, an
increase in corporate governance costs and Chapter 11 related professional fees,
partially offset by a decrease in wages and store closing costs.
-27-
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense increased $0.4 million for the third fiscal quarter compared to
the same period for the prior fiscal year. Interest expense increased $1.2
million for the first three fiscal quarters compared to the same period for the
prior fiscal year. The increase for the third fiscal quarter and the first three
fiscal quarters, as compared to the same periods 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 third quarter and first
three quarters of fiscal 2002 and 2001.
The Company did not record a tax benefit in the current year third quarter and
the current year first three fiscal quarters 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 40% for the third quarter and 43% for the first three quarters of fiscal year
2001. The effective rate was higher than the statutory rate because of the
nondeductible amortization of acquired assets.
CAPITAL EXPENSES
As a result of the Filing, the Company has continued to defer new store openings
and related capital expenditures. Any additional capital expenditures are
expected to be paid with proceeds from the DIP credit facility.
LIQUIDITY AND CAPITAL RESOURCES
On September 24, 2001, as a consequence of impending liquidity issues facing the
Company during the second quarter of fiscal year 2002 and after not making the
$250,000 payment due under its credit facility and the $4.5 million payment due
on its 10 1/4 Senior Subordinated Notes due 2004, the Company, and substantially
all of its subsidiaries, filed for Chapter 11 protection.
On September 26, 2001, the Company received interim approval of its DIP credit
facility, and on October 19, 2001, the Company received approval of its entire
$46 million DIP credit facility. As a result, the old credit facility was
retired, and the Company expects to continue to pay for employee salaries and
benefits, ongoing operations (including payments to vendors) and other working
capital needs using funds acquired from its DIP credit facility.
The Company has also identified stores with negative cash flow that it expects
to close in the near future. Such closings are expected to create income from
the sale of assets as well as to minimize losses suffered by the Company due to
the poor performance of these stores. However, the Company's Chapter 11 filing,
recurring operating losses and reduced cash flows from operating activities as
well as other previously disclosed conditions raise substantial doubt about the
Company's ability to continue as a going concern
CASH FLOW FROM OPERATING ACTIVITIES
Net cash used in operating activities was $2.5 million in the first three
quarters of the current fiscal year compared to net cash provided by operating
activities of $1.4 million in the same period of the prior fiscal year. This
change was primarily the result of decreased earnings of the Company and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued interest and other liabilities.
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CASH USED BY INVESTING ACTIVITIES
Net cash used in investing activities was $0.1 million in the first three
quarters of the current fiscal year compared to $12.9 million in the same period
of the prior year. The decrease in cash used was primarily the result of
decreased purchases of property and equipment.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net cash provided by financing activities was $13.0 million for the first three
quarters of the current fiscal year compared to net cash provided by financing
activities of $6.6 million for the same period of the prior year. The increase
in cash provided by financing activities was primarily generated by the proceeds
from debtor-in-possession financing, largely offset by the paydown on the former
Credit Facility.
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.
BUSINESS OUTLOOK
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. Forward-looking statements are generally identified by the words
"anticipate", "believe", "expect", "plan", "intend", "should", "estimate", and
similar expressions. These forward-looking statements include statements
relating to the Company's plans and objectives to upgrade and remodel store
locations, to implement its Business Segmentation Plan and Business
Restructuring Plan, to reorganize the Company under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York, to pay its employee salaries and benefits, to pay for its ongoing
operations (including payments to vendors) and other working capital needs, to
comply with the terms of the DIP Financing and any cash management order enter
by the Bankruptcy Court in connection with the Chapter 11 Cases, to maintain
adequate cash on hand, to generate cash from operations, to receive confirmation
of a plan or plans or reorganization under the Bankruptcy Code, to
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maintain profitability following such confirmation, to sell or lease certain
assets, to explore strategic alternatives, including the possible sale of the
Company, 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 ability of the Company to
reorganize itself and successfully emerge from its Chapter 11 bankruptcy,
perceptions of the Company by the Company's customers and vendors regarding the
Company's bankruptcy filing and their willingness to continue to do business
with the Company after its bankruptcy, 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, general
economic conditions and other factors disclosed in this Form 10-Q and the
Company's other filings with the Securities and Exchange Commission. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not have any instruments that it believes would be materially
affected by any future interest rate changes.
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").
The action is entitled New England Dairies, Inc. v. Dairy Mart Convenience
Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. District
Court for the State of Connecticut). This action was commenced on April 17,
1997, by New England Dairies, Inc. ("NED") alleging that the Company committed
an anticipatory breach of a supply agreement entered into between NED and the
Company on April 25, 1995 ("the Agreement"), when the Company entered into a
contract with a third party to sell all company-owned and franchised convenience
stores in New England, without requiring the third party purchaser to assume the
Agreement. NED's complaint alleges lost profits in the amount of $3.7 million.
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 of this
case to the court was completed on December 7, 2000. The court has not yet
rendered a decision. The Company has recognized no provision for any possible
loss in the accompanying financial statements. As a result of the Company's
bankruptcy, this litigation was automatically stayed pending the result of the
bankruptcy or further action of the bankruptcy court. On October 12, 2001,
however, the United States Bankruptcy Court for the Southern District of New
York granted relief from the automatic stay solely to permit a final decision
and the entry of judgment. In the event a judgment is entered against the
Company, such judgment would be treated as a pre-petition claim against the
Company.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Prior to securing DIP financing, the Company was in default under its Revolving
Credit Agreement for failing to pay a $250,000 amendment fee to its lenders
(due in the event the Company failed to consummate its merger by September 1,
2001) and for failing to comply with certain financial ratio covenants. The
Company also did not make an interest payment of approximately $4.5 million
that was due September 17, 2001, according to its 10 1/4% Senior Subordinated
Notes due 2004. On September 24, 2001, the Company and substantially all of its
subsidiaries filed voluntary petitions for protection under Chapter 11. On
October 19, 2001, the Company received court approval of a $46 million DIP
credit facility, and the Company retired its Revolving Credit Agreement with
proceeds from the DIP credit facility. As of the date of its bankruptcy filing,
the Company had an outstanding balance (including interest) of approximately
$93.7 million on its senior subordinated notes.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS:
1. Exhibit (10) - Loan and Security Agreement by and among Dairy Mart
Convenience Stores, Inc. and certain of its subsidiaries that
are signatories hereto, as Debtors and Debtors-In-Possession,
as Borrowers, certain of its subsidiaries that are Signatories
hereto, as Debtors and Debtors-In-Possession, as Guarantors,
the Lenders that are Signatories hereto as the Lenders, and
Foothill Capital Corporation as the Arranger and
Administrative Agent. Dated as of September 26, 2001.
2. Exhibit (11) - Statement re: Computation of Per-Share Earnings.
REPORTS ON FORM 8-K:
On December 18, 2001, the Company filed a Current Report on Form 8-K, under Item
3, disclosing the filing by Dairy Mart Convenience Stores, Inc. and
substantially all of its subsidiaries, for protection under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
DATE: December 18, 2001 /s/ GREGORY G. LANDRY
--------------------------------------
Gregory G. Landry
President &
Chief Executive Officer
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