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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended JANUARY 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ______ to ______
Commission File Number 0-12497
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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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (Par Value $.01)
Class B Common Stock (Par Value $.01)
(Titles of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 27, 1998, 3,133,862 shares of Class A Common Stock and 1,528,049
shares of Class B Common Stock were outstanding, and the aggregate market value
of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES,
INC., held by nonaffiliates was approximately $14,917,474.
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1998 definitive proxy statement to be filed pursuant to
Registration 14A within 120 days after the end of the Registrant's fiscal year
are incorporated by reference in Part III.
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include statements relating to the
Company's plans and objectives to upgrade and remodel store locations, to build
new stores and increase gasoline sales, to improve certain aspects of the
franchise program, to sell or lease certain assets, as well as the availability
of supplies of gasoline, the estimated costs for environmental remediation and
the sufficiency of the Company's liquidity and the availability of capital. Such
statements are based on management's current expectations and are subject to a
number of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Such factors
and uncertainties include, but are not limited to, the availability of financing
and additional capital to fund the Company's business strategy on acceptable
terms, if at all, the future profitability of the Company, the availability of
desirable store locations, the Company's ability to negotiate and enter into
lease, acquisition and supply agreements on acceptable terms, competition and
pricing in the Company's market area, volatility in the wholesale gasoline
market due to supply interruptions, modifications of environmental regulatory
requirements, detection of unanticipated environmental conditions, the timing of
reimbursements from state environmental trust funds, the Company's ability to
manage its long-term indebtedness, weather conditions, the favorable resolution
of certain pending and future litigation, and general economic conditions. 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.
PART I
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ITEM 1. BUSINESS
GENERAL
Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or
"Dairy Mart") operate one of the nation's largest regional convenience store
chains. Founded in 1957, the Company operates or franchises approximately 627
stores under the "Dairy Mart" name in seven states located in the Midwest and
Southeast. Approximately 293 stores sell gasoline and approximately 158 stores
are franchised.
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During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations in Connecticut, Rhode Island, Massachusetts and New York to
the DB Companies, Inc., a Rhode Island-based convenience store operator and
gasoline wholesaler and retailer for approximately $39.1 million.
Dairy Mart stores offer a wide range of products and services which cater to the
convenience needs of its customers, including milk, ice cream, groceries,
beverages, snack foods, candy, deli products, publications, health and beauty
aids, tobacco products, lottery tickets and money orders. The stores are
typically located in densely populated, suburban areas on sites which are easily
accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli items,
coffee, fountain drinks and other fast food items.
The Company is incorporated in Delaware and maintains its principal executive
offices at One Dairy Mart Way, 300 Executive Parkway West, Hudson, Ohio 44236.
The Company's telephone number is (330) 342-6600.
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STORES
The Company's stores are generally located in densely populated suburban areas,
and are situated close to single-family homes and apartments to attract
neighborhood shoppers. Store location, design, lighting and layout are intended
to cater to customers' desire for fast and convenient access. Approximately 293
locations also sell gasoline, which the Company believes is an important
convenience for customers. Shelving and displays, including refrigeration units,
deli and other fast food counters and displays, are designed to encourage
customers to purchase high profit margin products including impulse purchase
items such as candy, fountain drinks and ice cream novelties. Stores are located
on sites which are well-lit, easily accessible by customers and provide ample
parking. All of the Company's stores also offer extended hours for additional
convenience, with over one-half of the stores open 24 hours per day. A typical
Dairy Mart store ranges between 2,400 and 3,700 square feet and is a free
standing structure.
As of January 31, 1998, the Company operated and franchised retail convenience
stores in the following states:
NUMBER OF
STORES
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Ohio.....................................................................390
Kentucky.................................................................134
Michigan..................................................................32
Pennsylvania..............................................................32
Indiana...................................................................20
Tennessee.................................................................13
North Carolina........................................................... 6
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Total Stores.......................................................627
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The following table shows the number of company and franchise stores that were
opened or acquired, closed or sold, and transferred between Company operated and
franchise operated, during the last three fiscal years:
January 31, 1998 February 1, 1997 February 3, 1996
---------------------------- -------------------------- ---------------------------
Company Franchise Company Franchise Company Franchise
Operated Operated Total Operated Operated Total Operated Operated Total
-------- -------- ----- -------- -------- ----- -------- -------- -----
At beginning of period... 543 268 811 587 290 877 644 317 961
Opened or acquired...... 7 - 7 9 - 9 8 - 8
Closed or sold.......... (89) (102) (191) (55) (20) (75) (68) (24) (92)
Transferred (net)....... 8 (8) -- 2 (2) -- 3 (3) --
---- ---- ---- ---- ---- ---- ---- ---- ----
At end of period........ 469 158 627 543 268 811 587 290 877
==== ==== ==== ==== ==== ==== ==== ==== ====
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UPGRADE AND REMODEL OF EXISTING STORE BASE AND CLOSING UNDERPERFORMING STORES
The Company has an ongoing program to upgrade and remodel the Company's retail
and gasoline locations to cater to the always changing convenience needs of
today's customer. The program includes modernizing and re-imaging the store's
appearance, upgrading the gasoline facilities and installing modern
environmental protection equipment.
The Company evaluates the performance of each of its stores in order to
determine its contribution to the Company's overall profitability. Management
determines a minimum acceptable level of store performance required for a store
to be eligible for on-going capital expenditures and/or lease option renewal or
renegotiation. Accordingly, in fiscal year 1998, the Company closed 19 of its
retail convenience stores and seven of its retail gasoline facilities because of
their inability to meet the Company's economic and non-economic criteria for
long-term stability and growth. Another 16 stores were sold to independent
operators in fiscal year 1998.
NEW STORES
A major component in the Company's growth strategy is to continue to build new
stores and increase gasoline sales. During fiscal year 1998 the Company opened
seven new 3,700 square foot stores, all which offer gasoline through modern
facilities which include credit card readers in the dispensers. Three of the
new stores include branded food service which carries relatively higher gross
profit margins.
The Company intends to substantially accelerate the pace of new store
development during fiscal year 1999 with a target of 25 new stores located in
Ohio and Northern Kentucky. The Company believes adequate sources of financing
will continue to be available to support new store development.
TECHNOLOGICAL UPGRADE
The Company completed the first phase of its store automation program in fiscal
year 1998. Phases two and three are scheduled to be completed during the next
two fiscal years.
Phase one provided a new foundation for store accounting and management
reporting. This new host system is driven by the concept of centralized store
control. This allows for the collection and distribution of more detailed and
timely information from store operations and forms the basis for the formation
and implementation of improved merchandising strategies.
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Phase two, the implementation of a centralized pricebook, allows the definition
of market zones and the management of retail pricing strategy from the corporate
office. The implementation of a centralized pricebook is expected to improve
retail margins through increased accuracy of retail pricing and verification of
agreed upon vendor costs. Also, pricebook is expected to save input time, reduce
input errors, and provide greater control over store merchandise inventory.
Phase three, the implementation of a store level computer system, streamlines
the data entry process by allowing store managers to directly input their
inventory and operating results into the accounting system. A series of
exception-based reports allows management to verify input accuracy, maintain
accounting controls, and produce detailed reports on a daily basis. Store level
systems have also been interfaced to the point-of-sale devices to save input
time and increase control.
Future automation phases, which are an extension of the current implementations,
are expected to include scanning, time and attendance, and gasoline pump control
at the point-of-sale device.
GASOLINE OPERATIONS
Gasoline sales enable the Company to significantly increase a store's total
level of sales without a commensurate increase in overhead. Gasoline sales
accounted for approximately 38% of total revenues in fiscal year 1998, 42% for
fiscal year 1997 and 40% in fiscal year 1996. As of January 31, 1998, 293 stores
sold gasoline. Financial information related to the Company's gasoline
operations for the last three fiscal years is set forth in Note 12 to the
Consolidated Financial Statements.
The Company's gasoline pricing strategy has historically been designed, in
part, to provide value to customers by offering the same quality gasoline
offered by major oil companies at prices which are generally below nationally
advertised brands and comparable to other convenience store chains. The Company
obtains its gasoline from major oil company suppliers, primarily through spot
market purchases, and believes that there are adequate supplies of fuel
available from a number of sources at competitive prices.
Gasoline profit margins have a significant impact on the Company's income. Such
profit margins could be adversely influenced by factors beyond the Company's
control, such as volatility in the wholesale gasoline market due to supply
interruptions. In addition, gasoline profit margins are continually influenced
by competition in each local market area.
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The Company has entered into discussions with several major oil companies with
the goal of reaching agreements with one or more of them which will result in
certain of the Company's gasoline locations selling branded gasoline and in
upgrading certain of the Company's gasoline facilities. Although there are no
assurances any such agreement will be consummated, the Company believes offering
gasoline product with a major oil company brand would enable it to compete more
effectively.
PRODUCT SELECTION
All stores generally offer more than 3,000 core food and non-food convenience
items featuring well-known national brand names, as well as the Company's
private label products. Food items include a wide variety of products, including
canned foods and groceries, dairy products, beverages, snack items, candy, baked
goods and food service items, such as fountain soft drinks, coffee, cappuccino,
hot dogs, deli meats and deli sandwiches and similar foods. General merchandise
available includes gasoline (at 293 stores), cigarettes, health and beauty aids,
publications, lottery tickets and money orders.
The Company has installed branded food service at 27 store locations, including
18 Taco Bells(R), 1 Pizza Hut(R) and 8 Subways(R). The Company has entered into
an agreement with Restaurants Developers Corporation to install Mr. Hero(R)
sandwiches and Arabica(R) Coffee houses, well-established regional brands with
strong consumer recognition in Northeastern Ohio. These branded food service
offerings allow the Company to offer competitive, high-quality food service and
increase customer traffic providing ancillary sales opportunities for gasoline
and other convenience items.
In recent years, the Company has altered the mix of products and services to
emphasize the sale of items carrying higher profit margins. Fast food items
carry higher profit margins and tend to lead to the purchase of other high
profit margin products and impulse items, including salty-snacks, candy and
beverages. Dairy Mart offers a number of private label products such as milk,
bakery products, juices, dips and cheeses which generally carry a higher gross
profit margin than the Company's average gross profit margin on comparable
products. In fiscal year 1998, Dairy Mart completed the installation of
approximately 500 automated teller machines (ATMs) in its stores. Dairy Mart has
no capital investment in the ATMs and receives monthly fee income from the owner
and operator of the ATMs.
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FRANCHISE OPERATIONS
The Company franchises 158 stores. Franchise stores generally follow the same
operating policies as Company stores, and are subject to Company supervision
under franchise agreements. Company operated and franchise stores are of the
same basic store design and sell substantially the same products.
The Company offers two types of franchising arrangements: a "full" franchise and
a "limited" franchise. Under a full franchise agreement, the franchisee
purchases and owns both the merchandise inventory and the equipment located in
the store, and leases or subleases the store from the Company. Under a limited
franchise agreement, the franchisee owns only the merchandise inventory while
the Company retains ownership of the store equipment. Franchise fees are higher
for limited franchisees. As of January 31, 1998, there were 69 full franchise
locations and 89 limited franchise locations.
INTERNATIONAL OPERATIONS
The Company conducts business outside the United States as a licensor or as a
consultant. Currently, the Company is a party to two agreements with convenience
store operators in South Korea and Malaysia. As with the Company's prior
international arrangements, both agreements require a specified commitment of
Company personnel, but do not require any significant commitment of capital. At
the end of fiscal year 1998, there were 261 stores in South Korea and 21 stores
in Malaysia operating under these agreements.
ADVERTISING
To promote a uniform image for all stores, the Company designs and coordinates
advertising for all stores to complement its marketing strategy, which is
derived, in part, from market surveys and research. In-store, newspaper,
direct-mail advertising, special promotions and seasonal radio and television
advertising usually feature certain items which can be purchased at the stores,
and frequently include national brand items for which advertising costs are
often supplemented by the national brand suppliers. Sales promotions are
generally established and maintained on a bi-weekly or monthly basis.
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COMPETITION
The convenience store and retail gasoline industries are highly competitive. The
number and type of competitors vary by location. The Company presently competes
with other convenience stores, large integrated gasoline service station
operators, supermarket chains, neighborhood grocery stores, independent gasoline
service stations, fast food operations and other similar retail outlets, some of
which are well recognized national or regional retail chains. Some of the
Company's competitors have greater financial resources than the Company. Key
competitive factors include, among others, location, ease of access, store
management, product selection, pricing, hours of operation, store safety,
cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the Company's stores generally experience higher
revenues and profit margins during the warmer weather months, which fall within
the Company's second and third fiscal quarters.
EMPLOYEES
As of January 31, 1998, exclusive of franchisees and franchisees' employees, the
Company employed, on a full-time or part-time basis, approximately 3,500
employees. The Company has not experienced any work stoppages. There are no
collective bargaining agreements between the Company and any of its employees.
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ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing USTs to prevent future releases; (v) keeping appropriate
records; and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. A number of states in which the Company operates
also have adopted UST regulatory programs.
In the ordinary course of business, the Company periodically detects releases of
gasoline or other regulated substances from USTs it owns or operates. As part of
its program to manage USTs, the Company is involved in environmental assessment
and remediation activities with respect to releases of regulated substances from
its existing and previously operated retail gasoline facilities. The Company
accrues its estimates of all costs to be incurred for assessment and remediation
for known releases. These accruals are adjusted if and when new information
becomes known. Additionally, the Company records as receivables the estimated
reimbursements of a portion of the total costs from various state environmental
trust funds which have provisions for sharing or reimbursing certain costs
incurred by UST owners or operators based upon compliance with the terms and
conditions of such funds. Because of the nature of such releases, the actual
costs of assessment and remediation activities may vary significantly from year
to year. Under current federal and state regulatory programs, the Company also
will be obligated by December 22, 1998 to upgrade or replace most existing USTs
it owns or operates to meet certain corrosion, overfill- and spill-protection
and leak-detection requirements. The Company has evaluated each site on an
individual basis to determine the type of expenditures required to comply with
these and other requirements under the federal and state UST regulatory
programs.
In addition to ongoing assessment and remediation costs, the Company presently
estimates that it will make capital expenditures, including those requiring
upgrading or replacing of existing USTs, ranging from approximately $3.0 to $4.0
million in the aggregate over the next fiscal year to comply with current
federal and state UST regulations, which capital expenditures could be reduced
for locations (especially low volume locations) which may be closed in lieu of
the capital costs of compliance (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Environmental Responsibility").
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The Company's estimate of costs to be incurred for environmental assessment and
remediation and for UST upgrading and other regulatory compliance are based on
factors and assumptions that could change as a result of modifications of
regulatory requirements, detection of unanticipated environmental conditions, or
other unexpected circumstances. As a result, the actual costs incurred may vary
significantly from the estimate noted above.
ITEM 2. PROPERTIES
Of the 627 stores in operation as of January 31, 1998, 67 store locations were
owned by the Company and 560 were leased. In addition, the Company owns 23
locations and is the primary lessee for 97 locations not currently operated as
Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such
locations to third parties. From time to time the Company enters into
sale-leaseback transactions whereby the Company sells retail locations and
leases such locations back from the purchasers.
In fiscal year 1998, the Company sold its former office and manufacturing
facility located in Cuyahoga Falls, Ohio (see Note 1 to the Consolidated
Financial Statements). The Company leases a 47,000 corporate headquarters
facility in Hudson, Ohio to which it relocated in March 1998. The Company
leases administrative offices for various regional operations.
The Company is in the process of marketing for sale or lease two facilities it
owns in Enfield, Connecticut: the Company's former corporate headquarters
facility with approximately 77,000 square feet located on eighty-eight acres of
land and the Company's former Northeast regional operating office building and
former manufacturing and processing plant located in a 33,000 square foot
building.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a nominal defendant, along with certain of those
persons who were directors of the Company in fiscal 1996, in two shareholder
derivative actions captioned KAHN V. NIRENBERG (C.A. No. 14893) and UNI-MARTS,
INC. V. STEIN (C.A. No. 14713), both of which are pending in the Delaware Court
of Chancery of New Castle County. The plaintiffs allege, among other things,
that in connection with the settlement of the dispute between Charles Nirenberg
and the Company's management with respect to control of the Company, the
directors violated their fiduciary duty to the Company and its stockholders,
violated provisions of the Delaware general corporation law and wasted corporate
assets. Mr. Nirenberg is a former shareholder, director and officer of the
Company. The plaintiffs seek, among other things, a declaration that the current
structure of the general partner of DM Associates Limited Partnership ("DM
Associates") is invalid and that certain voting rights with respect to the Class
B Common Stock held by DM Associates should be vested in the Company. On August
9, 1996, the Court granted in part and denied in part defendants' motions to
dismiss.
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The Court held that plaintiffs failed to state (1) a claim for waste, (2) a
claim that the defendants did not make adequate disclosure in connection with
the transaction with Mr. Nirenberg and (3) any claim under the Delaware General
Corporation Law. The Court, however, refused to dismiss at the pleading stage
certain claims for breach of fiduciary duty. Discovery is proceeding. 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 Company is also a defendant in an action brought by a former supplier of
certain dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled NEW ENGLAND DAIRIES, INC. V. DAIRY MART CONVENIENCE STORES, INC. AND
DAIRY MART, INC., Civil Action No. 97-0569873 (Conn. Super.). This action was
commenced on April 17, 1997 by New England Dairies, Inc. ("NED") alleging that
Dairy Mart committed an anticipatory breach of a supply agreement entered into
between NED and Dairy Mart on April 25, 1995 (the "Agreement"), when Dairy Mart
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 action seeks lost profits in the amount
of $3.7 million. Discovery is proceeding. 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.
In the ordinary course of business, the Company is party to various other
actions which the Company believes are routine in nature and incidental to the
operation of its business. The Company believes that the outcome of the
proceedings to which the Company currently is party will not have a material
adverse effect upon its future results of operations or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 11, 1997 the Company held its 1997 Annual Meeting of stockholders.
The following matters were voted on at the Annual Meeting:
1. The election of Thomas W. Janes and Truby G. Proctor, Jr.,
as Class A Directors and Frank W. Barrett, J. Kermit Birchfield,
Jr., John W. Everets, Jr., Gregory G. Landry and Robert B. Stein,
Jr. as Class B Directors.
The following chart shows the number of votes cast for each matter voted on at
the Annual Meeting, the votes with respect to each constituting a majority of
the votes cast with respect to each matter:
For Against
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1. Election of Mr. Janes ...................223,893 19,070
2. Election of Mr. Proctor .................224,334 18,630
3. Election of Mr. Barrett ...............1,252,731 7,001
4. Election of Mr. Birchfield ............1,254,268 5,464
5. Election of Mr. Everts ................1,254,268 5,464
6. Election of Mr. Landry ................1,254,050 5,682
7. Election of Mr. Stein .................1,254,050 5,682
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PART II
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ITEM 5. MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company has not paid any cash dividends during the last three fiscal years,
and pursuant to loan covenants contained in the Company's senior revolving
credit facility, as amended, is currently restricted from paying any dividends
and from repurchasing its capital stock. On September 30, 1996, the Company's
Class A Common Stock and Class B Common Stock began trading on the American
Stock Exchange under the symbols DMC.A and DMC.B, respectively. The Company's
Class A Common Stock and Class B Common Stock were previously traded on the
NASDAQ Stock Market under the symbols DMCVA and DMCVB, respectively. The
following table sets forth the high and low sales prices per share of both
classes of the Company's Common Stock, as quoted on The American Stock Exchange
and The NASDAQ Stock Market, for the last two fiscal years.
Class A Class B
Common Common
Stock Stock
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High Low High Low
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Fiscal Year Ended January 31, 1998:
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First Quarter 6 3/16 3 3/4 6 1/4 4 1/8
Second Quarter 6 3/8 4 5/8 6 3/8 4 3/4
Third Quarter 6 1/4 4 3/8 6 1/8 4 1/2
Fourth Quarter 5 1/4 4 1/8 5 1/16 4 1/4
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Fiscal Year Ended February 3,1997:
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First Quarter 6 1/4 5 1/2 6 3/4 5 3/8
Second Quarter 6 3/8 5 1/8 6 1/2 5
Third Quarter 6 4 1/4 6 4 3/4
Fourth Quarter 5 7/8 4 5 13/16 3 7/8
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There were approximately 3,000 holders of the Company's Class A and Class B
Common Stock as of April 24, 1998. Included in this number are shares held in
nominee or street names.
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ITEM 6. SELECTED FINANCIAL DATA
Five Years Ended January 31, 1998 1998 1997 1996 1995 1994
- ----------------------------------- -------------------------------------------------------------------------
(in thousands, except per share amounts)
OPERATING RESULTS:
Revenues ............................................ $ 501,359 $ 585,746 $ 571,311 $ 596,782 $ 591,500
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Interest Expense .................................... 10,612 10,877 9,661 10,435 7,644
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Income (Loss) Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Change ..... (2,406) (2,613) (9,220) (17,319) 3,102
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Net Income (Loss) ................................... (1,710) (1,886) (6,000) (11,150) 866
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Earnings (Loss) Per Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Change .................... (0.37) (.42) (1.12) (1.94) .33
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Net Earnings (Loss) Per Share - Basic .......... (0.37) (.42) (1.12) (2.01) .16
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BALANCE SHEET DATA:
Net Property and Equipment .......................... $ 82,589 $ 89,448 $ 80,387 $ 70,578 $ 93,774
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Total Assets ........................................ 165,104 175,505 164,938 172,228 169,442
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Long-Term Obligations (a) ........................... 96,448 110,428 100,881 90,268 77,343
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Stockholders' Equity ................................ 6,445 7,913 9,208 22,817 33,870
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OTHER DATA:
Earnings Before Interest Expense, Income Taxes,
Depreciation and Amortization (EBITDA)(b) ...... $ 19,048 $ 20,138 $ 12,831 $ 5,593 $ 23,646
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(a) Long-term obligations include the current portion of long-term obligations.
(b) EBITDA is significant to the Company's calculations of its financial
covenants and is defined as earnings before interest expense, income taxes
and depreciation and amortization expenses. EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements
such as net income (loss) or cash flow from operations.
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FINANCIAL HIGHLIGHTS
For the Years Ended January 31, 1998, February 1, 1997 and February 3, 1996
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except number of locations, gross
profits per gallon and per share data)
FINANCIAL DATA:
Revenues:
Merchandise Sales.............................................. $306,062 $335,661 $341,526
Gasoline Sales................................................. 191,956 245,718 226,505
Other.......................................................... 3,341 4,367 3,280
------------------------------------------
Total Revenues.......................... $501,359 $585,746 $571,311
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Net loss(1) ........................................................ $ (1,710) $ (1,886) $ (6,000)
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STORE DATA:
Company Operated:
Gross Profit................................................... $ 99,187 $106,182 $111,153
Average Sales Per Store (2).................................... $590 $562 $525
Average Gross Profit Per Store (2)............................. $199 $188 $181
Number of Stores at Year End................................... 469 543 587
Franchise Operated:
Franchise Fee.................................................. $ 12,481 $18,264 $ 18,805
Average Sales Per Store(2)..................................... $572 $577 $560
Average Franchise Fees Per Store(2)............................ $61 $65 $62
Number of Stores at Year End................................... 158 268 290
Total Stores:
Gross Profit.................................................... $111,668 $124,446 $129,958
Average Sales Per Store(2)...................................... $584 $567 $536
Average Combined Gross Profit and Franchise Fees Per Store(2)... $159 $147 $141
Number of Stores at Year End.................................... 627 811 877
Gasoline Data:
Gallons Sold.................................................. 171,269 209,478 212,832
Gross Profit.................................................. $21,418 $25,082 $24,525
Average Gallons Sold Per Location(2).......................... 535 571 544
Gross Profit Per Gallon....................................... $0.1251 $0.1138 $0.1152
Number of Gasoline Locations at Year End...................... 293 360 376
OTHER DATA:
Weighted Average Number of Shares................................ 4,605 4,441 5,374
Book Value Per Share (3) ........................................ $0.94 $1.20 $1.41
(1) Net loss for fiscal year 1996 included special and/or unusual items. For a
discussion of these special and/or unusual charges, see Note 16 to the
Consolidated Financial Statements.
(2) The calculation of sales per store, gross profit per store, franchise fees
per store and gasoline gallons per store is based on a weighted average
number of stores open during fiscal years 1998, 1997 and 1996, respectively.
(3) The calculation utilizes total outstanding shares including the dilutive
effect of stock options, stock grants and stock warrants as of January 31,
1998, February 1, 1997 and February 3, 1996, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
PRO FORMA FISCAL YEAR 1998 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1997
RESULTS
During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations based in the northeastern United States for $39.1 million.
The Company also sold a former office and manufacturing facility for $4.1
million. These transactions resulted in a pre-tax gain of $3.6 million which
has been excluded from the pro forma results shown below. The following
discussion and analysis of Results of Operations for fiscal year 1998 compared
to fiscal year 1997 is based on unaudited Pro Forma Consolidated Statements of
Operations for fiscal year 1998 compared to fiscal year 1997. The unaudited Pro
Forma Consolidated Statements of Operations as presented below reflect the
exclusion, for the two fiscal years shown, of the historical revenues, cost of
goods sold, operating expenses, and direct and indirect administrative expenses
associated with the assets 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 assets sold.
Pro Forma Consolidated Statements of Operations
(unaudited)
(in millions, except per share amounts)
FOR THE YEARS ENDED JANUARY 31, 1998 AND FEBRUARY 1998 1997
1, 1997
----------------- ---------------
REVENUES ....................................... $459.3 $471.7
COST OF GOODS SOLD AND EXPENSES:
COST OF GOODS SOLD............................ 333.4 346.1
OPERATING & ADMINISTRATIVE EXPENSES........... 121.9 119.4
INTEREST EXPENSE.............................. 10.3 10.5
----------------- ---------------
465.6 476.0
LOSS BEFORE INCOME TAXES........................ (6.3) (4.3)
BENEFIT FROM INCOME TAXES....................... 1.8 1.2
----------------- ---------------
NET LOSS........................................ $(4.5) $(3.1)
LOSS PER SHARE.................................. $(0.98) $(0.70)
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REVENUES
Revenues for fiscal year 1998 decreased $12.4 million compared to fiscal year
1997. A summary of revenues by functional area is shown below:
PRO FORMA
1998 1997
----------------------------
(IN MILLIONS)
CONVENIENCE STORES.................. $285.7 $280.7
GASOLINE............................ 170.5 187.4
OTHER............................... 3.1 3.6
---------------------------
TOTAL............................... $459.3 $471.7
===========================
Convenience store revenues increased $5.0 million, or 1.8%, in fiscal year 1998
compared to fiscal year 1997 as a result of a 3.4% increase in comparable
Company operated store sales partially offset by the closure and/or sale of 35
underperforming stores during fiscal year 1998. Although the reduction in
stores had a negative impact on revenues, it did not have a material adverse
effect on results of operations, because the majority of stores closed and/or
sold had been operating at a loss.
Gasoline revenues decreased $16.9 million in fiscal year 1998 compared to fiscal
year 1997 as a result of a decrease in total gallons sold of 11.1 million and a
decrease in the average selling price of gasoline of 3.2 cents per gallon. The
decrease in the average selling price and in gasoline gallons sold was a result
of a highly competitive retailing environment experienced by the Company
throughout fiscal year 1998, particularly in its Southeast market where the
Company's gasoline volumes historically have been strong.
GROSS PROFITS
Gross profits increased $0.3 million from fiscal year 1997 to fiscal year 1998.
A summary of gross profits by functional area is shown below:
PRO FORMA
1998 1997
---------------------------
(IN MILLIONS)
CONVENIENCE STORES.................. $103.3 $101.9
GASOLINE............................ 19.5 20.1
OTHER............................... 3.1 3.6
---------------------------
TOTAL............................... $125.9 $125.6
===========================
Convenience store gross profit increased by $1.4 million in fiscal year 1998
compared to fiscal year 1997. The increase was a result of the increase in
convenience store sales, as described above. Convenience store gross profit
margins remained constant in fiscal year 1998 compared to fiscal year 1997.
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Gasoline gross profits decreased $0.6 million in fiscal year 1998 compared to
fiscal year 1997. Gasoline gross profits in fiscal year 1997 included a $1.2
million gasoline excise tax rebate from the State of Kentucky because the
Kentucky Supreme Court ruled that these taxes were improperly assessed and
collected. Excluding the excise tax rebate discussed above, gasoline gross
profits for fiscal year 1998 would have increased $0.6 million compared to
fiscal year 1997. This increase is primarily attributable to an increase in
gasoline gross profit margins of 1.2 cents per gallon in fiscal year 1998
compared to fiscal year 1997 partially offset by the decline in gasoline gallons
described above.
Other revenues and gross profits decreased $0.5 million in fiscal year 1998
compared to fiscal year 1997 primarily as a result of lower foreign consulting
revenues. In fiscal year 1997 the Company recognized a $0.4 million one-time
license fee earned upon the start up of a foreign consulting agreement in
Malaysia.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $2.5 million in fiscal year 1998
compared to fiscal year 1997. A summary of operating and administrative expenses
by functional area is shown below:
PRO FORMA
1998 1997
---------------------------
(IN MILLIONS)
CONVENIENCE STORES................... $82.9 $81.3
GASOLINE............................. 11.8 11.2
ADMINISTRATIVE & OTHER............... 27.2 26.9
---------------------------
TOTAL................................ $121.9 $119.4
===========================
Convenience store operating expenses increased $1.6 million in fiscal year 1998
compared to fiscal year 1997 primarily as a result of higher store wages,
depreciation and repair and maintenance expenses. Gasoline expenses increased
$0.6 million as a result of higher depreciation expense.
INTEREST EXPENSE, INFLATION AND TAXES
Pro forma interest expense in fiscal year 1998 decreased $0.2 million compared
to fiscal year 1997 as a result of a reduction in average outstanding mortgage
and capital lease obligations.
Inflation did not have a material effect on the Company's pro forma revenues,
gross profits, operating and administrative expenses in fiscal years 1998 and
1997.
The effective tax rate for the Company was a benefit of 28.9% and 27.8% for
fiscal years 1998 and 1997, respectively.
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FISCAL YEAR 1997 RESULTS COMPARED TO FISCAL YEAR 1996 RESULTS
The Company's net loss for fiscal year 1997 was $1.9 million compared to a net
loss of $6.0 million for fiscal year 1996. Fiscal year 1996 results included
special and/or unusual items. For a discussion of these special and/or unusual
charges, see Note 16 to the Consolidated Financial Statements.
Revenues for fiscal year 1997 increased $14.4 million from fiscal year 1996.
Fiscal year 1997 included 52 weeks whereas fiscal year 1996 included 53 weeks. A
summary of revenues by functional area is shown below:
FISCAL YEARS
1997 1996
------------------------------
(IN MILLIONS)
CONVENIENCE STORES................... $335.7 $341.5
GASOLINE............................. 245.7 226.5
OTHER................................ 4.3 3.3
------------------------------
TOTAL................................ $585.7 $571.3
==============================
Convenience store revenues decreased $5.8 million, or 1.7%, in fiscal year 1997
compared to fiscal year 1996 as a result of the reduction of 75 underperforming
stores, partially offset by a 2.9% increase in comparable store sales. Although
the reduction in stores had a negative impact on revenues, it did not have a
material adverse effect on the results of operations, because the majority of
stores closed or sold had been operating at a loss.
Gasoline revenues increased $19.2 million in fiscal year 1997 compared to fiscal
year 1996 as a result of an increase in the average selling price of gasoline of
10.9 cents per gallon partially offset by a decrease in gasoline gallons sold of
3.4 million. The decrease in gasoline gallons sold was as a result of the
unfavorable impact of fiscal year 1997 having one less week of operating
activity in comparison to fiscal year 1996, as noted above. On a per location
basis, average gallons increased by approximately 4.9% in fiscal year 1997
compared to fiscal year 1996. The increase in average store gallons sold was a
result of further development of new stores having a major gasoline presence and
the remodeling and expansion of gasoline facilities at certain existing
locations.
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GROSS PROFITS
Gross profits for fiscal year 1997 decreased $3.9 million from fiscal year 1996.
A summary of gross profits by functional area is shown below:
FISCAL YEARS
1997 1996
------------------------
(IN MILLIONS)
CONVENIENCE STORES.................. $124.5 $130.0
GASOLINE............................ 25.1 24.5
OTHER............................... 4.3 3.3
------------------------
TOTAL............................... $153.9 $157.8
========================
Convenience store gross profit decreased by $5.5 million in fiscal year 1997
compared to fiscal year 1996. The decrease was primarily a result of lower
product gross margins and the overall reduction in the average number of stores,
as described above, partially offset by increased marketing allowances and an
increase in comparable store sales, as described above.
Gasoline gross profits increased by $0.6 million in fiscal year 1997 compared to
fiscal year 1996 because of a gasoline excise tax rebate due the Company of $1.2
million from the State of Kentucky. The Kentucky Supreme Court ruled that these
taxes were improperly assessed and collected and therefore should be refunded to
the Company. Excluding the excise tax rebate discussed above, gasoline gross
profits for fiscal year 1997 decreased by $0.6 million compared to fiscal year
1996 primarily as a result of a decrease in gasoline gallons sold, as described
above, combined with a decrease of 0.13 cents in gross profit per gallon.
Other revenues and gross profits increased by $1.0 million in fiscal year 1997
compared to fiscal year 1996 because of the recognition of a $0.4 million
one-time license fee earned upon the start up of a foreign consulting agreement
and approximately $0.8 million in interest income associated with the excise tax
rebate discussed above.
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OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for fiscal year 1997 increased $0.5
million over fiscal year 1996 as adjusted to exclude special and/or unusual
costs and expenses (see Note 16 to the Consolidated Financial Statements). A
summary of expenses by functional area is shown below:
FISCAL YEARS
1997 1996
-------------------------
(IN MILLIONS)
CONVENIENCE STORES..................... $99.7 $100.2
GASOLINE............................... 14.0 13.3
ADMINISTRATIVE & OTHER (*)............. 31.9 31.6
-------------------------
TOTAL (*).............................. $145.6 $145.1
=========================
(*) Adjusted to exclude special and/or unusual costs and expenses
(see Note 16 to the Consolidated Financial Statements).
Convenience store operating expenses decreased $0.5 million in fiscal year 1997
compared to fiscal year 1996 primarily as a result of the closure or sale of
underperforming stores as described above, partially offset by higher labor,
rent and depreciation costs on a per store basis. Gasoline operating expenses
increased $0.7 million in fiscal year 1997 compared to fiscal year 1996
primarily as a result of an increase in environmental expenses associated with
the remediation of gasoline locations after considering probable reimbursements
from various state environmental trust funds.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense, as adjusted to exclude special and/or unusual interest charges
(see Note 16 to the Consolidated Financial Statements), increased in fiscal year
1997 as compared to fiscal year 1996, as a result of increased borrowings
associated with the issuance of the Series B Notes in December 1995 (see Notes 7
and 16 to the Consolidated Financial Statements).
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administration expenses in fiscal years 1997 and 1996.
The effective tax rate for the Company was a benefit of 27.8% and 34.8% for
fiscal years 1997 and 1996, respectively. The effective tax rates vary from
statutory rates primarily due to the effect of the non-deductible amortization
of intangible assets. In fiscal 1996, the effect of the non-deductible
amortization was offset by the recording of certain income tax benefits.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow because a majority of its
revenues are received in cash. For the fiscal year ended January 31, 1998, cash
flow from operations and cash generated from the sale of certain assets were
sufficient to fund capital expenditures.
The Company has a $30.0 million senior revolving credit facility available to
address the seasonality of operations and the timing of capital expenditures and
certain working capital disbursements. The Company can issue up to $15.0 million
of letters of credit under the facility. The facility is due and payable on
April 30, 1999 (see Note 7 to the Consolidated Financial Statements). As of
January 31, 1998, the Company had no outstanding revolving credit loans and $7.1
million outstanding in letters of credit under the facility. As discussed in
Note 7 to the Consolidated Financial Statements, this agreement was amended in
April 1998, effective January 1, 1998.
Management believes that cash flow from operations and the proceeds from the
sale of certain assets held for sale supplemented by the availability under
revolving credit facility or other forms of asset financing and/or leasing, if
necessary, will provide the Company with adequate liquidity and the capital
necessary to achieve its expansion initiatives in its retail operations (See
Capital Expenditures).
CASH PROVIDED BY OPERATING ACTIVITIES
During fiscal year 1998, net cash generated by operations was $1.7 million lower
than the prior fiscal year. This decrease was primarily a result of reduced
Results of Operations partially offset by the receipt in the current fiscal year
of the gasoline excise tax rebate discussed above.
CASH PROVIDED BY INVESTING ACTIVITIES
Net cash provided by investing activities increased by $23.5 million, primarily
as a result of proceeds generated from the sale of certain assets, offset in
part by increased capital expenditures with respect to new store construction,
store automation and remodeling of existing store locations.
CASH USED BY FINANCING ACTIVITIES
Net cash used by financing activities increased by $23.9 million from the prior
fiscal year. In fiscal year 1997 the Company borrowed $10.3 million under its
revolving credit facility which balance was paid in its entirety in fiscal year
1998.
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24
CAPITAL EXPENDITURES
The Company anticipates spending approximately $35.0 million for capital
expenditures in fiscal year 1999 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 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 and the
proceeds from the sale of certain assets held for sale 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
During fiscal year 1998, the Company adopted 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. For
a related discussion on environmental liabilities, see Note 15 to the
Consolidated Financial Statements.
YEAR 2000 COMPUTER COSTS
During fiscal year 1998 the Company undertook the implementation of its store
automation program. The first phase of this program was completed in fiscal
year 1998 with the remaining two phases expected to be completed by the end of
fiscal year 2000. The store automation program, when fully implemented, is
expected to enhance accounting and management controls, improve retail margins
through centralized retail pricing, improve inventory management, and achieve
efficiencies. In conjunction with the development of this and other systems,
the Company has been addressing the functionality of all the Company's computer
systems for the year 2000. The systems implemented by the Company are designed
to be year 2000 compliant. The Company does not expect to incur significant
costs in the future that would have material impact on Company's operating
results. The Company is also in the process of reviewing the efforts being
undertaken by its vendors and customers to become year 2000 compliant to ensure
that no business interruption is experienced at the turn of the century. The
Company is not currently aware of vendor or customer circumstances that may
have a material adverse impact on the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
notes thereto, appear on pages 36 through 57 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
--------
Information required by Items 10, 11 and 12 (DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT, EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT) is incorporated herein by reference from the
sections entitled "ITEM 1 - ELECTION OF DIRECTORS - Nominees for Election as
Directors," "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND
VOTING RIGHTS" "PRINCIPAL SHAREHOLDERS," AND "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its 1998 fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under "CERTAIN TRANSACTIONS" in
the Company's definitive proxy statement, and is incorporated herein by
reference.
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PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part
of this Form 10-K, see Page F-1.
(2) Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II - Valuation Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits:
Exhibit Number:
(3) Articles of Incorporation and Bylaws.
(3.1) The Company's Restated Certificate of Incorporation,
as amended, was filed as Exhibit 3.1 to the Company's
Form 10-K for the fiscal year ended February 1, 1992
and is filed herewith.
(3.2) A Certificate of Designation was filed as Exhibit 1 of
the Company's Form 8-K for the January 19, 1996 event
and is incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed
as Exhibit 3.2 to the Company's Form 10-Q for the
fiscal quarter ended November 2, 1996 and are
incorporated herein by reference.
(4) Instruments defining the rights of security holders,
including indentures.
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(4.1) The instruments defining the rights of the holders of
the Company's Common Stock include the Company's
Restated Certificate of Incorporation, Certificate of
Designation, Amended and Restated Bylaws and Rights
Agreement, filed as Exhibits 3.1, 3.2, 3.3 and 10.23
hereto, and those instruments filed as Exhibit 4.1 of
the Company's Registration Statement on Form S-1
(Registration No. 33-639) dated November 5, 1985,
which are incorporated herein by reference.
(4.2) Amended and Restated Indenture, dated as of December
1, 1995, by and among the Company, Certain
Subsidiaries of the Company, as Guarantors, and First
Bank National Association, as Trustee, was filed as
Exhibit 4.1 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated
herein by reference.
(4.3) The instruments defining the rights of the holder's of
the Company's Warrants include the Form of Stock
Purchase Warrants filed as Exhibits 10.13 and 10.14
thereto was filed as Exhibit 4.3 of the Company's Form
10-K for the fiscal year ended February 3, 1996 and is
incorporated herein by reference.
(10) Material Contracts.
(10.1) Credit Agreement dated as of April 24, 1996, among the
Company, Bank of Boston Connecticut as agent, and the
banks from time to time parties thereto was filed as
Exhibit 10.1 of the Company's Form 10-K for the fiscal
year ended February 3, 1996 and is incorporated herein
by reference.
(10.2) Amended Credit Agreement dated as of April 30, 1998,
among the Company, Bank of Boston Connecticut as
agent, and the banks from time to time parties thereto
is filed as Exhibit 10.2 attached hereto.
(10.3) 1985 Incentive Stock Option Plan, as amended, and form
of Incentive Stock Option Agreement, were filed as
Exhibit 10.4 to the Company's annual report on Form
10-K for the fiscal year ended January 30, 1988, and
are incorporated herein by reference.
(10.4) Asset purchase agreement dated March 6, 1997, among
Dairy Mart Convenience Stores, Inc. and DB Companies,
Inc. was filed as exhibit 2.1 of the Company's Form
8-K for the June 21, 1997 event and is incorporated
herein by reference.
(10.5) Closing agreement dated June 19, 1997, between Dairy
Mart Convenience Stores, Inc. and DB Companies, Inc.
was filed as exhibit 2.2 of the Company's Form 8-K for
the June 21, 1997 event and is incorporated herein by
reference.
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29
(10.6) 1990 Stock Option Plan and forms of qualified and non
qualified stock option agreements thereunder were
filed as Exhibit 10.4 to the Company's Form 10-K for
the fiscal year ended February 2, 1991, and are
incorporated herein by reference.
(10.7) 1995 Stock Option and Incentive Award Plan was filed
as Exhibit 10.1 of the Company's Form 10-Q for the
fiscal quarter ended July 29,1995 and is incorporated
herein by reference.
(10.8) 1995 Stock Option Plan for Outside Directors was filed
as Exhibit 10.6 of the Company's Form 10-K for the
fiscal year ended January 28, 1995 and is incorporated
herein by reference.
(10.9) Employment agreement between the Company and Robert B.
Stein, Jr. dated June 8, 1995 was filed as Exhibit
10.2 of the Company's Form 10-Q for the fiscal quarter
ended July 29, 1995 and is incorporated herein by
reference.
(10.10) Employment agreement between the Company and Gregory
G. Landry dated June 8, 1995 was filed as Exhibit 10.3
of the Company's Form 10-Q for the fiscal quarter
ended July 29, 1995 and is incorporated herein by
reference.
(10.11) Employment agreement between the Company and Gregg O.
Guy dated June 8, 1995 was filed as Exhibit 10.5 of
the Company's Form 10-Q for the fiscal quarter ended
July 29, 1995 and is incorporated herein by reference.
(10.12) Settlement agreement dated January 27, 1995 between
the Company and Frank Colaccino was filed as Exhibit
10.10 of the Company's January 28, 1995 Form 10-K and
is incorporated herein by reference.
(10.13) Note Purchase Agreement, dated as of December 1, 1995,
between the Company and the Purchasers Listed in the
Schedule of Purchasers therein, relating to 10-1/4%
Senior Subordinated Notes (Series B) due March 15,
2004, was filed as Exhibit 10.1 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and
is incorporated herein by reference.
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30
(10.14) Form of Stock Purchase Warrant to Subscribe for and
Purchase Shares of Class A Common Stock of the Company
(Initially Exercisable for an Aggregate of 1,215,000
Shares of Class A Common Stock) was filed as Exhibit
10.2 of the Company's Form 10-Q for the fiscal quarter
ended October 28, 1995 and is incorporated herein by
reference.
(10.15) Form of Stock Purchase Warrant to Subscribe for and
Purchase Shares of Class A Common Stock of the Company
(Initially Exercisable for an Aggregate of 500,000
Shares of Class A Common Stock) was filed as Exhibit
10.3 of the Company's Form 10-Q for the fiscal quarter
ended October 28, 1995 and is incorporated herein by
reference.
(10.16) Registration Rights Agreement, dated December 1, 1995,
by and among the Company and the Holders of (i)
10-1/4% Senior Subordinated Notes (Series B) of the
Company, due March 15, 2004, and (ii) Warrants to
Purchase 1,715,000 shares of Class A Common Stock, par
value $.01 per share, of the Company was filed as
Exhibit 10.4 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated
herein by reference.
(10.17) Agreement dated as of October 30, 1995 among the
Company, Charles Nirenberg, FCN Properties Corporation
and The Nirenberg Family Charitable Foundation, Inc.
was filed as Exhibit 10.1 of the Company's Form 8-K/A
Amendment No.1 for the October 30, 1995 event and is
incorporated herein by reference.
(10.18) Modification Agreement, dated as of December 1, 1995,
by and among the Company, Charles Nirenberg, FCN
Properties Corporation, The Nirenberg Foundation,
Inc., formerly known as the Nirenberg Family
Charitable Foundation, Inc., Robert B. Stein, Jr., and
Gregory G. Landry was filed as Exhibit 10.6 of the
Company's Form 10-Q for the fiscal quarter ended
October 28, 1995 and is incorporated herein by
reference.
(10.19) Amended and Restated Letter Agreement, dated December
1, 1995, to Mitchell J. Kupperman from the Company,
Robert B. Stein, Jr., and Gregory G. Landry was filed
as Exhibit 10.7 of the Company's Form 10-Q for the
fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
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31
(10.20) DM Associates Limited Partnership Agreement, dated
March 12, 1992, and filed herewith.
(10.21) First Amendment to Partnership Agreement of DM
Associates Limited Partnership, dated as of September
8, 1994. Incorporated herein by reference to Exhibit F
of the Schedule 13D, Amendment No. 4, dated January
27, 1995, filed by DM Associates Limited Partnership,
New DM Management Associates I, New DM Management
Associates II, Charles Nirenberg, Robert B. Stein,
Jr., Gregory G. Landry, Mitchell J. Kupperman and
Frank Colaccino.
(10.22) Partnership Agreement of New DM Management Associates
I, dated as of September 8, 1994. Incorporated herein
by reference to Exhibit G of the Schedule 13D,
Amendment No. 4, dated January 27, 1995, filed by DM
Associates Limited Partnership, New DM Management
Associates I, New DM Management Associates II, Charles
Nirenberg, Robert B. Stein, Jr., Gregory G. Landry,
Mitchell J. Kupperman and Frank Colaccino.
(10.23) First Amendment to Partnership Agreement of New DM
Management Associates I, dated as of December 1, 1995,
between Robert B. Stein, Jr., Gregory G. Landry and
Mitchell J. Kupperman was filed as Exhibit 10.10 of
the Company's Form 10-Q for the fiscal quarter ended
October 28, 1995 and is incorporated herein by
reference.
(10.24) Rights Agreement dated as of January 19, 1996 between
the Company and the First National Bank of Boston, as
Rights Agent, including form of Rights Certificate,
was filed as Exhibit 1 of the Company's Form 8-K for
the January 19, 1996 event and is incorporated herein
by reference.
(10.25) Third Amendment to Partnership Agreement of New DM
Management Associates I, dated as of December 12,
1997, was filed as exhibit 1 of the Company's Form 8-K
for the December 12, 1997 event and is incorporated
herein by reference.
(18) Preferability letter of Arthur Andersen LLP regarding
change in accounting policy relating to the
calculation of self insurance reserves was filed as
Exhibit 18 of the Company's Form 10-K for the fiscal
year ended February 3, 1996 and is incorporated herein
by reference.
(21) Subsidiaries of the Company was filed as Exhibit 21 of
the Company's Form 10-K for the fiscal year ended
February 3, 1996 and is incorporated herein by
reference.
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32
(23) Consent of Arthur Andersen LLP to the incorporation of
their reports included in this Form 10-K, for the
fiscal year ended January 31, 1998, into the Company's
previously filed Registration Statements on Forms S-8.
(27) Financial Data Schedule.
(99) Additional Exhibits.
(99.1) 9% secured promissory note dated March 12, 1992 issued
by DM Associates Limited Partnership in favor of the
Connecticut Development Authority (subsequently
assigned to FCN Properties Corporation and then to the
Company.)
(99.2) The Section entitled "Information regarding DM
Associates and the Nirenberg Transaction" on pages 19
through 21 of the Company's Proxy Statement dated
December 26, 1995 was filed as Exhibit 99 of the
Company's Form 10-K for the fiscal year ended February
3, 1996 and is incorporated herein by reference.
(b) Reports on Form 8-K
On December 22, 1997, the Company filed a Current Report on Form 8-K,
in which the Company reported that it had entered into a Third
Amendment (the "Amendment") to the Partnership Agreement of DM
Associates Limited Partnership, a Connecticut limited partnership ("DM
Associates"). The Amendment, made as of December 12, 1997, was executed
by New DM Management Associates I, the general partner of DM
Associates, HNB Investment Corp., the Class A limited partner of DM
Associates, and the Company, as the Class B limited partner of DM
Associates.
No Financial Statements were filed with any of the Current Reports.
(c) See (3) above.
(d) See (2) above.
-32-
33
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 1, 1998
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Robert B. Stein, Jr.
----------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer
and Chairman of the Board of Directors
By /s/ Gregory G. Landry
----------------------------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
-33-
34
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: May 1, 1998 /s/ Robert B. Stein, Jr.
---------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: May 1, 1998 /s/ Gregory G. Landry
---------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: May 1, 1998 /s/ Frank W. Barrett
---------------------------------------
Frank W. Barrett
Director
Dated: May 1, 1998 /s/ J. Kermit Birchfield, Jr.
---------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: May 1, 1998 /s/ John W. Everets, Jr.
---------------------------------------
John W. Everets, Jr.
Director
Dated: May 1, 1998 /s/ Thomas W. Janes
---------------------------------------
Thomas W. Janes
Director
-34-
35
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO FINANCIAL STATEMENTS
Form 10-K
Page
----
Report of Independent Public Accountants on 36
Consolidated Financial Statements
Consolidated Statements of Operations 37
and Stockholders' Equity for the
Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Consolidated Balance Sheets as of 38
January 31, 1998 and February 1, 1997
Consolidated Statements of Cash Flows for 39
the Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Notes to Consolidated Financial Statements 40 - 57
for the Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Report of Independent Public Accountants 58
on Schedule II
59
Schedule II
-35-
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart
Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of January
31, 1998 and February 1, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dairy Mart Convenience Stores,
Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
Cleveland, Ohio, ARTHUR ANDERSEN LLP
April 30, 1998.
-36-
37
CONSOLIDATED STATEMENTS OF OPERATIONS DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------
For The Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues (including excise taxes of $29,641, $36,427, and $36,331) $ 501,359 $ 585,746 $ 571,311
-----------------------------------------
Cost of goods sold and expenses:
Cost of goods sold ............................................ 364,932 431,851 413,548
Operating and administrative expenses ......................... 128,221 145,631 157,322
Interest expense .............................................. 10,612 10,877 9,661
-----------------------------------------
503,765 588,359 580,531
-----------------------------------------
Loss before income taxes ...................................... (2,406) (2,613) (9,220)
Benefit from income taxes ..................................... 696 727 3,220
-----------------------------------------
Net Loss ...................................................... $ (1,710) $ (1,886) $ (6,000)
LOSS PER SHARE ................................................... $ (0.37) $ (0.42) $ (1.12)
================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
- --------------------------------------------------------------------------------
(in thousands)
Common Stock Note
--------------------------- Retained Treasury Stock Receivable
Class A Class B Paid-in Earnings ---------------- from DM
Shares Shares Amount Capital (Deficit) Shares Amount Associates
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 28, 1995 ............... 3,290 2,962 $ 62 $ 27,581 $ 179 698 $ (5,005) -
ISSUANCE OF COMMON STOCK ................. 33 - - 110 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 3 (3) - - - - - -
ISSUANCE OF WARRANTS ..................... - - - 2,281 - - - -
NOTE RECEIVABLE FROM DM ASSOCIATES ....... - - - - - - - (10,000)
NET LOSS ................................. - - - - (6,000) - - -
==================================================================================================================================
BALANCE - FEBRUARY 3, 1996 ............... 3,326 2,959 62 29,972 (5,821) 698 (5,005) (10,000)
ISSUANCE OF COMMON STOCK ................. 184 - 2 589 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 34 (34) - - - - - -
NET LOSS ................................. - - - - (1,886) - -
==================================================================================================================================
BALANCE - FEBRUARY 1, 1997 ............... 3,544 2,925 64 30,561 (7,707) 698 (5,005) (10,000)
ISSUANCE OF COMMON STOCK ................. 78 - 1 241 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 1 (1) - - - - - -
NOTE RECEIVABLE FROM DM ASSOCIATES ....... - - - - - - - 10,000
PURCHASE OF TREASURY STOCK ............... - - - - - 1,220 (10,000) -
NET LOSS ................................. - - - - (1,710) - - -
---------------------------------------------------------------------------------------
==================================================================================================================================
BALANCE JANUARY 31, 1998 ................. 3,623 2,924 $ 65 $ 30,802 $ (9,417) 1,918 $(15,005) $ -
The accompanying notes are an integral part of these financial statements.
-37-
38
CONSOLIDATED BALANCE SHEETS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------
January 31, 1998 and February 1, 1997 1998 1997
====================================================================================================================
(dollars in thousands, except
per share in amounts)
ASSETS
Current Assets:
Cash ........................................................................... $ 3,806 $ 9,290
Short-term investments ......................................................... 3,629 1,533
Accounts and notes receivable .................................................. 14,970 13,588
Inventory ...................................................................... 16,808 20,184
Prepaid expenses and other current assets ...................................... 2,231 3,329
Deferred income taxes .......................................................... 1,048 1,811
---------------------------
Total current assets ........................................................... 42,492 49,735
Assets Held For Sale ........................................................... 10,715 9,543
Property and Equipment, net .................................................... 82,589 89,448
Intangible Assets, net ......................................................... 16,017 17,039
Other Assets, net .............................................................. 13,291 9,790
---------------------------
Total assets ................................................................... $ 165,104 $ 175,555
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ................................... $ 2,056 $ 1,383
Accounts payable ............................................................... 31,297 30,690
Accrued expenses ............................................................... 18,177 13,167
Accrued interest ............................................................... 3,567 3,635
---------------------------
Total current liabilities ...................................................... 55,097 48,875
---------------------------
Long-Term Obligations, less current portion above .............................. 94,392 109,045
---------------------------
Other Liabilities .............................................................. 9,170 9,722
---------------------------
Commitments and Contingencies (Notes 7, 8, 15)
Stockholders' Equity:
Preferred Stock (serial), par value $.01, 1,000,000 shares
authorized, no shares issued .................................................. - -
Class A Common Stock, par value $.01, 20,000,000 shares authorized 3,622,663 and
3,543,676 issued .............................................................. 36 35
Class B Common Stock, par value $.01, 10,000,000 shares
authorized, 2,924,016 and 2,924,917 issued .................................... 29 29
Paid-in capital ................................................................ 30,802 30,561
Retained deficit ............................................................... (9,417) (7,707)
Treasury stock, at cost ........................................................ (15,005) (5,005)
Note receivable from DM Associates ............................................. - (10,000)
---------------------------
Total stockholders' equity ..................................................... 6,445 7,913
---------------------------
Total liabilities and stockholders' equity ..................................... $ 165,104 $ 175,555
====================================================================================================================
The accompanying notes are an integral part of these balance sheets.
-38-
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CONSOLIDATED STATEMENTS OF CASH FLOWS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
For The Years Ended January 31, 1998, February 1, 1997, February 3, 1996
==================================================================================================================
1998 1997 1996
--------------------------------------
(in thousands)
Cash flows from operating activities:
Net loss.............................................................. $(1,710) $ (1,886) $ (6,000)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization ........................................ 10,842 11,874 12,390
Change in deferred income taxes ...................................... (1,454) (865) (2,873)
(Gain)loss on dispositions
of properties, net ................................................. (1,856) 958 (376)
Net changes in assets and liabilities:
Accounts and notes receivable ...................................... (4,562) (3,836) 2,646
Inventory .......................................................... 385 744 5,116
Accounts Payable ................................................... 607 (113) 1,861
Accrued interest ................................................... (68) 280 303
Other assets and liabilities ....................................... 5,692 2,454 (3,172)
--------------------------------------
Net cash provided by operating activities ............................ 7,876 9,610 9,895
--------------------------------------
Cash flows from investing activities:
Purchase of short-term investments ................................... (2,096) (1,533) -
Proceeds from sale of short-term investments ......................... - - 2,053
Purchase of property & equipment ..................................... (31,604) (23,782) (20,232)
Proceeds from sale of property, equipment, & assets
held for sale ................................................... 32,552 2,628 14,741
Increase in long-term notes receivable ............................... (653) (1,435) (1,579)
Proceeds from collection of long-term notes receivable ............... 998 1,513 1,706
Decrease(increase) in intangibles and other assets ................... 1,317 (372) 79
--------------------------------------
Net cash provided (used) by investing activities ..................... 514 (22,981) (3,232)
--------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations
and related warrants ........................................... - 10,930 13,500
Repayment of long-term obligations ............................... (14,116) (1,514) (2,131)
Note receivable from DM Associates ............................... - - (10,000)
Issuance of common stock ......................................... 242 591 110
--------------------------------------
Net cash (used) provided by financing activities ..................... (13,874) 10,007 1,479
--------------------------------------
(Decrease) increase in cash .......................................... (5,484) (3,364) 8,142
Cash at beginning of year ............................................ 9,290 12,654 4,512
--------------------------------------
Cash at end of year .................................................. $ 3,806 $ 9,290 $ 12,654
==================================================================================================================
Supplemental disclosures:
Cash paid during the year-
Interest ........................................................... $ 10,544 $ 10,466 $ 9,359
Income taxes refunded .............................................. (1,188) (97) (1,172)
Non - cash investing and financing activities-
Note receivable from DM Associates ................................. 10,000 - -
Purchase of treasury stock ......................................... (10,000) - -
Issuance of warrants ............................................... - - 665
Capital lease obligations .......................................... - - 828
The accompanying notes are an integral part of these financial statements.
-39-
40
Dairy Mart Convenience Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
1. SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND CONSOLIDATION - The accompanying financial statements
include the accounts of Dairy Mart Convenience Stores, Inc. and its subsidiaries
(the Company). All intercompany transactions have been eliminated.
NATURE OF THE BUSINESS - The Company owns, operates and franchises convenience
retail stores, a number of which also sell gasoline. The convenience stores are
primarily located in 7 states in the Midwest and the Southeast. The stores offer
a wide range of products including groceries, dairy products, tobacco products,
beverages, general merchandise, health and beauty aids and deli products.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January
31. There were 52 weeks included in the fiscal years ended January 31, 1998 and
February 1, 1997 and 53 weeks included in the fiscal year ended February 3,
1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SHORT-TERM INVESTMENTS - As of January 31, 1998 and February 1, 1997, the
Company's short-term investments consisted of U.S. Treasury Bills having
original maturities of less than one year. The Company accounted for these
investments as being available for sale. As of January 31, 1998 and February 1,
1997, the fair market values of the U.S. Treasury Bills approximated cost.
INVENTORY - Midwest convenience store inventory is stated primarily at the lower
of last-in, first-out(LIFO) cost or market. Southeast convenience store
inventory and gasoline inventory are stated at the lower of first-in, first-out
(FIFO) cost or market.
ASSETS HELD FOR SALE - Assets held for sale represent operating and
non-operating assets which the Company intends to sell in the near term and are
carried at the lower of cost or estimated net realizable value. The Company
reduced the carrying value of certain of these assets to their estimated net
realizable value by taking a special charge to earnings in fiscal year 1996 (see
Note 16). The amounts the Company may ultimately realize could differ materially
from the amounts assumed in arriving at the carrying value.
Assets held for sale at the end of fiscal year 1997 included $4.2 million for
the Company's former headquarters and plant facility in Cuyahoga Falls, Ohio. In
fiscal year 1998, the Company recognized a $0.7 million loss on the sale of this
facility as a result of costs incurred to remove asbestos and to complete other
building repairs.
PROPERTY, EQUIPMENT, AND DEPRECIATION - Property is stated at cost and is
depreciated on the straight-line basis for financial reporting purposes over the
following estimated useful lives:
Buildings 30-40 years
Equipment 5-30 years
- --------------------------------------------------------------------------------
Leasehold improvements are amortized primarily over the lesser of 10 years or
the term of the lease.
During fiscal 1997, the Company changed its estimate of the useful lives of new
store and gasoline equipment placed in service in fiscal 1995 and thereafter.
The change was made in order to reflect the actual useful lives of such assets.
The change had the effect of decreasing net loss in fiscal year 1997 by $395,000
($.09 per share).
-40-
41
LONG-LIVED ASSETS - Impairment of long-lived assets is recognized when events or
changes in circumstances indicate that the carrying amount of the asset, or
related group of assets, may not be recoverable. Measurement of the amount of
the impairment may be based on market values of similar assets or estimated
discounted future cash flows resulting from use and ultimate disposition of the
asset. Management has determined that there has been no material impairment to
any long-lived assets as of January 31, 1998, other than as provided for in
assets held for sale, as discussed above.
SELF INSURANCE RESERVES - The Company is self-insured for certain property,
liability, accident and health insurance risks, and establishes reserves for
estimated outstanding claims based on its historical claims experience and
reviews by third-party loss reserves specialists. The Company has purchased
insurance coverage for losses that may occur above certain levels. As of January
31, 1998, February 1, 1997, and February 3, 1996, the Company had established
reserves for these risks of $4,409,000, $5,350,000, and $7,305,000,
respectively, which are recorded on a present value basis using a risk-free rate
of return to discount the liability. The ultimate amount of these liabilities
could differ from these estimates. In fiscal year 1997, the Company changed its
estimate of incurred but not reported claims with respect to its property and
liability insurance reserve to reflect favorable claims experience and a
reduction in the Company's convenience store base. The change had the effect of
decreasing net loss in fiscal year 1997 by $470,000 ($.11 per share). At January
31, 1998, February 1, 1997 and February 3, 1996, the risk-free rate of returns
were 5.55%, 6.39% and 5.53%, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has disclosed the fair value,
related carrying value and method of determining fair value for the following
financial instruments in the accompanying notes as referenced: short-term
investments (see Note 1), accounts and notes receivable (see Note 2) and
long-term obligations (see Note 7).
-41-
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dairy Mart Convenience Stores, Inc. and Subsidiaries
January 31, 1998, February 1, 1997 and February 3, 1996
REVENUE RECOGNITION - The Company recognizes revenues as earned, including
franchise revenues and interest income. Franchise revenues represent a
percentage of franchise store sales remitted to the Company on a weekly or
monthly basis, for providing merchandising, advertising, store audits, and other
operating and administrative support services, as well as revenues derived from
initial fees and the gain on sale of store assets to franchisees. Franchise
revenues were $12,481,000, $18,264,000, and $18,805,000 for the fiscal years
ended January 31, 1998, February 1, 1997, and February 3, 1996, respectively.
STORE PREOPENING AND CLOSING COSTS - Consistent with the requirements of the
American Institute of Certified Public Accountants' Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities", expenditures of a
non-capital nature associated with opening a new store are expensed as incurred.
At the time the decision is made to close a store, estimated unrecoverable costs
are charged to expense. Such costs include the net book value of abandoned
fixtures, equipment, leasehold improvements and a provision for the present
value of future lease obligations, less the present value of estimated future
sub-rental income. The Company utilizes a risk-free rate of return to discount
its future lease obligations and sub-rental income. As of January 31, 1998,
February 1, 1997 and February 3, 1996, the risk-free rate of return was 5.55%,
6.39% and 5.53%, respectively.
EARNINGS (LOSS) PER SHARE - In the fourth quarter of Fiscal 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share", for computing basic and diluted earnings (loss) per share. Earnings
(loss) per share have been calculated based on the weighted average number of
shares of common stock outstanding and the effect of stock options, if dilutive,
during each year. As required, all previously reported earnings per share have
been restated using the computational requirements of SFAS No. 128. Additionally
during fiscal 1996, the Company acquired a $10,000,000 note receivable (Note)
from DM Associates Limited Partnership (DM Associates) collateralized by
1,220,000 shares of the Company's Class B Common Stock (Pledged Shares). In
fiscal 1998, DM Associates relinquished its right to the Pledged Shares in
satisfaction of the note principal and therefore these shares are reflected as
treasury stock for earnings (loss) per share purposes (See Note 16). The
weighted average number of shares used in the calculation of basic earnings
(loss) per share was 4,605,054, 4,440,997 and 5,373,784 for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996, respectively. As
the Company had net losses in each of the fiscal years 1998, 1997, 1996, diluted
earnings (loss) per share has not been presented.
RECLASSIFICATIONS - Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used for the
current year.
- --------------------------------------------------------------------------------
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of January 31, 1998 and February
1, 1997 is as follows:
1998 1997
- -------------------------------------------------------------------------------------
(IN THOUSANDS)
Franchise accounts receivable ............................. $ 8,901 $ 4,905
Franchise notes receivable ................................ 2,654 3,071
Marketing allowances ...................................... 2,390 3,100
Other receivable........................................... 8,391 6,346
--------------------
22,336 17,422
Less allowance for doubtful accounts and notes receivable 2,241 1,545
--------------------
Net accounts and notes receivable ......................... 20,095 15,877
Less noncurrent notes receivable (included in other assets) 5,125 2,289
--------------------
Current accounts and notes receivable ..................... $14,970 $13,588
- --------------------------------------------------------------------------------
The carrying amount of current accounts and notes receivable approximates fair
value because of the short maturity of those receivables. The fair value of the
Company's noncurrent notes receivable is estimated by discounting the future
cash flows using the rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. As of January
31, 1998 and February 1, 1997, the fair values of the noncurrent notes
receivable approximate their carrying values.
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43
Dairy Mart Convenience Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3. INVENTORY:
A summary of inventory as of January 31, 1998 and February 1, 1997 is as
follows:
1998 1997
- -----------------------------------------------------------------------
(in thousands)
Inventory valued at FIFO cost................. $21,088 $ 24,775
LIFO reserve.................................. (4,280) (4,591)
------------------------
Inventory .................................... $16,808 $ 20,184
- --------------------------------------------------------------------------------
Approximately 57.2% and 46.3% of inventories were valued under the LIFO method
at January 31, 1998 and February 1, 1997, respectively.
The LIFO reserve reflects the difference between stating the inventory at
historical LIFO cost and the more current FIFO cost. Had the FIFO method been
used, cost of goods sold would have been decreased by $407,000 and $84,000 in
1998 and 1997, respectively, and increased by $249,000 in 1996. Loss per share
would have been decreased by $.06 and $.01 in 1998 and 1997, respectively, and
increased by $.03 in 1996, had the FIFO method been used.
During 1998, 1997 and 1996, the Company liquidated certain LIFO inventory that
was carried at lower costs prevailing in prior years. The effect of the
liquidation was to decrease net loss by approximately $11,000 ($.00 per share),
$380,000 ($.09 per share) and $488,000 ($.09 per share) in 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of January 31, 1998 and February 1, 1997
is as follows:
1998 1997
- ---------------------------------------------------------------------------------
(IN THOUSANDS)
Land and improvements ........................ $ 5,697 $ 8,898
Building and leasehold improvements .......... 29,303 35,603
Equipment .................................... 95,365 85,785
Assets under capital leases .................. 2,815 3,397
---------------------------
133,180 133,683
Less accumulated depreciation and amortization (50,591) (44,235)
---------------------------
Property and equipment, net .................. $ 82,589 $ 89,448
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $ 2,106,000 and
$2,244,000 as of January 31, 1998 and February 1, 1997, respectively.
- --------------------------------------------------------------------------------
5. INTANGIBLE ASSETS:
A summary of intangibles as of January 31, 1998 and February 1, 1997 is as
follows:
1998 1997
- ----------------------------------------------------------------------
(IN THOUSANDS)
Goodwill..................................... $ 13,890 $ 14,345
Franchise and operating rights............... 10,144 10,144
------------------------
24,034 24,489
Less accumulated amortization................ (8,017) (7,450)
------------------------
Intangible assets, net....................... $ 16,017 $ 17,039
- --------------------------------------------------------------------------------
Goodwill represents the excess of cost over fair value of net assets purchased
and is being amortized on a straight-line basis over a period of 40 years.
Franchise and operating rights represent the value of franchise relationships
purchased in connection with past acquisitions and are being amortized on a
straight-line basis over 30 years. The Company assesses the recoverability of
these intangibles by determining whether the amortization of the goodwill and
franchise and operating rights over the remaining lives can be recovered through
projected future operating results on an undiscounted basis. The Company's
management anticipates a return to profitability in fiscal year 1999 and
therefore no provision for impairment was recorded in any period.
- --------------------------------------------------------------------------------
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44
Dairy Mart Convenience Stores, Inc. and Subsidiaries
6. ACCRUED EXPENSES:
A summary of accrued expenses as of January 31, 1998 and February 1, 1997 is as
follows:
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
Accrued salaries and wages ..................... $ 3,984 $ 4,089
Accrued environmental assessment and remediation 5,341 1,782
Other accrued expenses ......................... 8,852 7,296
----------------------
Total accrued expenses ............. $18,177 $13,167
- --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS:
The company had the following long-term obligations as of January 31, 1998
and February 1, 1997:
JANUARY 31, 1998 FEBRUARY 1, 1997
INTEREST MATURITY -------------------------- -----------------
RATE (FISCAL YEAR) CURRENT LONG-TERM TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Senior Subordinated Notes (Series A Notes) ................ 10.25% 2005 $ - $75,000 $ 75,000 $ 75,000
Senior Subordinated Notes (Series B Notes), Net of
Original Issue Discount of $1,317 ..................... 10.25% 2005 - 12,183 12,183 12,046
Senior Revolving Credit Facility .......................... various 2000 - - - 10,280
Real Estate Mortgage Notes Payable ....................... 6.25%-12.0% 1999-2012 167 2,996 3,163 5,727
Small Business Administration Debentures .................. 6.9%-9.6% 1999-2006 1,100 3,130 4,230 4,230
Equipment Financing ....................................... various 1999-2000 486 269 755 1,513
Capital Leases, Net of Interest and Executory Costs of $292 various 1999-2009 303 814 1,117 1,632
---------------------------------------------
$2,056 $94,392 $ 96,448 $110,428
- --------------------------------------------------------------------------------
In March 1994, the Company issued $75,000,000 principal amount of 10.25% senior
subordinated notes (the "Series A Notes") due March 15, 2004. The proceeds
received from the sale of the series a notes, net of offering costs of
$2,298,000, were used to repay the entire outstanding indebtedness under the
then existing bank term loan and bank revolving loan and to redeem in full the
Company's 14.25% subordinated debentures due November, 2000.
In December 1995, the Company issued an additional $13,500,000 principal amount
of 10.25% senior subordinated notes (the "Series B Notes") due March 15, 2004.
The proceeds received from the sale of the Series B Notes were used primarily to
purchase the interests of a former majority stockholder of the company and
certain of his affiliates in dm associates (See Note 16). The indenture pursuant
to which the Company issued the series a notes was amended and restated to apply
to the Series B Notes.
In conjunction with the issuance of the Series B Notes, the Company issued to
the purchasers of the Series B Notes warrants to purchase 1,215,000 shares of
Class A common stock of the Company. In addition, the Company issued to the
holders of the Series A Notes warrants to purchase 500,000 shares of the Class A
common stock of the Company. The warrants may be exercised any time during the
next five years. The initial exercise price of the warrants was $6.95 per share,
which was adjusted in December 1996, to $5.45 per share. The exercise price may
be adjusted further based upon the occurrence of various events, including stock
dividends and issuances of common stock by the company for a per share price
less than the exercise price of the warrants or less than the current market
value to the Company's Class A common stock.
The Series A and Series B Notes, (collectively, the "Notes") are redeemable, at
the option of the Company, after March 15, 1999 at rates starting at 104.75% of
principal amount reduced annually through March 15, 2002 at which time they
become redeemable at 100% of principal amount. the terms of the notes may
restrict, among other things, the payment of dividends and other distributions,
investments, the repurchase of capital stock and the making of certain other
restricted payments by the Company and its subsidiaries, the incurrence of
additional indebtedness and new operating lease obligations by the Company or
any of its subsidiaries, and certain mergers, consolidations and dispositions of
assets. Additionally, according to the terms of the Notes, if a change of
control occurs, as defined, each holder of the notes will have the right to
require the Company to repurchase such holder's notes at 101% of the principal
amount thereof.
The Company has a $30,000,000 senior revolving credit facility, of which up to
$15,000,000 is available for the issuance of letters of credit. The outstanding
balance is due and payable on April 30, 1999; However, the company may extend
such date for up to two additional one-year periods, with the consent of the
lenders. On April 30, 1998, certain provisions of the revolving credit facility
were amended effective January 1, 1998. Revolving credit loans under the amended
credit agreement bear interest at the Company's option, at an applicable margin
over the agent bank's base rate or the libor rate. the applicable margin, if
any, is based upon the ratio of consolidated indebtedness to consolidated
ebitda, as defined below. the adjusted credit agreement also provides for a
commitment fee of 1/2 % on any unused portion of the revolving credit facility.
Among other restrictions, the amended credit agreement contains financial
covenants relating to specified levels of: indebtedness (reduced by an amount
equal to cash) to earnings before interest expense, taxes, depreciation and
amortization (ebitda); ebitda to interest expense; ebitda plus rent, less taxes
paid in cash to interest expense, rent expense and principal payments required
to be made on indebtedness; and the maintenance of a minimum net worth. in
connection with the credit agreement, the Company granted a security interest in
substantially all of its non-real estate assets and pledged as collateral the
shares of capital stock of certain subsidiary corporations of the Company.
-44-
45
The Company is limited in the amount of cash dividends that it may pay and the
amount of capital stock and subordinated indebtedness that it may repurchase by
applicable covenants contained in the senior revolving credit facility and
notes. As of January 31, 1998, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of January 31, 1998 and February 1, 1997, respectively, the fair values of
the real estate mortgage notes payable, small business administration
debentures, equipment financing and capital leases, approximated their
respective carrying amounts. Fair values of obligations is based on rates
available to the Company for debt with similar terms and maturities. As of
January 31, 1998, the fair value of the Series B Notes, net of original issue
discount, approximated the carrying amount. as of February 1, 1997, the fair
value of the Series B Notes, net of original issue discount, was $11,795,000. as
of January 31, 1998, the fair value of the Series A Notes approximated the
carrying amount. As of February 1, 1997, the fair value of the Series A Notes
was $73,605,000. The fair values of the notes were based on quoted market prices
as of January 31, 1998 and February 1, 1997, respectively. the revolving credit
facility is a variable rate loan, and thus, the fair value approximates the
carrying amount as of February 1, 1997.
As of January 31, 1998, maturities on long-term obligations for the next five
years, are as follows:
- --------------------------------------------------------------------------------
FISCAL YEAR
- --------------------------------------------------------------------------------
(IN THOUSANDS)
1999............................................................... $ 2,056
2000............................................................... 3,215
2001............................................................... 274
2002............................................................... 2,588
2003............................................................... 98
- --------------------------------------------------------------------------------
8. Operating Leases
The Company leases operating properties, including store locations and office
space, under various lease agreements expiring through 2020. Certain of these
locations are sublet to the Company's franchisees. The future minimum lease
payments related to these properties are included in the following summary.
A summary of future minimum lease payments and sublease receipts as of January
31, 1998 is as follows:
Operating Operating Net
Leases Subleases Operating
Payable/Receivable in Fiscal Year Ending Payable Receivable Leases
- -----------------------------------------------------------------------------------------------------
(in thousands)
1999....................................................... $ 12,035 $1,737 $10,298
2000....................................................... 9,901 1,165 8,736
2001....................................................... 7,593 701 6,892
2002....................................................... 5,691 332 5,359
2003....................................................... 4,263 112 4,151
Thereafter................................................. 21,551 113 21,438
------------------------------------
Total...................................................... $ 61,034 $4,160 $56,874
- -----------------------------------------------------------------------------------------------------
Rental expense for all operating leases was as follows:
=====================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(in thousands)
Leases.......................................................... $13,038 $15,523 $15,297
Less subleases.................................................. 2,509 4,000 4,169
----------------------------------
Net............................................................. $10,529 $11,523 $11,128
=====================================================================================================
-45-
46
Dairy Mart Convenience Stores, Inc. and Subsidiaries
9. FEDERAL AND STATE INCOME TAXES:
The benefit from income taxes for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996 was as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------
(in thousands)
Current benefit (provision)
Federal .......................... $ (286) $ 207 $ 495
State and Local .................. (472) (345) (148)
---------------------------------------
Total current benefit (provision) (758) (138) 347
---------------------------------------
Deferred benefit
Federal .......................... 949 547 2,101
State and Local .................. 505 318 772
---------------------------------------
Total deferred benefit .......... 1,454 865 2,873
---------------------------------------
Total benefit ....................... $ 696 $ 727 $ 3,220
======================================================================================
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. These minimum taxes are
included in the current provision for state and local income taxes. In addition,
the Company records a reduction in the provision (increase in the benefit) for
income taxes for the benefit to be realized from targeted jobs credits in the
year in which they arise. A reconciliation of the difference between the
statutory federal income tax rate and the effective income tax rate follows:
Percent of Pretax Loss
------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Statutory federal income tax rate ................................ 34% 34% 34%
Increase (decrease) from:
State income tax benefit (provision), net of federal tax effect 1 (1) 5
Nondeductible expenses and amortization of acquired assets .... (6) (5) (5)
Targeted jobs credit .......................................... - - 1
---------------------------
Effective income tax rate ........................................ 29% 28% 35%
========================================================================================================
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Significant deferred tax assets (liabilities) as of January 31, 1998
and February 1, 1997 were as follows:
1998 1997
- -------------------------------------------------------------------------------------
(in thousands)
Capitalized leases ............................... $ 158 $ 141
Depreciation and amortization .................... (12,504) (15,414)
Vacation accrual ................................. 269 310
Inventory (LIFO) ................................. (1,176) (1,236)
Reserve for asset valuations ..................... 910 606
Insurance reserves not deductible for tax purposes 1,508 1,654
Income deferred for financial statement purposes . 2,210 2,872
Reserve for closed stores and renovations ........ 1,358 476
Accrued restructuring and severance reserves ..... 357 585
Write-down of non-operating properties ........... 1,185 1,591
Tax credits and net operating loss carryforwards . 11,133 12,067
Other ............................................ 223 525
-------------------------
Net deferred tax asset ........................... $ 5,631 $ 4,177
================================================================================
As of January 31, 1998, the Company had alternative minimum tax credits
aggregating $668,000 which carryforward indefinitely for federal income tax
purposes. These credits can be used in the future to the extent that the
Company's regular tax liability exceeds its liability calculated under the
alternative minimum tax method. In addition, the Company had $1,900,000 of
targeted jobs credit carryforwards that expire, if unused, from fiscal 2007 to
2011 and $471,000 of foreign tax credit carryforwards that expire, if unused, in
fiscal 1999 to 2002. The Company and its subsidiaries file a consolidated
federal income tax return but generally file separate state income tax returns.
As of January 31, 1998, the Company had regular federal income tax net operating
loss carryforwards of $17,848,000 which expire, if unused, from fiscal 2009 to
2012 and net operating loss carryforwards for state income tax purposes of
$34,962,000 which expire, if unused from fiscal 1999 to 2012. Realization of the
net operating loss carryforwards is dependent on generating sufficient taxable
income prior to the expiration of the operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, would be reduced in the near term if
management's estimate of future taxable income during the carryforward period is
reduced. No valuation allowance for deferred tax assets was provided as of
January 31, 1998 and February 1, 1997.
10. CAPITAL STOCK:
In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under
the SRP, each holder of Class A and Class B Common Stock was declared a dividend
of one Preferred Stock Purchase Right (the "Rights"). The Rights are to purchase
one one-hundredth (1/100) of a share of Series A Junior Preferred Stock at a
price of $30 subject to certain adjustments. The Rights are exercisable under
certain circumstances, and expire on January 19, 2006.
Dividends may be declared and paid on Class A Common Stock without being paid on
Class B Common Stock. No dividend may be paid on Class B Common Stock without
equal amounts paid concurrently on Class A Common Stock (see Note 7). Holders of
Class A Common Stock have one-tenth vote per share and are entitled to elect 25%
of the Board of Directors so long as the number of outstanding shares of Class A
Common Stock is at least 10% of the total of all shares of Common Stock
outstanding. Holders of Class B Common Stock have one vote per share. Holders of
Class B Common Stock have the right to convert their shares at any time for an
equivalent number of shares of Class A Common Stock.
-46-
47
In June 1986, the stockholders approved an Employee Stock Purchase Plan. The
plan, as amended in September, 1996, provides that employees may purchase
quarterly, through payroll deductions, up to 1,000 shares of Class A Common
Stock at 85% of the market value. Of the original 1,250,000 shares provided for
under this plan, 1,023,892 shares remained available for issuance as of January
31, 1998.
As of January 31, 1998, February 1, 1997 and February 3, 1996, the Company held
521,625 shares of Class A Common Stock as treasury stock. The Company held
1,395,957, 175,957 and 175,957 shares of Class B Common Stock as treasury shares
as of January 31, 1998, February 1, 1997, and February 3, 1996, respectively.
- --------------------------------------------------------------------------------
11. STOCK OPTION PLANS, GRANTS AND WARRANTS:
In general, the Company's stock option plans provide for the granting of options
to purchase Company shares at the market price of such shares as of the option
grant date. The options generally have a ten year term and vest and become
exercisable on a pro rata basis over four years.
The Company adopted Stock Option Plans in 1985 and 1990 providing for the
granting of options to employees up to an aggregate of 226,875 shares of Class B
Common Stock and 750,000 shares of Class A Common Stock. The Company granted
incentive stock options pursuant to these Plans totaling 177,887 in fiscal 1996.
No options were granted from these plans in either fiscal 1998 or fiscal 1997.
As of January 31, 1998, the Company had available for grant under the 1990 Plan
options to purchase 56,906 of Class A Common Stock, after considering the lapse
of options previously granted. In addition to the incentive stock options
granted under the above Plans the Company has granted 47,500, 25,125 and 97,500
non-qualified stock options in fiscal 1998, 1997 and 1996 respectively, which
are not part of a specific plan.
In January 1996, the Company adopted a Stock Option and Incentive Award Plan
(the "Award Plan") and a non-qualified Stock Option Plan for Outside Directors
("Outside Directors Plan"). The Award Plan provides for granting of stock awards
and options to employees up to a total of 650,000 shares of either Class A or
Class B Common Stock. In fiscal 1998, 1997 and 1996, the Company granted
incentive stock options of 125,000, 22,500 and 82,500, respectively. As of
January 31, 1998, the Company had available for grant under the Award plan
options to purchase 42,500 shares of Class A Common Stock, after considering the
lapse of options previously granted. The Outside Directors Plan provides for the
initial grant of an option to purchase 3,500 shares of the Company's Class A
Common Stock to each non-employee director and an annual grant of an option to
purchase 3,500 shares. The maximum number of shares reserved for issuance under
this plan is 50,000. The Company granted 17,500 nonqualified stock options to
Outside Directors in fiscal years 1997 and 1996, respectively. As of January 31,
1998, the Company had available for grant under the Outside Directors Plan
options to purchase 15,000 shares of Class A Common Stock.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, "Accounting for Stock-Based Compensation", and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
1998 1997 1996
- ------------------------------------------------------------------------------------
Risk-free interest rates..................... 6.19% 6.24% 5.66%
Expected dividend yield...................... 0.00% 0.00% 0.00%
Expected volatility.......................... 42.64% 39.00% 39.00%
Expected life in years....................... 9.50 6.72 7.51
================================================================================
-47-
48
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------------
Pro forma net loss.................................. ($1,887) ($2,028) ($6,057)
Pro forma loss per share............................ ($0.41) ($0.46) ($1.13)
================================================================================
The pro forma effect on net loss for fiscal years 1998, 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal year 1996.
A summary of the Company's stock option activity and related information for the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, is
as follows:
(options in thousands)
Weighted-Average
Options Exercise Price
------- --------------
Outstanding January 28, 1995 ......... 706 $3.71
Granted .............................. 375 3.98
Exercised ............................ (17) 2.80
Forfeited ............................ (121) 2.98
----------------------
Outstanding February 3, 1996 ......... 943 $3.92
Granted .............................. 65 4.58
Exercised ............................ (170) 3.17
Forfeited ............................ (197) 5.70
----------------------
Outstanding February 1, 1997 ......... 641 $3.64
Granted .............................. 172 4.49
Exercised ............................ (62) 2.84
Forfeited ............................ (84) 3.58
----------------------
Outstanding January 31, 1998 ......... 667 $3.95
================================================================================
The weighted-average fair values of stock options granted during fiscal years
1998, 1997 and 1996 were $3.26, $3.12 and $3.07, respectively.
The following table summarizes information about the Company's stock options
outstanding as of January 31, 1998:
- ----------------------------------------------------------------------------------------------------------
Weighed-
Weighted Average
Average Remaining
Grant Options Options Exercise Contractural
Price Range Outstanding Exercisable Price Life (Years)
- ----------------------------------------------------------------------------------------------------------
$2.75 to $2.88............................ 261,738 239,397 $2.81 5.7
$3.63 to $4.60............................ 210,387 89,944 3.80 7.6
$5.00 to $6.00............................ 195,000 37,500 5.64 8.8
- ----------------------------------------------------------------------------------------------------------
Total 667,125 366,841
================================================================================
During fiscal years 1998, 1997 and 1996, the Company awarded, pursuant to the
Award plan, restricted stock grants consisting of an aggregate of 137,500,
45,000 and 100,000 shares, respectively, of the Company's Class A Common Stock.
In addition, the Company awarded 137,500 shares of the Company's Class B Common
Stock in fiscal 1998. No compensation was recorded with respect to the shares
awarded under the Award Plan.
In December 1995, the Company issued warrants to purchase 1,715,000 shares of
Class A Common Stock, which may be exercised at any time during the next four
years (see Notes 7 and 16) at an initial exercise price of $6.95 per share,
which exercise price was subsequently adjusted to $5.45 per share as of February
1, 1997. The issuance of the warrants was recorded as an increase in paid-in
capital.
12. GASOLINE OPERATIONS:
A summary of gasoline operations for the years ended January 31, 1998, February
1, 1997 and February 3, 1996, is as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Gasoline gallons sold.................................................... 171,269 209,478 212,832
Gasoline revenues........................................................ $191,956 $245,718 $226,505
Cost of gasoline sold.................................................... 170,537 220,636 201,980
Depreciation............................................................. 2,798 2,651 2,461
Capital expenditures..................................................... 7,288 5,869 7,585
Net book value of gasoline equipment..................................... 21,122 21,801 19,054
================================================================================
-48-
49
13. EMPLOYEE BENEFIT PLANS:
The Company provides benefits to qualified employees through a defined
contribution profit sharing plan. Contributions under this plan are made
annually in amounts determined by the Company's Board of Directors. No
discretionary contributions to this plan were made in fiscal 1998, 1997 or 1996.
Effective January 1, 1993, the profit sharing plan was amended pursuant to
section 401(k) of the Internal Revenue Code enabling eligible employees to
contribute up to 15% of their annual compensation to the plan, with the Company
matching 25% of such contributions up to 6% of the employees' annual
compensation. Matching contributions from the Company for fiscal years 1998,
1997 and 1996 were $103,000, $117,000 and $128,000, respectively. The Company
does not offer any additional postretirement and post-employment benefits to its
employees.
- --------------------------------------------------------------------------------
14. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS:
In fiscal year 1998, the Company completed the sale of assets relating to 156
convenience store and retail gasoline locations in Connecticut, Massachusetts,
Rhode Island and New York for $39.1 million. The principal assets sold by the
Company include inventories, convenience store and gasoline fixtures and
equipment, land, buildings, and building and leasehold improvements. In fiscal
1998, the Company also sold its former office and manufacturing facility in Ohio
for $4.1 million. The resulting net pre-tax gain of $3.6 million has been
excluded from the pro forma results. The following unaudited pro forma
information of the Company for the fiscal years ended January 31, 1998 and
February 1, 1997, has been prepared assuming that the asset sales had occurred
as of the beginning of the fiscal year ended February 1, 1997. The unaudited pro
forma information is 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 assets 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 assets sold 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 assets sold. The unaudited pro forma information is as follows:
1998 1997
--------------------------------------
(in thousands, except per share amounts)
Revenues ............................ $ 459,348 $ 471,668
--------------------------------------
Cost of goods sold and expenses:
Cost of goods sold .................. 333,419 346,085
Operating and administrative expenses 121,957 119,387
Interest expense .................... 10,330 10,518
--------------------------------------
$ 465,706 $ 475,990
--------------------------------------
Loss before income taxes ....... (6,358) (4,322)
Benefit from income taxes ........... 1,839 1,219
--------------------------------------
Net loss ........................ $ (4,519) $ (3,103)
Loss per share:
Loss per share ...................... $ (0.98) $ (0.70)
================================================================================
15. COMMITMENTS AND CONTINGENCIES:
As of January 31, 1998, the Company was contingently liable for outstanding
letters of credit amounting to $7,100,000.
The Company has certain environmental contingencies related to the ongoing costs
to comply with federal, state and local environmental laws and regulations,
including costs for assessment, compliance, remediation and certain capital
expenditures related to its gasoline operations. In the ordinary course of
business, the Company is involved in environmental assessment and remediation
activities with respect to releases of regulated substances from existing and
previously operated retail gasoline facilities. The Company accrues its estimate
of all costs to be incurred for assessment and remediation for known releases.
In February 1997, the Company adopted SOP No. 96-1, "Environmental Remediation
Liabilities", which provides guidance on specific accounting issues related to
the recognition, measurement and disclosure of environmental remediation
liabilities. These accruals are adjusted if and when new information becomes
known. Due to the nature of such releases, the actual costs of assessment and
remediation may vary significantly from year to year. As of January 31, 1998 and
February 1, 1997, the Company had recorded an accrual of $6,770,000 and
$1,782,000, respectively, for such costs. The Company is entitled to
reimbursement of a portion of the above costs from various state environmental
trust funds based upon compliance with the terms and conditions of such funds.
As of January 31, 1998 and February 1, 1997, the Company had recorded a
reimbursement receivable of $ 4,770,000 and $1,450,000, respectively. For the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, the
Company recorded a provision for environmental expenses of $3,354,000,
$2,109,000 and $1,048,000, respectively. Additionally, under current federal and
state regulatory programs, the Company will be obligated by December 1998 to
upgrade or replace most of its existing underground storage tanks ("USTs"). The
Company presently estimates that it will be required to make capital
expenditures related to the upgrading or replacing of USTs of approximately $3.0
to $4.0 million in the aggregate through December 1998, which capital
expenditures could be reduced for locations which may be closed in lieu of the
capital costs of compliance. The Company's estimate of costs to be incurred for
environmental assessment and remediation and for UST upgrading and other
regulatory compliance are based on factors and assumptions that could change due
to modifications of regulatory requirements, detection of unanticipated
environmental conditions or other unexpected circumstances. Due to the nature of
such information, the actual costs incurred may vary from the Company's
estimates, and the ongoing costs of assessment and remediation activities may
vary significantly from year to year.
In fiscal 1997, the Company entered into a new agreement for the wholesale
supply of various grocery items to its Northeast, Midwest and Southeast region
stores. Under the supply agreement, the Company is obligated to purchase
annually a minimum amount of merchandise for a period of nine years. Management
believes that the level of purchase is readily achievable over the term of the
new agreement. Prices to be charged by the supplier must be competitive.
-49-
50
The Company has been named as a nominal defendant, along with those persons who
were directors of the Company in fiscal 1996, in two shareholder derivative
actions. The plaintiffs allege, among other things, that in connection with the
settlement of the dispute between a former majority stockholder of the Company
and certain of his affiliates and the Company's board of directors and
management with respect to control of the Company, the directors violated their
fiduciary duty to the Company and its stockholders, violated provisions of
Delaware corporate law and wasted corporate assets. The plaintiffs seek, among
other things, a declaration that the current structure of the general partner of
DM Associates is invalid and that certain voting rights, with respect to the
Class B Common Stock held by DM Associates should be vested in the Company. DM
Associates owns approximately 35% of the total voting power of both classes of
the Company's Common Stock. The Company is contesting these claims and at this
time is not able to determine what the outcome of this litigation will be.
The Company is also a defendant in an action brought by a former supplier of
certain dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled NEW ENGLAND DAIRIES, INC. V. DAIRY MART CONVENIENCE STORES, INC. AND
DAIRY MART, INC., Civil Action No. 97-0569873 (Conn. Super.). This action was
commenced on April 17, 1997 by New England Dairies, Inc. ("NED") alleging that
Dairy Mart committed an anticipatory breach of a supply agreement entered into
between NED and Dairy Mart on April 25, 1995 (the "Agreement"), when Dairy Mart
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 action seeks lost profits in the amount
of $3.7 million. Discovery is proceeding. 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.
In the ordinary course of business, the Company is party to various other
actions which the Company believes are routine in nature and incidental to the
operation of its business. The Company believes that the outcome of the
proceedings to which the Company currently is party will not have a material
adverse effect upon its future results of operations or financial condition.
- --------------------------------------------------------------------------------
-50-
51
16. CORPORATE GOVERNANCE ISSUES AND RESTRUCTURING INITIATIVES:
In fiscal year 1996, the Company incurred special and/or unusual costs and
expenses associated with corporate governance issues and corporate restructuring
initiatives and other operating costs which have been included in operating and
administrative expenses in the Consolidated Statement of Operations.
1996
- ----------------------------------------------------------------------------------------------
(in thousands)
Costs and expenses associated with corporate governance issues............... $ 8,985
Corporate restructuring initiatives and other operating costs................ 3,215
================================================================================
During fiscal 1996, the Company entered into an agreement with a former majority
stockholder of the Company and certain of his affiliates (Former Holder) for
purposes of settling a dispute between the Former Holder and the Company's board
of directors and management with respect to control of the Company. The dispute
arose due to philosophical differences with regards to the strategic direction
and management of the Company. The agreement provided for a cash payment of
$13,150,000 to the Former Holder comprised of $10,000,000 for the purchase of
certain interests of the Former Holder in DM Associates, which then owned
1,858,743 shares of the Company's Class B Common Stock, and $3,150,000 for
additional costs and expenses which consisted of $850,000, $800,000 and
$1,500,000 for the reimbursement of legal and other costs, for the execution of
a non-compete agreement, and for a release of claims against the Company, by or
with the Former Holder, respectively. The acquired interests included a 46%
limited partnership interest in DM Associates and a promissory note receivable
from DM Associates. The promissory note had a principal amount of $7,100,000,
and had accrued interest at an annual rate of 9% since its inception in 1992,
for a total accreted value as of February 3, 1996 of approximately $10,000,000.
The note was collateralized by the Pledged Shares and had a scheduled maturity
date of September 12, 1997.
The Company did not attribute value to its acquired limited partnership interest
in DM Associates because at the then current market price of the Company's Class
B Common Stock, the Company would not receive any distribution upon a
dissolution of DM Associates in respect of the interest since the other limited
partner of DM Associates is entitled to a preferential return according to the
terms and conditions of the partnership agreement. Based upon the market price
of the Company's Class B Common Stock as of January 31, 1998, the Company still
would not receive any distribution upon a liquidation of DM Associates. The
Company attributed a fair value of $10,000,000 to the acquired promissory note
and recorded the note as a reduction of stockholders' equity in the Consolidated
Balance Sheets. Although DM Associates retained its right to pay the full
accreted value of the note at or before maturity, the Company anticipated, based
upon the market price of the Company's Class B Common Stock and since DM
Associates primary asset was the Pledged Shares, that DM Associates would choose
to relinquish its right to the Pledged Shares in full satisfaction of the note.
Assuming that the Company received the Pledged Shares in satisfaction of the
note and received no value for its limited partnership interest, the Company
effectively paid $8.20 per share for the Pledged Shares at the time of the
agreement when the quoted market price of the Company's Class B Common Stock was
$6.38 per share. The Company's Board of Directors obtained a fairness opinion
from a nationally recognized valuation firm prior to consummating the agreement
to the effect that the price paid by the Company in the transaction was fair
from a financial point of view to the Company and its public stockholders. The
aforementioned opinion was based on, among other items: the market multiple
approach in which the Company was compared with other publicly traded companies
on the basis of operational and economic similarities; the comparable
transaction approach in which transactions involving the acquisition of a
control position in other convenience and grocery store operators were reviewed;
and the discounted cash flow approach in which management's financial
projections (which reflected improved profitability and cash flows for fiscal
years 1997 through 2001) were reviewed to develop a value indication for the
Company. These analyses resulted in a valuation range for the Company's Common
Stock of $6.85 to $9.45 per share. In addition, the Company elected to expense
the costs associated with the non-compete agreement rather than deferring such
costs over the term of the agreement as the future value was deemed to have
minimal economic impact on future years.
In September 1997, DM Associates relinquished its right to the Pledged Shares in
satisfaction of the note principal and paid $646,000 to the Company as interest
on the note. The interest income is included in revenues in the accompanying
Consolidated Statement of Operations for fiscal 1998.
During fiscal 1996, the Company incurred $5,835,000 of additional costs and
expenses in connection with the aforementioned transactions. These costs and
expenses included $2,672,000 for legal and other professional fees, $1,211,000
for the termination of an officer of the Company who was a party to the Former
Holder's claims against the Company, $1,287,000 for financing fees primarily
incurred to amend the Company's senior revolving credit facility with respect to
the purchase of the Former Holder's interest and issuance of Series B Notes (see
Note 7) and $665,000 for the issuance of warrants to purchase 500,000 shares of
the Company's Class A Common Stock to holders of the Company's Series A Notes as
fee for the consent of such holders for the Company to purchase the interests of
the Former Holder and for the waiver of certain alleged defaults under the terms
of the Series A Notes.
During fiscal 1996, the Company recorded additional operating and exit costs
totaling $3,215,000 related to the aforementioned restructuring initiatives
including $1,313,000 incurred during the wind-down of dairy and manufacturing
distribution operations since the eventual sales of such operations occurred at
later dates than initially anticipated by management and $1,000,000 for the
further write-down of the properties held for sale to their estimated net
realizable value based upon marketing efforts to dispose of these assets in the
fourth quarter of fiscal 1996. In addition, the Company incurred an additional
$902,000 of costs related to the sale or closing of the 143 retail convenience
stores and 81 retail gasoline facilities since such sales/closings occurred at
later dates than originally had been planned by management.
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52
Dairy Mart Convenience Stores, Inc. and Subsidiaries
17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION:
The Company's payment obligations under 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 the Company ("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.
Investment in subsidiaries is 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 intercompany balances and
transactions.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
---------------------------------------------------------------------
(in thousands)
Revenues (including excise taxes of $ 29,641) ........ $ 1,144 $ 499,737 $ 478 $ - $ 501,359
Cost of goods sold and expenses:
Cost of goods sold ............................... - 364,932 - - 364,932
Operating and administrative expenses ............ 269 127,919 33 - 128,221
Interest expense ................................. 9,776 485 351 - 10,612
---------------------------------------------------------------------
10,045 493,336 384 - 503,765
---------------------------------------------------------------------
Income (loss) before income taxes and equity in
income of consolidated subsidiaries .......... (8,901) 6,401 94 - (2,406)
Benefit from (provision for) income taxes ............ 2,573 (1,850) (27) - 696
---------------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries .................... (6,328) 4,551 67 - (1,710)
Equity in income of consolidated subsidiaries ........ 4,618 67 - (4,685) 0
---------------------------------------------------------------------
Net income (loss) ............................. $ (1,710) $ 4,618 $ 67 $ (4,685) $ (1,710)
================================================================================
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53
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 31, 1998
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
----------------------------------------------------------------
(in thousands)
ASSETS
Current Assets:
Cash ...................................................... $ - $ 3,572 $ 234 $ - $ 3,806
Short-term investments .................................... - 3 3,626 - 3,629
Accounts and notes receivable ............................. 1,254 13,040 676 - 14,970
Inventory ................................................. - 16,808 - - 16,808
Prepaid expenses and other current assets ................. 69 2,162 - - 2,231
Deferred income taxes ..................................... 852 196 - - 1,048
----------------------------------------------------------------
Total current assets ................................... 2,175 35,781 4,536 - 42,492
----------------------------------------------------------------
Assets Held for Sale ........................................ - 10,715 - - 10,715
Property and Equipment, net ................................. - 82,589 - - 82,589
Intangible Assets, net ...................................... - 16,017 - - 16,017
Investment in and Advances to Subsidiaries .................. 1,580 9,929 1,782 - 13,291
Other Assets, net ........................................... 118,672 1,948 137 (120,757) 0
----------------------------------------------------------------
Total assets .......................................... $ 122,427 $ 156,979 $ 6,455 $(120,757) $ 165,104
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ................. $ 637 $ 319 $ 1,100 $ - $ 2,056
Accounts payable ............................................ 20,138 11,159 - - 31,297
Accrued expenses ............................................ 1,297 16,857 23 - 18,177
Accrued interest ............................................ 3,450 - 117 - 3,567
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities ............................... 25,522 28,335 1,240 - 55,097
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations, less current portion above ........... 90,460 802 3,130 - 94,392
Other Liabilities ........................................... - 9,170 - - 9,170
Stockholders' Equity ........................................ 6,445 118,672 2,085 (120,757) 6,445
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity .............. $ 122,427 $ 156,979 $ 6,455 $(120,757) $ 165,104
=================================================================================================================================
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1998
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-----------------------------------------------------------------
(in thousands)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............. $ 3,844 $ 3,993 $ 39 $ - $ 7,876
-----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments ........................... - (3) (2,093) - (2,096)
Purchase of property and equipment ........................... - (31,604) - - (31,604)
Proceeds from sale of property, equipment and assets
held for sale .............................................. - 32,552 - - 32,552
Investment in and advances to subsidiaries ................... 8,112 (8,818) 706 - -
Increase in long-term notes receivable ....................... - (92) (561) - (653)
Proceeds from collection of long-term notes receivable ....... - 35 963 - 998
Decrease in intangibles and other assets ..................... 28 1,281 8 - 1,317
-----------------------------------------------------------------
Net cash provided by (used in) investing activities ............. 8,140 (6,649) (977) - 514
-----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term obligations ........................... (12,326) (1,790) - - (14,116)
Issuance of common stock ..................................... 242 - - - 242
-----------------------------------------------------------------
Net cash used in financing activities ........................... (12,084) (1,790) - - (13,874)
-----------------------------------------------------------------
Decrease in cash ................................................ (100) (4,446) (938) - (5,484)
Cash at beginning of year ....................................... 100 8,018 1,172 - 9,290
-----------------------------------------------------------------
Cash at end of year ............................................. $ - $ 3,572 $ 234 $ - $ 3,806
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest .................................................. $ 9,710 $ 485 $ 349 $ - $ 10,544
Income taxes refunded ..................................... (1,188) - - - (1,188)
Non-cash investing and financing activities
Note receivable from DM Associates ........................ 10,000 - - - 10,000
Purchase of treasury stock ................................ (10,000) - - - (10,000)
====================================================================================================================================
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54
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------------
(in thousands)
Revenues (including excise taxes of $36,427) .............. $ 253 $ 584,981 $ 512 $ - $ 585,746
Cost of goods sold and expenses:
Cost of goods sold ..................................... - 431,851 - - 431,851
Operating and administrative expenses .................. 277 145,326 28 - 145,631
Interest expense ....................................... 10,050 472 355 - 10,877
----------------------------------------------------------------
10,327 577,649 383 - 588,359
----------------------------------------------------------------
Income (loss) before income taxes and equity in income
of consolidated subsidiaries ......................... (10,074) 7,332 129 - (2,613)
Benefit from (provision for) income taxes ................. 2,802 (2,040) (35) - 727
----------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries ........................... (7,272) 5,292 94 - (1,886)
Equity in income of consolidated subsidiaries ............. 5,386 94 - (5,480) -
----------------------------------------------------------------
Net income (loss) .................................... $ (1,886) $ 5,386 $ 94 $ (5,480) $ (1,886)
================================================================================================================================
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF 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 investments ....................... - - 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 3,309 - - 3,329
Deferred income taxes ........................ 933 878 - - 1,811
--------------------------------------------------------------
Total current assets ....................... 1,073 45,286 3,376 - 49,735
--------------------------------------------------------------
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 $ 168,700 $ 6,411 $(128,802) $ 175,555
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations .. $ 929 $ 454 $ - $ - $ 1,383
Accounts payable ............................. 13,800 16,890 - - 30,690
Accrued expenses ............................. 726 12,432 9 - 13,167
Accrued interest ............................. 3,520 - 115 - 3,635
--------------------------------------------------------------
Total current liabilities ................. 18,975 29,776 124 - 48,875
--------------------------------------------------------------
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 $ 168,700 $ 6,411 $(128,802) $ 175,555
===================================================================================================================
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Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 1, 1997
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------
(in thousands)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .... $ (4,406) $ 13,925 $ 91 $ - $ 9,610
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Short-term Investments ................... - - (1,533) - (1,533)
Purchase of property and equipment ................... - (23,782) - - (23,782)
Proceeds from sale of property, equipment and
assets held for sale ............................... - 2,628 - - 2,628
Investment in and advances to subsidiaries ........... (7,475) 8,043 (568) - -
Increase in long-term notes receivable ............... - (128) (1,307) - (1,435)
Proceeds from collection of long-term notes receivable - 98 1,415 - 1,513
Decrease (increase) in intangibles and other assets .. (1) (409) 38 - (372)
------------------------------------------------------------
Net cash used in investing activities .................. (7,476) (13,550) (1,955) - (22,981)
------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations and related warrants 10,580 350 - - 10,930
Repayment of long-term obligations ................... (928) (578) (8) - (1,514)
Issuance of common stock ............................. 591 - - - 591
------------------------------------------------------------
Net Cash provided by (used in) financing activities .... 10,243 (228) (8) - 10,007
------------------------------------------------------------
(Decrease) Increase in cash ............................ (1,639) 147 (1,872) - (3,364)
Cash at beginning of year .............................. 1,739 7,871 3,044 - 12,654
------------------------------------------------------------
Cash at end of year .................................... $ 100 $ 8,018 $ 1,172 $ - $ 9,290
========================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest ............................................. $ 9,635 $ 472 $ 359 $ - $ 10,466
Income taxes refunded ................................ (97) - - - (97)
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 3, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------------
(in thousands)
Revenues (including excise taxes of $36,331) ........ $ 681 $ 570,099 $ 531 $ - $ 571,311
Cost of goods sold and expenses:
Cost of goods sold ................................ - 413,548 - - 413,548
Operating and administrative expenses ............. 9,288 148,016 18 - 157,322
Interest expense .................................. 8,723 594 344 - 9,661
------------------------------------------------------------------
18,011 562,158 362 - 580,531
------------------------------------------------------------------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries .......... (17,330) 7,941 169 - (9,220)
Benefit from (provision for) income taxes ........... 6,052 (2,768) (64) - 3,220
------------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries ..................... (11,278) 5,173 105 - (6,000)
Equity in income of consolidated subsidiaries ....... 5,278 105 - (5,383) -
------------------------------------------------------------------
Net income (loss) ............................... $ (6,000) $ 5,278 $ 105 $ (5,383) $ (6,000)
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Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 3, 1996
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------
(in thousands)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .... $ (9,824) $ 19,624 $ 95 $ - $ 9,895
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments ......... - - 2,053 - 2,053
Purchase of property and equipment ................... - (20,232) - - (20,232)
Proceeds from sale of property, equipment and
assets held for sale ............................... - 14,741 - - 14,741
Investment in and advances to subsidiaries ........... 8,096 (7,831) (265) - -
Increase in long-term notes receivable ............... - - (1,579) - (1,579)
Proceeds from collection of long-term notes receivable - 69 1,637 - 1,706
Decrease (increase) in intangibles and other assets .. 183 (113) 9 - 79
------------------------------------------------------------
Net cash used by investing activities .................. 8,279 (13,366) 1,855 - (3,232)
------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and related warrants 13,500 - - - 13,500
Repayment of long-term obligations ................... (326) (1,805) - - (2,131)
Note Receivable from DM Associates ................... (10,000) - - - (10,000)
Issuance of common stock ............................. 110 - - - 110
-----------------------------------------------------------
Net cash provided by (used in) financing activities .... 3,284 (1,805) - - 1,479
------------------------------------------------------------
Increase in cash ....................................... 1,739 4,453 1,950 - 8,142
Cash at beginning of year .............................. - 3,418 1,094 - 4,512
------------------------------------------------------------
Cash at end of year .................................... $ 1,739 $ 7,871 $ 3,044 $ - $ 12,654
========================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest ............................................. $ 8,512 $ 535 $ 312 $ - $ 9,359
Income taxes paid .................................... (1,172) - - - (1,172)
Noncash investing and financing activities -
Issuance of warrants ................................. 665 - - - 665
Capital lease obligations ............................ 768 60 - - 828
========================================================================================================================
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57
Dairy Mart Convenience Stores, Inc. and Subsidiaries
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information is as follows:
- -------------------------------------------------------------------------------------------------------
Fiscal Quarter Ended
- -------------------------------------------------------------------------------------------------------
May 3, August 2, November 1, January 31,
Fiscal year ended January 31, 1998 1997 1997 1997 1998
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues ............................... $ 139,929 $ 136,164 $ 118,313 $ 106,953
Gross Profit ........................... 37,521 36,477 32,226 30,203
Net Income (loss) ...................... 17 1,122 (310) (2,539)
Basic earnings (loss) per share ........ 0.00 0.24 (0.07) (0.54)
Diluted earnings (loss) per share ...... 0.00 0.23 (0.07) (0.54)
- --------------------------------------------------------------------------------------------------------
May 4, August 3, November 2, February 1,
Fiscal year ended February 1, 1997 1996 1996 1996 1997
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues ............................... $ 141,328 $ 156,132 $ 147,344 $ 140,942
Gross profit ........................... 36,246 41,676 40,990 34,983
Net income (loss) ...................... (393) 2,234 193 (3,920)
Basic earnings (loss) per share ........ (0.09) 0.51 0.04 (0.85)
Diluted earnings (loss) per share ...... (0.09) 0.48 0.04 (0.85)
- --------------------------------------------------------------------------------------------------------
-57-
58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Dairy Mart Convenience Stores, Inc. and
subsidiaries (the Company) included in this Form 10-K and have issued our report
thereon dated April 30, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Cleveland, Ohio, ARTHUR ANDERSEN LLP
April 30, 1998.
58
59
SCHEDULE II
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNTS
Column A Column B Column C Column D Column E
- -------------------------------- ---------- ------------------------- ----------- -----------
Additions
-------------------------
Balance at Charged to Deductions: Balance at
Beginning Costs and Other and Accounts End of
Description of period Expenses Recoveries Written off Period
- -------------------------------- ---------- ------------------------- ----------- -----------
Reserve for Doubtful Accounts:
Fiscal Year Ended February 3, 1996 $1,728,242 $1,220,153 $ -- $(1,101,173) $1,847,222
Fiscal Year Ended February 1, 1997 1,847,222 1,210,771 -- (1,513,256) 1,544,737
Fiscal Year Ended January 31, 1998 1,544,737 986,907 -- (291,006) 2,240,638
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