1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended AUGUST 2, 1997
[ ] 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.)
210 BROADWAY EAST, CUYAHOGA FALLS, OHIO 44222
(Address of principal executive offices)
Registrant's telephone number, including area code (330) 923-0421
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
SHARES OF CLASS A COMMON STOCK OUTSTANDING AUGUST 2, 1997 - 3,042,283
SHARES OF CLASS B COMMON STOCK OUTSTANDING AUGUST 2, 1997 - 2,783,060
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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 SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ----------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
Revenues ............................... $ 136,160 $ 155,980 $ 276,093 $ 297,462
--------- --------- --------- ---------
Cost of goods sold and expenses:
Cost of goods sold .................... $ 99,687 $ 114,459 $ 202,095 $ 219,542
Operating and administrative expenses . 33,448 35,041 68,137 69,431
Interest expense ...................... 2,693 2,756 5,460 5,504
Gain on disposition of
properties, net .................... (1,678) (3) (1,633) (89)
--------- --------- --------- ---------
134,150 152,253 274,059 294,388
--------- --------- --------- ---------
Income before income taxes ............ 2,010 3,727 2,034 3,074
Provision for income taxes ............. (888) (1,493) (895) (1,233)
--------- --------- --------- ---------
Net income .......................... $ 1,122 $ 2,234 $ 1,139 $ 1,841
- -------------------------------------------------------------------------------------------
Weighted average shares outstanding .... 4,813 4,700 4,784 4,702
--------- --------- --------- ---------
Income per share ....................... $ 0.23 $ 0.48 $ 0.24 $ 0.39
- -------------------------------------------------------------------------------------------
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
(in thousands)
AUGUST 2, 1997 FEBRUARY 1, 1997
- --------------------------------------------------------------------------------
ASSETS
(Unaudited)
Current Assets:
Cash ........................................ $ 6,389 $ 9,290
Short-term investments ...................... 22,212 1,533
Accounts and notes receivable ............... 14,950 13,588
Inventory ................................... 17,638 20,184
Prepaid expenses and other current assets ... 2,602 3,279
Deferred income taxes ....................... 4,618 1,811
--------- ---------
Total current assets ..................... 68,409 49,685
--------- ---------
Assets Held For Sale ............................ 5,386 9,543
--------- ---------
Property and Equipment, net ..................... 74,533 89,448
--------- ---------
Intangible Assets, net .......................... 15,988 17,039
--------- ---------
Other Assets, net ............................... 10,475 9,790
--------- ---------
Total assets .................................... $ 174,791 $ 175,505
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations .. $ 1,155 $ 1,383
Accounts payable ............................. 32,485 30,640
Accrued expenses ............................. 19,014 13,167
Accrued interest ............................. 3,552 3,635
--------- ---------
Total current liabilities ................ 56,206 48,825
--------- ---------
Long-Term Obligations, less current portion above 95,777 109,045
--------- ---------
Other Liabilities ............................... 13,591 9,722
--------- ---------
Stockholders' Equity:
Preferred Stock (serial) .................... -- --
Class A Common Stock ........................ 36 35
Class B Common Stock ........................ 30 30
Paid-in capital ............................. 30,724 30,560
Retained earnings (deficit) ................. (6,568) (7,707)
Treasury stock, at cost ..................... (5,005) (5,005)
Note receivable from DM Associates .......... (10,000) (10,000)
--------- ---------
Total stockholders' equity ............... 9,217 7,913
--------- ---------
Total liabilities and stockholders' equity ...... $ 174,791 $ 175,505
- --------------------------------------------------------------------------------
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 TWO FISCAL QUARTERS ENDED
------------------ --------------
AUGUST 2, 1997 AUGUST 3, 1996
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ........................................... $ 1,139 $ 1,841
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 6,015 5,833
Amortization of original issue discount .............. 66 97
Change in deferred income taxes ...................... (1,223) (866)
Gain on disposition of properties, net ............... (1,633) (89)
Net change in assets and liabilities:
Accounts and notes receivable .................. (1,362) (1,724)
Inventory ...................................... 2,546 462
Accounts payable ............................... 1,845 3,853
Accrued interest ............................... (83) 299
Other assets and liabilities ................... 6,537 4,733
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities .............. 13,847 14,439
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and change in short-term investments ..... (20,679) (1,532)
Purchase of property and equipment ................... (13,438) (9,429)
Net proceeds from sale of property, equipment and
assets held for sale .............................. 28,838 2,233
Increase in long-term notes receivable ............... (18) (1,368)
Proceeds from collection of long-term notes receivable 231 971
Decrease (increase) in intangibles and other assets .. 1,715 (425)
- -----------------------------------------------------------------------------------------
Net cash used by investing activities .................. (3,351) (9,550)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in revolving loan, net ...................... (10,280) --
Increase in long-term obligations .................... -- 650
Repayment of long-term obligations ................... (3,282) (697)
Issuance of common stock ............................. 165 158
- -----------------------------------------------------------------------------------------
Net cash (used by) provided by financing activities .... (13,397) 111
- -----------------------------------------------------------------------------------------
(Decrease) increase in cash ............................ (2,901) 5,000
Cash at beginning of fiscal year ....................... 9,290 12,654
- -----------------------------------------------------------------------------------------
Cash at end of second fiscal quarter ................... $ 6,389 $ 17,654
- -----------------------------------------------------------------------------------------
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
AUGUST 2, 1997
(Unaudited)
The unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules
and regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented, and which are of a normal, recurring nature. It is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's Form 10-K, filed with the
Securities and Exchange Commission on May 1, 1997.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the February 1,
1997 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. Supplemental Balance Sheet Information
--------------------------------------
The composition of the Company's accrued expenses in the Consolidated
Balance Sheets is as follows:
August 2, February 1,
1997 1997
-------------------------------
Accrued salaries and wages $ 4,049 $ 4,089
Accrued environmental assessment and
remediation 3,668 1,782
Accrued income taxes 2,634 (563)
Other accrued expenses 8,663 7,859
------- -------
Accrued Expenses $19,014 $13,167
------- -------
3. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first two fiscal
quarters ended August 2, 1997 follows:
COMMON STOCK
------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES PAID-IN CAPITAL
ISSUED AT ISSUED AT IN EXCESS OF
$.01 PAR VALUE $.01 PAR VALUE AMOUNT PAR VALUE
-------------- -------------- --------- ---------------
Balance February 1, 1997 3,509,576 2,959,017 $ 64,686 $ 30,560,173
Employee stock purchase plan 11,082 - 111 42,934
Stock options exercised 43,250 - 433 121,105
---------- ---------- --------- -------------
Balance August 2, 1997 3,563,908 2,959,017 $ 65,230 $ 30,724,212
---------- ---------- --------- -------------
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As of August 2, 1997, there were 521,625 shares of Class A Common Stock
and 175,957 shares of Class B Common Stock held as treasury stock at an
aggregate cost of $5,004,847, leaving 3,042,283 Class A shares and 2,783,060
Class B shares outstanding.
4. Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is based on the weighted average number of
shares outstanding, including the dilutive effect of stock options, if
appropriate, during each period. The Company's note receivable from DM
Associates Limited Partnership is secured by 1,220,000 shares of the Company's
Class B Common Stock, which shares are treated similar to treasury stock for
earnings (loss) per share purposes.
During 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share". The statement will revise the methods and disclosures
regarding earnings per share. The Company is required to adopt SFAS 128 in the
fourth quarter of fiscal 1998.
5. Seasonality
-----------
The results of operations for the first two fiscal quarters ended
August 2, 1997 are not necessarily indicative of results to be expected for the
full fiscal year. The convenience store industry in the Company's marketing
areas experiences a higher percentage of revenues and profit margins during the
summer months than during the winter months. Historically, the Company has
achieved more favorable financial results in its second and third fiscal
quarters, as compared to its first and fourth fiscal quarters.
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6. Unaudited Pro Forma Information
-------------------------------
On June 21, 1997, the Company completed the sale of the assets relating
to 156 convenience store and retail gasoline locations in Connecticut,
Massachusetts, Rhode Island, and New York. The principal assets sold by the
Company include inventories, convenience store and gasoline fixtures and
equipment, land, buildings, and building and leasehold improvements. The
following unaudited pro forma information of the Company for the fiscal year
ended February 1, 1997 and the first two fiscal quarters ended August 2, 1997,
has been prepared assuming that the sale of the 156 convenience store and
retail gasoline locations had occurred as of the beginning of the fiscal year
ended February 1, 1997. The unaudited pro forma information are not necessarily
indicative of the results which would have been reported if the transaction had
occurred at the beginning of the fiscal year ended February 1, 1997, or which
may be reported in the future. The unaudited pro forma information reflects the
exclusion, for both fiscal periods shown, of historical revenues, cost of goods
sold, operating expenses, and direct and indirect administrative expenses
associated with the 156 retail locations sold. Additionally, the unaudited pro
forma information reflects the elimination of historical interest expense
related to debt retired based on the assumption that proceeds from the sale of
the 156 retail locations had been received at the beginning of the fiscal year
ended February 1, 1997, and also reflects the elimination of the estimated
income tax effect of the associated excluded results of operations for the 156
retail locations sold. The unaudited pro forma information is as follows:
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(Unaudited)
(in thousands, except per share amounts)
FOR THE TWO FISCAL FOR THE FISCAL
QUARTERS ENDED YEAR ENDED
------------------ --------------
AUGUST 2, FEBRUARY 1,
1997 1997
----------------------------------------------------------------------------------------------------------
Revenues................................ $ 234,044 $ 471,969
---------- ---------
Loss before income taxes................ (1,192) (4,012)
---------- ----------
Net loss................................ $ (667) $ (2,889)
----------------------------------------------------------------------------------------------------------
Loss per share.......................... $ (0.15) $ (0.65)
----------------------------------------------------------------------------------------------------------
6. Supplemental Consolidating Financial Information (unaudited)
------------------------------------------------------------
The Company's payment obligations under the Series A and Series B
Senior Subordinated Notes are guaranteed by certain of the Company's
subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and unconditionally
guaranteed on an unsecured, senior subordinated, joint and several basis by each
of the guarantor subsidiaries. The following supplemental financial information
sets forth, on a consolidating basis, statement of operations, balance sheet,
and cash flow information for the Company ("Parent Company Only"), for the
Guarantor Subsidiaries and for Financial Opportunities, Inc. ("FINOP"), the
Company's non-guarantor subsidiary. Separate complete financial statements of
the respective Guarantor Subsidiaries would not provide additional information
which would be useful in assessing the financial condition of the Guarantor
Subsidiaries, and are accordingly omitted.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method for purpose of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principle elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
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Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 2, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Revenues ............................. $ 267 $ 275,607 $ 219 $ -- $ 276,093
Cost of goods sold and expenses:
Cost of goods sold ............... -- 202,095 -- -- 202,095
Operating and administrative
expenses ....................... 139 67,983 15 -- 68,137
Interest expense ................. 4,883 401 176 -- 5,460
Gain on disposition of
properties, net ................ -- (1,633) -- -- (1,633)
--------- --------- ----- --------- ---------
5,022 268,846 191 -- 274,059
--------- --------- ----- --------- ---------
Income (loss) before income taxes
and equity in income
of consolidated subsidiaries ... (4,755) 6,761 28 -- 2,034
(Provision for) benefit from
income taxes ........................ 2,092 (2,975) (12) -- (895)
--------- --------- ----- --------- ---------
Income (loss) before equity in
income of consolidated
subsidiaries ................... (2,663) 3,786 16 -- 1,139
Equity in income of
consolidated subsidiaries ........... 3,802 16 -- (3,818) --
--------- --------- ----- --------- ---------
Net income ........................ $ 1,139 $ 3,802 $ 16 $ (3,818) $ 1,139
========= ========= ===== ========= =========
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Supplemental Consolidating Balance Sheets
August 2, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
ASSETS
Current Assets:
Cash ............................ $ 1,623 $ 3,836 $ 930 $ -- $ 6,389
Short-term investments .......... -- 19,878 2,334 -- 22,212
Accounts and notes receivable ... 103 14,285 562 -- 14,950
Inventory ....................... -- 17,638 -- -- 17,638
Prepaid expenses and
other current assets ........... 142 2,460 -- -- 2,602
Deferred income taxes ........... 2,272 2,346 -- -- 4,618
-------- -------- ------ ---------- --------
Total current assets ......... 4,140 60,443 3,826 -- 68,409
-------- -------- ------ ---------- --------
Assets Held For Sale ............... -- 5,386 -- -- 5,386
Property and Equipment, net ........ -- 74,533 -- -- 74,533
Intangible Assets, net ............. -- 15,988 -- -- 15,988
Other Assets, net .................. 1,251 7,246 1,978 -- 10,475
Investment in and Advances to
Subsidiaries ..................... 119,021 1,398 636 (121,055) --
-------- -------- ------ ---------- -------
Total assets ....................... $124,412 $164,994 $6,440 $(121,055) $174,791
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ......... $ 808 $ 347 $ -- $ -- $ 1,155
Accounts payable ................ 18,733 13,752 -- -- 32,485
Accrued expenses ................ 1,626 17,368 20 -- 19,014
Accrued interest ................ 3,435 -- 117 -- 3,552
-------- -------- ------ ---------- --------
Total current liabilities .... 24,602 31,467 137 -- 56,206
-------- -------- ------ ---------- --------
Long-Term Obligations,
less current portion above ........ 90,593 954 4,230 -- 95,777
Other Liabilities .................. -- 13,552 39 -- 13,591
Stockholders' Equity ............... 9,217 119,021 2,034 (121,055) 9,217
-------- -------- ------ ---------- --------
Total liabilities and
stockholders' equity ............. $124,412 $164,994 $6,440 $(121,055) $174,791
======== ======== ====== ========== ========
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Supplemental Consolidating Statement of Cash Flows
for the Two Fiscal Quarters Ended August 2, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Net cash provided by operating
activities ............................ $ 5,518 $ 8,191 $ 138 $ -- $ 13,847
-------- -------- -------- ------- -------
Cash flows from investing activities:
Purchase of and change in
short-term investments ............... -- (19,878) (801) -- (20,679)
Purchase of property and equipment .... -- (13,438) -- -- (13,438)
Net proceeds from sale of property,
equipment and assets held for sale ... -- 28,838 -- -- 28,838
Investment in and advances to
subsidiaries ......................... 7,763 (7,970) 207 -- --
Increase in long-term notes receivable -- (18) -- -- (18)
Proceeds from collection of
long-term receivables ................ -- 21 210 -- 231
Increase in intangibles
and other assets ..................... 29 1,682 4 -- 1,715
-------- -------- -------- ------- --------
Net cash provided by (used by) investing
activities ............................ 7,792 (10,763) (380) -- (3,351)
-------- -------- -------- ------- --------
Cash flows from financing activities:
Decrease in revolving loan, net ....... (10,280) -- -- -- (10,280)
Repayment of long-term obligations .... (1,672) (1,610) -- -- (3,282)
Issuance of common stock .............. 165 -- -- -- 165
-------- -------- -------- ------- --------
Net cash used by
financing activities ................... (11,787) (1,610) -- -- (13,397)
-------- -------- -------- ------- --------
Increase (decrease) in cash .............. 1,523 (4,182) (242) -- (2,901)
Cash at beginning of fiscal year ......... 100 8,018 1,172 -- 9,290
-------- -------- -------- ------- -------
Cash at end of second fiscal quarter ..... $ 1,623 $ 3,836 $ 930 $ -- $ 6,389
======== ======== ======== ======= =======
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Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 3, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Revenues ........................... $ 135 $ 297,056 $ 271 $ -- $297,462
Cost of goods sold and expenses:
Cost of goods sold .............. -- 219,542 -- -- 219,542
Operating and administrative
expenses ....................... 138 69,293 -- -- 69,431
Interest expense ................ 5,077 253 174 -- 5,504
Gain on disposition of
properties, net ................ -- (89) -- -- (89)
-------- --------- ------- --------- --------
5,215 288,999 174 -- 294,388
-------- --------- ------- --------- --------
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries ... (5,080) 8,057 97 -- 3,074
(Provision for) benefit from
income taxes ...................... 2,037 (3,264) (6) -- (1,233)
-------- --------- ------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries ................. (3,043) 4,793 91 -- 1,841
Equity in income of consolidated
subsidiaries ................. 4,884 91 -- (4,975) --
-------- --------- ------- --------- --------
Net income ...................... $ 1,841 $ 4,884 $ 91 $ (4,975) $ 1,841
======== ========= ======= ========= ========
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Supplemental Consolidating Balance Sheets
February 1, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- -------- ------ ---------- --------
(in thousands)
ASSETS
Current Assets:
Cash ............................ $ 100 $ 8,018 $1,172 $ -- $ 9,290
Short-term investment ........... -- -- 1,533 -- 1,533
Accounts and notes receivable ... 20 12,897 671 -- 13,588
Inventory ....................... -- 20,184 -- -- 20,184
Prepaid expenses and
other current assets ........... 20 3,259 -- -- 3,279
Deferred income taxes ........... 933 878 -- -- 1,811
-------- -------- ------ ---------- --------
Total current assets ......... 1,073 45,236 3,376 -- 49,685
-------- -------- ------ ---------- --------
Assets Held For Sale ............... -- 9,543 -- -- 9,543
Property and Equipment, net ........ -- 89,448 -- -- 89,448
Intangible Assets, net ............. -- 17,039 -- -- 17,039
Other Assets, net .................. 1,389 6,209 2,192 -- 9,790
Investment in and Advances to
Subsidiaries ..................... 126,784 1,175 843 (128,802) --
-------- -------- ------ ---------- -------
Total assets ....................... $129,246 $168,650 $6,411 $(128,802) $175,505
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ......... $ 929 $ 454 $ -- $ -- $ 1,383
Accounts payable ................ 13,800 16,840 -- -- 30,640
Accrued expenses ................ 726 12,432 9 -- 13,167
Accrued interest ................ 3,520 -- 115 -- 3,635
-------- -------- ------ ---------- --------
Total current liabilities .... 18,975 29,726 124 -- 48,825
-------- -------- ------ ---------- --------
Long-Term Obligations,
less current portion above ........ 102,358 2,457 4,230 -- 109,045
Other Liabilities .................. -- 9,683 39 -- 9,722
Stockholders' Equity ............... 7,913 126,784 2,018 (128,802) 7,913
-------- -------- ------ ---------- --------
Total liabilities and
stockholders' equity ............. $129,246 $168,650 $6,411 $(128,802) $175,505
======== ======== ====== ========== ========
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Supplemental Consolidating Statement of Cash Flows
for the Two Quarters Ended August 3, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
Net cash provided by (used by) operating
activities ............................ $(5,215) $ 19,580 $ 74 $ -- $ 14,439
------- -------- ------- ---- --------
Cash flows from investing activities:
Purchase of and increase in
short-term investments ............... -- -- (1,532) -- (1,532)
Purchase of property and equipment .... -- (9,429) -- -- (9,429)
Net proceeds from sale of property,
equipment and assets held for sale ... -- 2,233 -- -- 2,233
Investment in and advances to
subsidiaries ......................... 9,606 (9,123) (483) -- --
Increase in long-term notes receivable -- (120) (1,248) -- (1,368)
Proceeds from collection of
long-term receivables ................ -- 60 911 -- 971
Increase in intangibles
and other assets ..................... -- (428) 3 -- (425)
------- -------- ------- ---- --------
Net cash provided by (used by) investing
activities ............................ 9,606 (16,807) (2,349) -- (9,550)
------- -------- ------- ---- --------
Cash flows from financing activities:
Increase in revolving loan, net ....... 300 350 -- -- 650
Repayment of long-term obligations .... (463) (226) (8) -- (697)
Issuance of common stock .............. 158 -- -- -- 158
------- -------- ------- ---- --------
Net cash provided by (used by)
in financing activities ................ (5) 124 (8) -- 111
------- -------- ------- ---- --------
Increase (decrease) in cash ............. 4,386 2,897 (2,283) -- 5,000
Cash at beginning of fiscal year ........ 1,739 7,871 3,044 -- 12,654
------- -------- ------- ---- --------
Cash at end of second fiscal quarter .... $ 6,125 $ 10,768 $ 761 $ -- $ 17,654
======= ======== ======= ==== ========
7. Subsequent Events
-----------------
During fiscal 1996, the Company acquired a $10,000,000 note
receivable ("Note") from DM Associates Limited Partnership collateralized by
1,220,000 shares of the Company's Class B Common Stock ("Pledged Shares"). The
Note has been recorded as a reduction to stockholders' equity on the
Consolidated Balance Sheets of the Company. Since the Note was not paid when
it became due and payable on July 31, 1997, the Company, subsequent to the
close of the current year second fiscal quarter, has received the Pledged
Shares in satisfaction of the Note.
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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
During the current year second fiscal quarter, the Company sold 156 convenience
store and retail gasoline locations based in the northeastern United States (see
Note 6 to the Consolidated Financial Statements). The following discussion and
analysis of Results of Operations is based on unaudited Pro Forma Consolidated
Statements of Operations, as shown below, for the current year first two fiscal
quarters and current year second fiscal quarter as compared to the corresponding
periods of the prior fiscal year. The unaudited Pro Forma Consolidated
Statements of Operations as presented below reflect the exclusion, for all
comparative fiscal periods shown, of the historical revenues, cost of goods
sold, operating expenses, and direct and indirect administrative expenses
associated with the 156 retail locations sold. Additionally, the unaudited Pro
Forma Consolidated Statements of Operations reflect the elimination of
historical interest expense related to debt retired based on the assumption that
proceeds from the sale had been received as of the beginning of the prior fiscal
year, and also reflect the elimination of the estimated income tax effect of the
associated excluded results of operations for the 156 retail locations sold. The
unaudited Pro Forma Consolidated Statements of Operations for the comparative
second fiscal quarter and the first two fiscal quarters are as follows:
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------- -------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------
Revenues ............................... $ 120,828 $ 125,595 $ 234,044 $ 239,323
--------- --------- --------- ---------
Cost of goods sold and expenses:
Cost of goods sold .................... $ 88,014 $ 92,128 $ 170,654 $ 176,127
Operating and administrative expenses . 29,602 28,698 58,304 56,753
Interest expense ...................... 2,579 2,696 5,180 5,386
Loss (gain) on disposition of
properties, net .................... 1,053 (3) 1,098 (89)
--------- --------- --------- ---------
121,248 123,519 235,236 238,177
--------- --------- --------- ---------
Income (loss) before income taxes ...... (420) 2,076 (1,192) 1,146
Benefit (provision) for income taxes ... 181 (832) 525 (460)
--------- --------- --------- ---------
Net income (loss) ................... $ (239) $ 1,244 $ (667) $ 686
- -------------------------------------------------------------------------------------------------------
Weighted average shares outstanding .... 4,602 4,700 4,586 4,702
--------- --------- --------- ---------
Income (loss) per share ................ $ (0.05) $ 0.26 $ (0.15) $ 0.15
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REVENUES
Revenues for the current year first two fiscal quarters decreased by
$5.3 million from the prior year first two fiscal quarters, and revenues for the
current year second fiscal quarter decreased by $4.8 million from the prior year
second fiscal quarter. A summary of revenues by functional area for the
comparative second fiscal quarter and the first two fiscal quarters is as
follows:
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FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- -------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
(IN MILLIONS) 1997 1996 1997 1996
- ------------------------------------------------------------------ ------------------
CONVENIENCE STORES $ 75.0 $ 75.8 $ 143.0 $ 143.6
GASOLINE 45.1 49.0 89.8 94.3
OTHER 0.7 0.8 1.2 1.4
------------------- ------------------
TOTAL $ 120.8 $ 125.6 $ 234.0 $ 239.3
=================== ==================
Convenience store revenues decreased by $0.6 million in the current
year first two fiscal quarters as compared to the prior year first two fiscal
quarters, and convenience store revenues for the current year second fiscal
quarter decreased by $0.8 million as compared to the prior year second fiscal
quarter. These decreases were primarily due to a reduction of approximately 26
underperforming stores in the current fiscal year. The decrease in the current
year first two fiscal quarters was partially offset by a 1.1% increase in
comparable store sales, while in the current year second fiscal quarter there
was a 0.5% decrease in comparable store sales. Although the reduction in stores
had a negative impact on revenues they did not have a material adverse effect on
results of operations, since the majority of stores closed or sold had been
operating at a loss.
Gasoline revenues decreased $4.5 million in the current year first two
fiscal quarters as compared to the prior year first two fiscal quarters, and
gasoline revenues for the current year second fiscal quarter decreased $3.9
million as compared to the prior year second fiscal quarter. The decrease in
gasoline revenues for the first two fiscal quarters was primarily due to a
decrease in total gallons sold of 5.4 million partially offset by an increase in
the average selling price of gasoline of 1.2 cents per gallon. The decrease in
gasoline revenues for the second fiscal quarter was primarily due to a decrease
in total gallons sold of 3.0 million and also due to a decrease in the average
selling price of gasoline of 2.0 cents per gallon.
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GROSS PROFITS
Gross profits for the current year first two fiscal quarters increased
$0.2 million from the prior year first two fiscal quarters, and gross profits
for the current year second fiscal quarter decreased $0.7 million from the prior
year second fiscal quarter. A summary of the gross profits by functional area
for the comparative second fiscal quarter and the first two fiscal quarters is
as follows:
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
(IN MILLIONS) 1997 1996 1997 1996
----------------------------------------------------------- ---------------------------
CONVENIENCE STORES $ 27.1 $ 27.9 $ 52.2 $ 52.6
GASOLINE 5.0 4.8 10.0 9.3
OTHER 0.7 0.8 1.2 1.3
----------------------- ---------------------------
TOTAL $ 32.8 $ 33.5 $ 63.4 $ 63.2
======================= ===========================
Convenience store gross profits decreased by $0.4 million in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters, and convenience store gross profits decreased by $0.8 million
in the current year second fiscal quarter as compared to the prior year second
fiscal quarter. These decreases were primarily due to lower product gross
margins in the current year second fiscal quarter, and due to the overall
reduction in the average number of stores, as described above.
Gasoline gross profits increased by $0.7 million in the current year
first two fiscal quarters as compared to the prior year first two fiscal
quarters, and gasoline gross profits increased by $0.2 million in the current
year second fiscal quarter as compared to the prior year second fiscal quarter.
These increases were primarily due to an increase of 1.6 cents and 1.3 cents in
gross profit per gallon for the two fiscal quarters and second fiscal quarter,
respectively, mostly offset by the decreases in gasoline
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gallons sold, as described above.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the current year first two
fiscal quarters increased $1.5 million from the prior year first two fiscal
quarters, and operating and administrative expenses for the current year second
fiscal quarter increased by $0.9 million from the prior year second fiscal
quarter. A summary of expenses by functional area for the comparative second
fiscal quarter and first two fiscal quarters is as follows:
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
----------------------------- -----------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
(IN MILLIONS) 1997 1996 1997 1996
- -------------------------------------------------------------------------------- -----------------------------
CONVENIENCE STORES $ 20.5 $ 20.7 $ 40.6 $ 40.6
GASOLINE 3.0 2.7 5.8 5.6
ADMINISTRATIVE AND OTHER 6.1 5.3 11.9 10.6
----------------------------- -----------------------------
TOTAL $ 29.6 $ 28.7 $ 58.3 $ 56.8
============================= =============================
Convenience store operating expenses decreased by $0.2 million in the
current year second fiscal quarter as compared to the prior year second fiscal
quarter, and convenience store operating expenses remained constant in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters. Convenience store operating expenses were reduced due to the
overall reduction in the average number of stores, as described above,
partially, or entirely, offset by higher labor, depreciation and maintenance
costs.
Gasoline operating expenses increased by $0.2 million in the current
year first two fiscal quarters as compared to the prior year first two fiscal
quarters, and gasoline operating expenses increased by $0.3 million in the
current year second fiscal quarter as compared to the prior year second fiscal
quarter. These increases are primarily due to higher rent and depreciation
expenses partially offset by reduced environmental re-mediation
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expenditures.
Administrative and other expenses increased by $1.3 million in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters, and administrative and other expenses increased by $0.8 million
in the current year second fiscal quarter as compared to the prior year second
fiscal quarter. These increases are due to higher professional and legal fees
and an increase in the Company's workers' compensation and commercial liability
insurance expense attributable to unfavorable claims experience.
INTEREST EXPENSE, LOSS (GAIN) ON DISPOSITION OF PROPERTIES, AND TAXES
Interest expense decreased by $0.2 million in the current year first
two fiscal quarters as compared to the prior year first two fiscal quarters, and
interest expense decreased $0.1 million in the current year second fiscal
quarter as compared to the prior year second fiscal quarter due to a reduction
in the amount of outstanding letters of credit in the current year two fiscal
quarters and current year second fiscal quarter.
Loss (gain) on disposition of properties increased by $1.2 million in
the current year first two fiscal quarters and by $1.1 million in the current
year second fiscal quarter as compared to the corresponding periods of the prior
fiscal year due to higher costs and expenses associated with the closing of
certain underperforming stores in the current fiscal year.
The effective tax rate for the Company was a benefit of 44% and 43% for
the current year first two fiscal quarters and the current year second fiscal
quarter, respectively, and a provision of 40% for the corresponding periods of
the prior year.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since a majority
of its revenues are received in cash. The amount of cash generated from
operations significantly exceeded the current debt service requirements of the
Company's long-term obligations. The capital expenditures of the Company were
funded by the excess cash flow available after debt service and by the cash
generated from the sale of certain assets. Additionally, the Company has a
revolving line of credit available to address the seasonality of operations and
the timing of capital expenditures and certain working capital disbursements.
Management believes that the cash flow from operations, the proceeds from the
sale of certain assets held for sale and the proceeds from the sale of 156
convenience store and retail gasoline locations formerly operated in the
northeastern United States (see Note 6 to the Consolidated Financial
Statements), supplemented by the availability of a revolving line of credit will
provide the Company with adequate liquidity and the capital necessary to achieve
its expansion initiatives in its retail operations (see "Capital Expenditures").
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities decreased by $0.6 million in
the current year first two fiscal quarters as compared to the corresponding
period of the prior year primarily due to the reduced results of operations (see
Consolidated Statements of Operations).
During the current year first two fiscal quarters, the Company paid its
trade payables in an average of 28 days, which compares to 26 days for fiscal
1997 and 27 days for the prior year first two fiscal quarters. The cash flow of
the Company is also favorably impacted by the Company's use of funds from the
sale of money orders, pending remittance of such funds to the issuer of the
money orders. As of August 2, 1997, February 1, 1997 and August 3, 1996,
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the amounts due the issuer were $9.1 million, $7.9 million and $7.8 million
respectively.
CASH USED BY FINANCING ACTIVITIES
Cash used by financing activities increased $13.5 million in the
current year first two fiscal quarters as compared to the corresponding period
of the prior year primarily due to a reduction in the outstanding balance of the
Company's revolving credit facility and the payment of certain long-term
obligations with the proceeds from the sale of 156 convenience store and retail
gasoline locations, as described above. The Company has a $30.0 million senior
revolving credit facility with $15.0 million available for issuance of letters
of credit. The Company may utilize the revolving credit facility as needed for
working capital and general corporate purposes. As of August 2, 1997, the
Company did not have any outstanding revolving credit loans and had $7.4 million
in outstanding letters of credit.
CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities decreased by $6.2 million in the
current year first two fiscal quarters as compared to the corresponding period
of the prior year primarily due to net proceeds generated from the sale of the
156 convenience store and retail gasoline locations, as described above,
partially offset by an increased level of capital expenditures and purchase of
short-term investments.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $25 million for capital
expenditures in fiscal 1998 by purchasing store and gasoline equipment for new
stores, remodeling a certain number of existing store and gasoline locations,
implementing and/or upgrading office and store technology and
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meeting the Company's requirements to comply with federal and state underground
gasoline storage tank regulations (see "Environmental Responsibility"). These
capital expenditures will be funded primarily by cash generated from operations,
the proceeds from the sale of assets held for sale as of August 2, 1997, the
proceeds from the sale of 156 convenience store and retail gasoline locations,
as described above, supplemented by the availability of a senior revolving line
of credit or other forms of equipment financing and/or leasing, if necessary.
The Company intends to lease the real estate for the majority of new store
locations.
ENVIRONMENTAL RESPONSIBILITY
The Company accrues its estimate of all costs to be incurred for
assessment and remediation with respect to releases of regulated substances from
existing and previously operated retail gasoline facilities. As of August 2,
1997, the Company had recorded an accrual of $8,809,000 for such costs, the
majority of which are anticipated to be spent over the next 3 to 5 years.
The Company is entitled to reimbursement of a portion of the above
costs from various state environmental trust funds based upon compliance with
the terms and conditions of such trust funds. As of August 2, 1997, the Company
had recorded a net state trust fund reimbursement receivable of $5,439,000
(representing a gross receivable of $7,613,000 less an allowance of $2,174,000).
Although there are no assurances as to the timing, the Company believes that it
is probable that reimbursements from the state environmental trust funds will be
received within one to five years from the payment of the reimbursable
assessment and remediation expenses.
In addition, the Company estimates that future capital expenditure
requirements to comply with federal and state underground gasoline storage tank
regulations will be approximately $7.0 to $8.0 million in the aggregate
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through December 1998. These costs could be reduced for low volume retail
gasoline locations closed in lieu of the capital cost of compliance.
The Company's estimate of costs to be incurred for environmental
assessment and remediation and for required underground storage tank upgrading
and other regulatory compliance is based on factors and assumptions that could
change due to modifications of regulatory requirements or detection of
unanticipated environmental conditions.
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Part II.
OTHER INFORMATION
-----------------
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 July 7, 1997, the Company filed a Current Report
on form 8-K, in which the Company reported that it had
finalized the sale its 156 convenience store locations in
Connecticut, Massachusetts, Rhode Island and 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: September 22, 1997 /s/ Gregory G. Landry
---------------------
Gregory G. Landry
Executive Vice President
Chief Financial Officer
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