1
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 30, 1999
[ ] 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
-----------------------
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 26, 1999, 3,222,598 shares of Class A Common Stock and 1,485,199
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 $13,937,741.
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1999 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.
PART I
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ITEM 1. BUSINESS
BUSINESS OUTLOOK
This Form 10-K contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include 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.
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 618 stores under the
"Dairy Mart" name in seven states located in the Midwest and Southeast United
States. 282 stores sell gasoline and 141 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
care aids, tobacco products, select highly consumable general merchandise,
lottery tickets, money orders and select customer focused services. 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.
STORES
The Company's stores are generally located in 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. 282 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. 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 3,800 square feet and is a
free standing structure.
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As of January 30, 1999, the Company operated and franchised retail convenience
stores in the following states:
Number of
Stores
---------
Ohio 388
Kentucky 129
Michigan 32
Pennsylvania 30
Indiana 20
Tennessee 13
North Carolina 6
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Total Stores 618
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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 30, 1999 January 31, 1998 February 1, 1997
------------------------------ ------------------------------ ------------------------------
Company Franchise Company Franchise Company Franchise
Operated Operated Total Operated Operated Total Operated Operated Total
---------- ----------- ------- --------- ---------- ------- --------- ---------- -------
At beginning of period 469 158 627 543 268 811 587 290 877
Opened or acquired 25 - 25 7 - 7 9 - 9
Closed or sold (16) (18) (34) (89) (102) (191) (55) (20) (75)
Transferred (net) (1) 1 0 8 (8) - 2 (2) -
----- ------ ------ ----- ------ ------ ------ ------ ------
At end of period 477 141 618 469 158 627 543 268 811
===== ====== ====== ===== ====== ====== ====== ====== ======
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 1999, the Company closed 21 of its
retail facilities because of their inability to meet the Company's economic and
non-economic criteria for long-term stability and growth. An additional 13
stores were sold to independent operators in fiscal year 1999.
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NEW STORES
A major component of the Company's growth strategy is to continue to build new
stores and increase gasoline sales. During fiscal year 1999, the Company opened
twenty-five new 3,800 square-foot-stores, all which offer gasoline through
modern facilities which include credit card readers in the gasoline dispensers.
The Company plans to accelerate the pace of new store development during fiscal
year 2000, with a target of up to 40 new stores by the end of fiscal year 2000.
The Company believes adequate sources of financing will continue to be
available to support new store development.
TECHNOLOGICAL UPGRADE
During fiscal year 1999, the Company entered the final 18-month phase of its
chain-wide, reengineering project that included installation of a new Unix-based
host accounting system, new point-of-sale (POS) devices, new fueling automation
systems, new laptop computers for managers, and computers for store-based
customer service managers.
RETAIL AUTOMATION IMPLEMENTATION
ACTUAL/PROJECTED COMPLETION
---------------------------------------------
PHASE/INITIATIVE FY'98 FY'99 FY'00 FY'01
- -------------------------------------------------------------------------------------------------------
Phase I: POS Rollout 100%
Phase II: Implement Host Accounting System 100%
Phase III: Implement Store-Level Computer
Systems 100%
Phase IV: Implement Centralized Automated
Pricebook 25% 75%
Phase V: Implement Evolution Initiatives
* Payroll Time & Attendance 100%
* Process Payroll from Money Order
Device 50% 50%
* Computer Assisted Ordering 30% 70%
Phases one, two and three provided a new foundation for store accounting and
management reporting. The 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 provides the
basis for the formation and implementation of improved merchandising strategies.
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Phase four, the implementation of a centralized automated pricebook, allows the
definition of market zones and the management of a retail pricing strategy from
the corporate office. The implementation of a centralized automated pricebook is
expected to improve retail margins through increased accuracy of retail pricing
and verification of agreed upon vendor costs. Additionally, the pricebook is
expected to save data entry time, reduce data entry errors, and provide greater
control over store merchandise inventory.
GASOLINE OPERATIONS
Gasoline sales accounted for approximately 34% of total revenue in fiscal year
1999, 38% for fiscal year 1998 and 42% in fiscal year 1997. As of January 30,
1999, 282 stores sold gasoline.
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.
In an effort to provide name-brand recognition, the Company entered into a long
term agreement with Chevron U.S.A. Products Company in August 1998, to sell
branded gasoline at approximately fifty eight of its locations in Kentucky and
Southern Indiana. The Company finished conversion of these stores during the
fourth quarter of fiscal year 1999. During fiscal year 2000, the Company expects
to finalize the appropriate major-oil brand affiliation for most of its gasoline
dispensing stores in Ohio and Michigan. Branding the Company's gasoline assets
has improved the overall quality of these assets and is considered important in
attracting new customers who prefer to purchase major-oil branded gasoline.
Branding also offers the Company access to the credit card base of the branding
partner, whose branded customers tend to purchase higher octane fuels that
carry a higher gross margin.
Gasoline profit margins have a significant impact on the Company's income. Such
profit margins could be adversely influenced by factors beyond the Company's
control, such as volatility in the wholesale gasoline market due to supply
interruptions. In addition, gasoline profit margins are continually influenced
by competition in each local market area.
PRODUCT SELECTION
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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 282 stores), cigarettes, health and beauty aids,
publications, lottery tickets and money orders.
The Company has installed branded food service which carries a
relatively higher gross profit margin, at 29 store locations, including 19 Taco
Bells(R), 1 Pizza Hut(R) and 8 Subways(R). The Company opened five branded
food service locations, during fiscal year 1999. The Company has entered into
an exclusive agreement with Restaurants Developers Corporation to develop Mr.
Hero quick-serve restaurants in selected stores in most of Ohio and all of
Kentucky. The Company also has an agreement to install Arabica(R) Coffee houses
in selected stores. Mr. Hero(R) sandwiches and Arabica(R) Coffee houses are
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.
The Company has signed a five year agreement with Millstone, a subsidiary of
Proctor & Gamble, to exclusively sell Millstone brand coffee blends in Dairy
Mart stores. Dairy Mart will be the only convenience store chain in its markets
selling Millstone coffee.
The Company has also entered into a five year agreement with Coca-Cola Fountain,
U.S.A., to exclusively sell Coca-Cola fountain products in the store's fountain
centers.
In March 1999, the Company entered into an agreement to provide no-fee ATM
services at all of its locations. The contract term is for one year and is
renewable for an additional seven year term. The Company believes this service
should be a significant traffic builder.
FRANCHISE OPERATIONS
The Company franchises 141 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.
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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 30, 1999, there were 56 full franchise
locations and 85 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 1999, there were 236 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 most stores to complement its marketing strategy, which is
derived, in part, from market history and research. In-store, newspaper,
direct-mail advertising, special promotions, outdoor billboard and radio and
television advertising usually feature certain specially priced items designed
to attract today's time-constrained consumers in search of convenience related
items, and typically include national brand items for which advertising costs
are often supplemented by the national brand vendor partners. Sales promotions
are generally established and maintained on a bi-weekly or monthly basis.
COMPETITION
The convenience store and retail gasoline industries are highly competitive. The
number and type of competitors vary by location. The Company presently competes
with other convenience stores, large integrated gasoline service station
operators, supermarket chains, neighborhood grocery stores, independent gasoline
service stations, fast food operations and other similar retail outlets, some of
which are well recognized national or regional retail chains. Some of the
Company's competitors have greater financial resources than the Company. Key
competitive factors include, among others, location, ease of access, store
management, product selection, pricing, hours of operation, store safety,
cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the
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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 30, 1999, exclusive of franchisees and franchisees' employees, the
Company employed, on a full-time or part-time basis, approximately 3,600
employees. The Company has not experienced any work stoppages. There are no
collective bargaining agreements between the Company and any of its employees.
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. The Company has retained an outside
third party to perform testing and remediation services.
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 estimate of all costs to be incurred for assessment and remediation
for known releases. These accruals are adjusted if and when new information
becomes known. Additionally, the Company records receivables based upon the
estimated reimbursement 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 was obligated to either upgrade or replace most existing USTs it owned
or operated or close them by December 22, 1998 to meet certain corrosion,
overfill- and spill-protection and leak-detection requirements. The Company met
this obligation prior to December 22, 1998 for all operating locations. Gasoline
operations at 14 locations were closed on or prior to December 22, 1998. The
Company is in the process of negotiating for the sale of these locations. There
can be no assurance that the Company will be able to sell these locations.
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ITEM 2. PROPERTIES
Of the 618 stores in operation as of January 30, 1999, 61 store locations were
owned by the Company and 557 were leased. In addition, the Company owns 21
locations and is the primary lessee for 36 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 building and
manufacturing facility located in Cuyahoga Falls, Ohio (see Note 1 to the
Consolidated Financial Statements). The Company relocated its corporate
headquarters to a 47,000 square foot facility in Hudson, Ohio which is leased
from a third party. In addition, 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. In October 1998, the Company entered into a long term lease for the
former corporate headquarters. Effective April 1999, the Company entered into
an agreement to sell the former corporate headquarters.
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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 year 1996, in two
shareholder derivative actions. The two cases have been consolidated as Dairy
Mart Convenience Stores, Inc. Derivative Litigation, and the case is currently
pending in the Delaware Court of Chancery of New Castle County as Consolidated
C.A. No. 14713. 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, that
certain interests in the general partner of DM Associates should be vested in
the Company, and that the voting rights associated with the Class B Common Stock
held by DM Associates should be neutralized. On August 9, 1996, the Court
granted in part and denied in part defendants' motions to dismiss. The Court
held the 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 now closed and both sides have moved for
summary judgment and are awaiting the Court's decision. 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 complaint alleges lost profits in the
amount of $3.7 million. Both sides have moved for summary judgment which was
subsequently denied on March 12, 1999 for both parties. 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 has recognized no
provision for any possible loss in the accompanying financial statements.
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
None
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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. The Company's Class A Common Stock and
Class B Common Stock trade on the American Stock Exchange under the symbols DMCa
and DMCb, 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 for the last two fiscal years.
Class A Class B
Common Common
Stock Stock
--------- --------
High Low High Low
------------------------------------------------------------------------
Fiscal Year Ended January 30, 1999:
------------------------------------------------------------------------
First Quarter 4 5/8 3 9/16 4 3/4 3 7/8
Second Quarter 4 1/2 3 9/16 4 3/8 3 5/8
Third Quarter 4 2 7/8 4 3/8 3
Fourth Quarter 4 3/8 3 1/4 4 1/4 2 3/4
------------------------------------------------------------------------
Fiscal Year Ended January 31, 1998:
------------------------------------------------------------------------
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
------------------------------------------------------------------------
There were approximately 948 holders of the Company's Class A and Class B Common
Stock as of April 26, 1999. 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 30, 1999
(in thousands, except per share amounts)
1999 1998 1997 1996 1995
---------- --------- ---------- ----------- -----------
OPERATING RESULTS:
Revenues $477,047 $501,359 $585,746 $ 571,311 $ 596,782
----------------------------------------------------------
Interest Expense 10,806 10,612 10,877 9,661 10,435
----------------------------------------------------------
Income (Loss) Before Income Taxes,
Extraordinary Item and Cumulative Effect
of Account Change(a) 175 (1,999) (2,529) (9,492) (17,192)
----------------------------------------------------------
Net Income (Loss)(a) 25 (1,468) (1,836) (6,162) (11,075)
----------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Before Extraordinary Item and Cumulative
Effect of Accounting Change(a) .01 (.32) (.41) (1.15) (1.93)
----------------------------------------------------------
Net Earnings (Loss) Per Share-Basic
and Diluted(a) .01 (.32) (.41) (1.15) (2.00)
----------------------------------------------------------
BALANCE SHEET DATA:
Net Property and Equipment $ 98,829 $ 82,589 $ 89,448 $ 80,387 $ 70,578
----------------------------------------------------------
Total assets(a) 181,331 167,647 177,805 167,188 174,640
----------------------------------------------------------
Long-term obligations (b) 108,507 96,448 110,428 100,881 90,268
----------------------------------------------------------
Stockholders' Equity(a) 9,257 8,988 10,214 11,459 25,230
----------------------------------------------------------
OTHER DATA:
Earnings Before Interest Expense, Income
Taxes, Depreciation and Amortization
(EBITDA) (a)(c) $ 21,233 $ 19,455 $ 20,222 $12,559 $ 5,720
----------------------------------------------------------
(a) As restated from previously reported for the change from the LIFO inventory
valuation method.
(b) Long-term obligations include the current portion of long-term obligations.
(c) 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 30, 1999, JANUARY 31, 1998
AND FEBRUARY 1, 1997
(in thousands, except number of locations, gross
profits per gallon and per share data)
1999 1998 1997
------------ ------------ -------------
FINANCIAL DATA:
Revenues:
Merchandise Sales $313,076 $306,062 $335,661
Gasoline Sales 159,815 191,956 245,718
Other 4,156 3,341 4,367
------------ ------------ -------------
Total Revenues $477,047 $501,359 $585,746
------------ ------------ -------------
Net income (loss) (1) $ 25 $ (1,468) $ (1,836)
------------ ------------ -------------
STORE DATA:
Company Operated:
Gross profit(1) $103,229 $ 99,594 $106,283
Average sales per store (2) $651 $ 590 $ 562
Average gross profit per store (2) $219 $ 200 $ 188
Number of stores at year end 477 469 543
Franchise Operated:
Franchise fee $ 10,255 $ 12,481 $ 18,264
Average sales per store (2) $ 612 $ 572 $ 577
Average franchise fees per store (2) $ 68 $ 61 $ 65
Number of stores at year end 141 158 268
Total Stores:
Gross profit(1) $113,484 112,075 124,547
Average sales per store (2) $ 641 $ 584 $ 567
Average Combined Gross Profit
and Franchise Fees per $ 182 $ 160 $ 148
Store (2)
Number of stores at year end 618 627 811
GASOLINE DATA:
Gallons Sold 169,916 171,269 209,478
Gross profit $ 20,085 $ 21,418 $ 25,082
Average gallons sold per 590 535 571
location
Gross profit per gallon $ 0.1182 $ 0.1251 $ 0.1138
Number of gasoline locations
at year end 282 293 360
OTHER DATA:
Weighted average number of 4,679 4,605 4,441
shares
Book value per share (3)(1) $ 1.32 $ 1.31 $ 1.63
(1) As restated from previously reported for the change from the LIFO inventory
valuation method.
(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 1999, 1998 and 1997, respectively.
(3) The calculation utilizes total outstanding shares including the dilutive
effect of stock options, stock grants and stock warrants as of January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations 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 1999 compared to fiscal year
1998 and fiscal year 1998 compared to fiscal year 1997 is based on unaudited Pro
Forma Consolidated Statements of Operations for fiscal years 1998 and 1997. The
unaudited Pro Forma Consolidated Statements of Operations as presented below
reflect the exclusion, for fiscal years 1998 and 1997, 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 asset sales had been received as of the
beginning of fiscal year 1997, and also reflect the elimination of the estimated
income tax effect of the associated excluded results of operations for the
assets sold. The unaudited Pro Forma Consolidated Statements of Operations also
reflect the change from the LIFO inventory valuation method retroactively
applied.
FISCAL YEAR 1999 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1998 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
For the Years Ended January 30, 1999, January 31, 1998 and February 1, 1997
Pro Forma Pro forma
1999 1998 1997
------ ---------- ---------
(Unaudited) (Unaudited)
Revenues $ 477.0 $459.3 $471.7
Cost of goods sold and expenses:
Cost of goods sold 339.3 333.0 346.1
Operating & administrative expenses 126.7 121.9 119.4
Interest expense 10.8 10.3 10.5
------- ------ -------
476.8 465.2 476.0
Income (loss) before income taxes 0.2 (5.9) (4.3)
(Provision) benefit from income taxes (0.2) 1.6 1.2
------- ------ -------
Net income (loss) $ 0.0 $ (4.3) $ (3.1)
Income (loss) per share $ 0.01 $(0.93) $(0.70)
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REVENUES
Revenues for fiscal year 1999 increased $17.7 million compared to fiscal year
1998. A summary of revenues by functional area is shown below:
Pro
Forma
1999 1998
------ ------
(in millions)
Convenience Stores $313.0 $285.7
Gasoline 159.8 170.5
Other 4.2 3.1
====== ======
Total $477.0 $459.3
====== ======
Convenience store revenues increased $27.3 million, or 9.6%, in fiscal year 1999
compared to fiscal year 1998 as a result of a 9.2% increase in comparable
Company operated store sales and the opening of twenty-five new stores during
fiscal year 1999, partially offset by the closure and/or sale of thirty-four
underperforming stores during the last twelve months. 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 $10.7 million in fiscal year 1999 compared to fiscal
year 1998 as a result of a decrease in the average selling price of gasoline of
16.0 cents per gallon primarily due to a general market decline in retail
gasoline prices during fiscal year 1999. This decline in gasoline revenues was
partially offset by an increase in gallons sold of 14.4 million primarily as a
result of opening of new stores.
GROSS PROFITS
Gross profits increased $11.4 million from fiscal year 1998 to fiscal year 1999.
A summary of gross profits by functional area is shown below:
Pro
Forma
1999 1998
------ ------
(in millions)
Convenience Stores $113.4 $103.7
Gasoline 20.1 19.5
Other 4.2 3.1
====== ======
Total $137.7 $126.3
====== ======
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Convenience store gross profit increased by $9.7 million in fiscal year 1999
compared to fiscal year 1998. 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 1999 compared to fiscal year 1998.
Gasoline gross profits increased $0.6 million in fiscal year 1999 compared to
fiscal year 1998. This increase is primarily attributable to the increase in
gallons sold in fiscal year 1999 compared to fiscal year 1998, offset partially
by a decrease in gross profit per gallon of $.007.
Other revenues and gross profits increased $1.1 million in fiscal year 1999
compared to fiscal year 1998. In fiscal year 1999, the Company recognized a $3.0
million one-time pre-tax fee earned through the termination of a long-term ATM
(automatic teller machine) agreement. The Company's former partner in the
agreement agreed to the termination fee in lieu of its ongoing payment
obligations under the agreement which were approximately $130,000 per month.
This fee was partially offset by a decrease in interest income. In fiscal year
1998, proceeds received from the sale of certain assets were invested resulting
in higher interest income.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $4.8 million in fiscal year 1999
compared to fiscal year 1998. A summary of operating and administrative expenses
is shown below:
Pro
Forma
1999 1998
--------- ---------
(in millions)
Operating Expenses $ 99.8 $ 94.7
General & Administrative 26.9 27.2
Expenses
========= =========
Total $126.7 $121.9
========= =========
The increase was primarily due to higher store wages, depreciation expense,
repair and maintenance expenses, and certain expenses related to the relocation
of the Company's information processing center from Connecticut to Ohio. These
increases were partially offset by lower environmental remediation expenses.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense in fiscal year 1999 increased $0.5 million compared to fiscal
year 1998 as a result of increased borrowings under the Company's revolving line
of credit.
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administrative expenses in fiscal years 1999 and 1998.
The effective tax rate for the Company was a provision of 85.7% and a benefit of
26.6% for fiscal years 1999 and 1998, respectively. The higher effective tax
rate in
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the current year is a result of nondeductible expenses related to the
amortization of acquired assets. (See "Notes to Consolidated Financial
Statements", Note 9).
PRO FORMA FISCAL YEAR 1998 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1997
RESULTS
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
decreases in the average selling price and in gasoline gallons sold were 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 $0.7 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 $103.7 $101.9
Gasoline 19.5 20.1
Other 3.1 3.6
====== ======
Total $126.3 $125.6
====== ======
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Convenience store gross profit increased by $1.8 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.
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 primarily as a result of higher store wages,
depreciation and repair and maintenance expenses.
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 26.6% and 27.4% for
fiscal years 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since a majority of its
revenues are received in cash. The amount of cash generated from operations
significantly exceeded the current debt service requirements of the Company's
long-term obligations.
The Company is pursuing expansion initiatives in its retail operations (see
"Capital Expenditures"). The capital expenditures of the Company are generally
funded by the excess operating cash flow available after debt service, the
proceeds from the sale of property, equipment and assets held for sale and other
forms of long-term asset financing and/or leasing. Additionally, the Company has
a $30.0 million senior
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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, 2003 (see Note 7 to the
Consolidated Financial Statements). As of January 30,1999, the Company had $10.2
million in outstanding revolving credit loans and had $7.0 million in
outstanding letters of credit under the facility.
In May 1998, the Company received a $53.7 million forward commitment that
provides real estate sale/leaseback or mortgage financing on a long-term basis
to fund the real estate acquisitions associated with its new store development
program. At the end of fiscal year 1999, the Company had $25 million available
under this agreement. The Company accounts for these real estate sale/leaseback
transactions as operating leases. In January 1999, the Company entered into a
$3.8 million sale/leaseback arrangement for equipment financing which was fully
utilized at the end of the year. The term of this lease is for 48 months with
principal and interest due on a monthly basis. The Company accounted for this
transaction as a capital lease.
The Company has a real estate mortgage loan on its former corporate headquarters
which is due and payable in June 1999. The Company has entered into an agreement
to sell this property and has elected not to refinance the mortgage pending
completion of the sale prior to June, 1999. Proceeds from the sale will be used,
in part, to retire this mortgage.
Management believes that the cash flow from operations, the proceeds from the
sale of certain assets held for sale and other forms of asset financing and/or
leasing, supplemented by the availability under the revolving credit facility,
will provide the Company with adequate liquidity and the capital necessary to
achieve its expansion initiatives.
CASH PROVIDED BY OPERATING ACTIVITIES
During fiscal year 1999, net cash generated by operations increased $3.0 million
compared to fiscal year 1998. The increase in fiscal year 1999 was primarily a
result of the Company's improved profitability and improved working capital
position, offset partially by a net decrease in other assets and liabilities.
The improvement in working capital was primarily a result of an increase in
trade and excise tax payables, partially offset by a related increase in store
merchandise inventory required to support increased store sales, as described
above. The net decrease in other assets and liabilities is primarily a result of
a decrease in the Company's environmental remediation liabilities resulting from
increased remediation expenditures during fiscal year 1999. (See Note 14).
CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities was $19.7 million in fiscal year 1999
compared to net cash provided by investing activities of $0.5 million in fiscal
year 1998. The increase in cash used by investing activities during fiscal year
1999 compared to fiscal year 1998 was primarily a result of increased capital
expenditures in fiscal year 1999 required to support the Company's growth
initiatives. The Company opened 25 new stores in fiscal year
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1999 compared to 7 new stores in fiscal year 1998. See "Capital Expenditure"
section below for further discussion of the Company's capital spending plan.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $8.4 in fiscal year 1999 compared
to a net use of cash of $13.9 million in fiscal year 1998. In fiscal year 1999
the Company borrowed $10.2 million under its revolving credit facility compared
to a net repayment of $10.3 million in fiscal year 1998.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $25 million, net of
sale/leaseback transactions, for capital expenditures in fiscal year 2000 by
purchasing store and gasoline equipment for new stores, remodeling a certain
number of existing store and gasoline locations and implementing and/or
upgrading office and store technology.
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 14 to the
Consolidated Financial Statements.
YEAR 2000
The Year 2000 issue ("Y2K") is the result of computer software programs being
coded to use two digits rather than four to define the applicable year. Some of
the Company's older computer programs that have date-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions in
operations.
The Company's process toward resolution of its Y2K issue has been ongoing for
the past three years and the project includes a phased approach: (1) awareness;
(2) assessment and replacement; (3) contingency planning; (4) renovation; (5)
testing and certification; and, (6) production release. Phases one and two are
complete. Phases three through six are in various stages of completion, with all
remaining phases expected to be complete by September, 1999.
As a part of the Company's broader initiatives with respect to retail store
automation , the Company purchased and implemented a Y2K compliant,
commercial-off-the-shelf retail accounting system to replace the existing legacy
accounting system and related sub-systems. In conjunction with the
implementation of this system, the Company migrated its remaining financial,
human resources and other systems from an existing mainframe environment to a
new Unix-based client/server architecture
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certified to be Y2K compliant. The Company is in various stages of testing,
renovating and implementing system changes. The Company expects to complete
these internal Y2K initiatives by September, 1999.
The Company is also reviewing the efforts being undertaken by its third party
suppliers and vendors to become Y2K compliant. The Company sent questionnaires
during the fourth quarter of fiscal 1999 to all of its significant vendors and
suppliers to ascertain their state of Y2K readiness and is evaluating their
responses. The Company expects to complete assessment and testing of its
supplier and vendor Y2K compliance by June, 1999. Contingency planning efforts
will escalate following completion of third party assessments and testing and
such contingency planning efforts are expected to be complete by September,
1999.
Because the Company's scheduled replacements of mainframe systems and retail
store automation and accounting systems are considered by management to be a
planned capital expenditure and incidental to the Y2K issue, the Company does
not consider these expenditures to be specifically related to Y2K compliance and
upgrades. The Company has used internal resources to assess and address internal
and third party Y2K readiness. These internal costs are included as general and
administrative expenses in the Company's financial statements and are not
tracked separately for purposes of determining costs of Y2K readiness.
The Company's estimates regarding the expected completion dates involved in the
Company's Y2K project are based on various assumptions regarding future events,
including the availability of resources, the success of third parties in
addressing their own Y2K issues, and other factors. There are significant risks
to the Company if actual completion dates or costs differ materially from
expected completion dates and costs. These risks include the need to process
transactions manually at significant costs to the Company, significant delays in
obtaining key operational data for analysis, the inability to pay vendors,
settle receivables or procure merchandise for resale on a timely basis and to
perform other critical business functions which could have a material adverse
effect on the Company's financial position and the results of its operations.
Further, the Company cannot reasonably estimate the impact on the Company of key
third parties not successfully addressing their own Year 2000 issues, although
the Company believes that it will generally have alternative sources for
comparable products and does not expect to experience any material business
disruptions. Due to the uncertainty of these factors, the Company is unable to
quantify a worst-case scenario at this time.
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ITEM 7A. QUANTITATIVE AND QUALITIVE MARKET RISK
The Company does not have any instruments that it believes would be materially
affected by any future interest rate changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
notes thereto, appear on pages 34 through 59 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 1999 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 January 31, 1998
and is incorporated herein by reference.
(3.2) A Certificate of Designation was filed as Exhibit 1 of
the Company's Form 8-K for the January 19, 1996 event
and is incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed
as Exhibit 3.2 to the Company's Form 10-Q for the
fiscal quarter ended 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 November 27,
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.
(10.4) 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.
(10.6) 1990 Stock Option Plan is filed herewith.
(10.7) Amended and Restated 1995 Stock Option and Incentive
Award Plan was filed as Exhibit A to the Company's
1998 Annual Proxy Statement filed on Schedule 14A on
May 29, 1998 and is incorporated herein by reference.
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(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.
(10.12) 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.
(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.
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29
(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.
(10.20) DM Associates Limited Partnership Agreement, dated
March 12, 1992, was filed as Exhibit E of the
Company's Schedule 13D dated March 12, 1992, filed by
DM Associates Limited Partnership, DM Management
Associates and Frank Colaccino and is incorporated
herein by reference.
(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.
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30
(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 Associate 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.
(10.26) Dairy Mart Convenience Stores, Inc. Supplemental
Executive Retirement Plan is filed herewith.
(10.27) Directors Deferred Compensation Plan is filed
herewith.
(18.1) Preferability letter of Arthur Andersen LLP regarding
change in accounting policy relating to the change in
inventory valuation methods, and filed herewith.
(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.
(23) Consent of Arthur Andersen LLP to the incorporation of
their reports included in this Form 10-K, for the
fiscal year ended January 30, 1999, 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
NONE.
No Financial Statements were filed with any of the Current Reports.
(c) See (3) above.
(d) See (2) above.
-30-
31
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: 4/30/99
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
-31-
32
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: 4/30/99 /s/ Robert B. Stein, Jr.
------------- -------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: 4/30/99 /s/ Gregory G. Landry
------------- -------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: 4/30/99 /s/ Frank W. Barrett
------------- -------------------------------------
Frank W. Barrett
Director
Dated: 4/30/99 /s/ J. Kermit Birchfield, Jr.
------------- -------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: 4/30/99 /s/ John W. Everets, Jr.
------------- -------------------------------------
John W. Everets, Jr.
Director
Dated: 4/30/99 /s/ Thomas W. Janes
------------- -------------------------------------
Thomas W. Janes
Director
Dated: 4/30/99 /s/ Albert T. Adams
------------- -------------------------------------
Albert T. Adams
Director
-32-
33
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page
------------------
Report of Independent Public Accountants on
Consolidated Financial Statements 34
Consolidated Statements of Operations
and Stockholders' Equity for the
Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 35
Consolidated Balance Sheets as of
January 30, 1999 and January 31, 1998 36
Consolidated Statements of Cash Flows for
the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 37
Notes to Consolidated Financial Statements
for the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 38-57
Report of Independent Public Accountants
on Schedule II 58
Schedule II 59
-33-
34
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
30, 1999 and January 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 30, 1999. 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 30, 1999, and January 31, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 1999, in conformity with generally accepted
accounting principles.
As explained in Note 3 to the consolidated financial statements, the Company has
given retroactive effect to a change in method of inventory valuation from the
LIFO to the FIFO method.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
April 23, 1999.
-34-
35
CONSOLIDATED STATEMENTS OF OPERATIONS DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
===========================================================================================================
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
---------------------------------------------------------------------------------
(in thousands, except per share amounts)
1999 1998 1997
--------- --------- ---------
Revenues (including excise taxes of $31,265, $29,641
and $36,427) $477,047 $501,359 $585,746
Cost of goods sold and expenses:
Cost of goods sold 339,308 364,525 431,767
Operating and administrative expenses 126,758 128,221 145,631
Interest expense
10,806 10,612 10,877
---------- ---------- ---------
476,872 503,358 588,275
---------- ---------- ---------
Income (loss) before income taxes 175 (1,999) (2,529)
(Provision) Benefit from income taxes (150) 531 693
---------- ---------- ---------
Net Income (loss) $ 25 $ (1,468) $ (1,836)
Earnings (loss) per share $ .01 $ (0.32) $ (0.41)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===========================================================================================================
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
---------------------------------------------------------------------------
(in thousands)
Common Stock
---------------------------
Class Class Retained
A B Paid-in Earnings
Shares Shares Amount Capital (Deficit)
-------- -------- -------- -------- --------
Balance - February 3, 1996 as
previously stated 3,326 2,959 $ 62 $ 29,972 $ (5,821)
Adjustment for the cumulative effect on
prior years of applying retroactively
the change in the method of accounting
for inventories (See Note 3) -- -- -- -- 2,251
-------- -------- -------- -------- --------
Balance - February 3, 1996 as restated 3,326 2,959 62 29,972 (3,570)
Issuance of common stock 184 -- 2 589 --
Exchange of Class B Shares for
Class A Shares 34 (34) -- -- --
Net loss -- -- -- -- (1,836)
-------- -------- -------- -------- --------
Balance - February 1, 1997 3,544 2,925 64 30,561 (5,406)
Issuance of common stock 78 -- 1 241 --
Exchange of Class B Shares for
Class A Shares 1 (1) -- -- --
Note Receivable from DM Associates -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Net loss -- -- -- -- (1,468)
-------- -------- -------- -------- --------
BALANCE JANUARY 31, 1998 3,623 2,924 65 30,802 (6,874)
Issuance of Common Stock 78 -- 1 243 --
Exchange of Class B Shares For
Class A Shares 43 (43) -- -- --
Net Income -- -- -- -- 25
-------- -------- -------- -------- --------
Balance January 30, 1999 3,744 2,881 $ 66 $ 31,045 $ (6,849)
=====================================================================================================================
Note
Treasury Stock Receivable
--------------------- from DM
Shares Amount Associates
-------- -------- --------
Balance - February 3, 1996 as
previously stated 698 $ (5,005) $(10,000)
Adjustment for the cumulative effect on
prior years of applying retroactively
the change in the method of accounting
for inventories (See Note 3) -- -- --
-------- -------- --------
Balance - February 3, 1996 as restated 698 (5,005) (10,000)
Issuance of common stock -- -- --
Exchange of Class B Shares for
Class A Shares -- -- --
Net loss -- -- --
-------- -------- --------
Balance - February 1, 1997 698 (5,005) (10,000)
Issuance of common stock -- -- --
Exchange of Class B Shares for
Class A Shares -- -- --
Note Receivable from DM Associates -- -- 10,000
Purchase of treasury stock 1,220 (10,000) --
Net loss -- -- --
-------- -------- --------
BALANCE JANUARY 31, 1998 1,918 (15,005) --
Issuance of Common Stock -- -- --
Exchange of Class B Shares For
Class A Shares -- -- --
Net Incomes -- -- --
-------- -------- ------
Balance January 30, 1999 1,918 $(15,005) $ --
======================================================================================
The accompanying notes are an integral part of these financial statements.
-35-
36
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 30, 1999 AND JANUARY 31, 1998
-------------------------------------
(dollars in thousands, except per share amounts)
1999 1998
--------- ---------
ASSETS
Current Assets:
Cash $ 3,367 $ 3,806
Short-term investments 2,724 3,629
Accounts and notes receivable 15,541 14,970
Inventory 24,293 21,088
Prepaid expenses and other current assets 2,324 2,231
Deferred income taxes 1,520 1,048
--------- ---------
Total current assets 49,769 46,772
--------- ---------
Assets Held For Sale 6,327 10,715
Property and Equipment, net 98,829 82,589
Intangible Assets, net 15,452 16,017
Other Assets, net 10,954 11,554
--------- ---------
Total Assets $ 181,331 $ 167,647
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations $ 4,056 $ 2,056
Accounts payable 35,685 31,297
Accrued expenses 15,378 18,177
Accrued interest 3,713 3,567
--------- ---------
Total current liabilities 58,832 55,097
--------- ---------
Long-Term Obligations, less current portion above 104,451 94,392
Other Liabilities 8,791 9,170
Commitments and Contingencies (Notes 7, 8, 14)
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 3,744,223 and
3,622,663 issued 37 36
Class B Common Stock, par value $.01,
10,000,000 shares authorized, 2,881,156 and
2,924,016 issued 29 29
Paid-in capital 31,045 30,802
Retained deficit (6,849) (6,874)
Treasury stock, at cost (15,005) (15,005)
--------- ---------
Total stockholders' equity 9,257 8,988
--------- ---------
Total liabilities and stockholders'
equity $ 181,331 $ 167,647
===============================================================================
The accompanying notes are an integral part of these balance sheets.
-36-
37
CONSOLIDATED STATEMENTS OF CASH FLOWS DAIRY MART CONVENIENCE STORES, INC.
AND SUBSIDIARIES
===============================================================================
For the Years ended January 30, 1999, January 31, 1998 and February 1, 1997
---------------------------------------------------------------------------
(in thousands)
1999 1998 1997
------------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 25 $ (1,468) $ (1,836)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 10,252 10,842 11,874
Change in deferred income taxes 127 (1,289) (814)
Loss (gain) on dispositions of
properties, net 710 (1,856) 958
Net changes in assets and liabilities:
Accounts and notes receivable 1,138 (4,562) (3,836)
Inventory (3,205) (22) 643
Accounts Payable 4,388 607 (113)
Accrued interest 146 (68) 280
Other assets and liabilities (2,690) 5,692 2,454
-------- -------- --------
Net cash provided by 10,891 7,876 9,610
operating activities
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (2,096) (1,533)
Proceeds from sale of short-term
investments 905 -- --
Purchase of property & equipment (52,398) (31,604) (23,782)
Proceeds from sale of property,
equipment, & assets held for sale 30,760 32,552 2,628
Increase in long-term notes receivable (1,176) (653) (1,435)
Proceeds from collection of long-term
notes receivable 1,544 998 1,513
(Increase) decrease in intangibles and
other assets 642 1,317 (372)
-------- -------- --------
Net cash (used for) provided by investing
activities (19,723) 514 (22,981)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and
related warrants -- -- 10,930
Repayment of long-term obligations (2,051) (3,836) (1,514)
Borrowings on revolving loan, net 10,200 (10,280) --
Issuance of common stock 244 242 591
-------- -------- --------
Net cash provided by (used for) by
financing activities 8,393 (13,874) 10,007
-------- -------- --------
Decrease in cash (439) (5,484) (3,364)
Cash at beginning of year 3,806 9,290 12,654
-------- -------- --------
Cash at end of year $ 3,367 $ 3,806 $ 9,290
===============================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest $ 10,661 $ 10,544 $ 10,466
Income taxes refunded (381) (1,188) (97)
Non-cash investing and financing activities-
Note receivable from DM Associates -- 10,000 --
Purchase of treasury stock -- (10,000) --
Capital lease obligations 3,756 -- --
===============================================================================
The accompanying notes are an integral part of these financial statements.
-37-
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DAIRY MART CONVENIENCE STORES,
INC. AND SUBSIDIARIES
JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
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 United States.
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 30, 1999,
January 31, 1998 and February 1, 1997.
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 30, 1999 and January 31, 1998, 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 30, 1999 and January 31,
1998, the fair market values of the U.S. Treasury Bills approximated cost.
INVENTORY - The Company's inventory is stated at the lower of first-in,
first-out (FIFO) cost or market (see Note 3).
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 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 year 1997, the Company changed its estimate of the useful lives
of new store and gasoline equipment placed in service in fiscal year 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).
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 30, 1999.
-38-
39
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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
30, 1999, January 31, 1998 and February 1, 1997, the Company had established
reserves for these risks of $2,878,000, $4,409,000 and $5,350,000, 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 30, 1999,
January 31, 1998 and February 1, 1997, the risk-free rate of returns were 4.8%,
5.55% and 6.39%, 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).
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 in exchange for the Company providing merchandising,
advertising, store audit, 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 $10,255,000, $12,481,000
and $18,264,000 for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997, 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.
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. 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 year 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 15). The weighted average number of
shares used in the calculation of basic earnings (loss) per share was 4,679,186,
4,605,054 and 4,440,997 for the fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997, respectively. Dilutive earnings per share has not
been presented as the Company's basic and dilutive earnings per share are equal
for fiscal years 1999, 1998 and 1997.
NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS Effective February 1, 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which requires disclosure of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income is defined as changes in stockholders' equity from
non-owner sources. The adoption of this Statement had no impact on the Company
for any of the fiscal years presented.
RECLASSIFICATIONS - Certain amounts in the prior periods' Consolidated
Financial Statements have been reclassified to conform to the presentation used
for the current period.
- -------------------------------------------------------------------------------
-39-
40
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of January 30, 1999 and
January 31, 1998 is as follows:
1999 1998
----------- ----------
(in thousands)
Franchise accounts receivable $4,293 $ 8,901
Franchise notes receivable 2,894 2,654
Marketing allowances 4,665 2,390
Other receivable 8,810 8,391
----------- ----------
20,662 22,336
Less allowance for doubtful accounts and
notes receivable 2,074 2,241
----------- ----------
Net accounts and notes receivable 18,588 20,095
Less noncurrent notes receivable (included 3,047 5,125
in other assets)
----------- ----------
Current accounts and notes receivable $15,541 $14,970
===============================================================================
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 30, 1999 and January 31, 1998, the
fair values of the noncurrent notes receivable approximate their carrying
values.
===============================================================================
3. CHANGE IN METHOD OF INVENTORY VALUATION:
The Company has changed its method for valuing inventory and cost of
goods sold from LIFO to FIFO method in fiscal year 1999. Prior to fiscal
year 1999, approximately 57% of the stores had used the LIFO method of
valuing inventory. The change in the inventory valuation method for these
stores was made in order to more appropriately cost inventory in light of
continuing price volatility in the prices of its inventory, particularly
as it relates to price volatility in the category of cigarettes, thus
eliminating the confusion to financial statement users and to provide a
more uniform system for valuing all inventories company-wide. The
financial statements of prior years have been retroactively restated to
apply the new method. The effect of the accounting change, net of the tax
effect of 40.6%, on net loss, and earnings per share, as previously
reported for fiscal years, 1998, 1997 and prior years is:
INCREASE
------------------------------------
EFFECT ON: 1998 1997 PRIOR
-----------------------------------
Net Income $ 242 $ 50 $ 2,251
Earnings Per Share
Basic & Diluted $ .05 $.01
-40-
41
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
===============================================================================
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of January 30, 1999 and January 31,
1998 is as follows:
1999 1998
------------ -------------
(in thousands)
Land and improvements $ 5,779 $ 5,697
Building and leasehold
improvements 32,156 29,303
Equipment 108,517 95,365
Assets under capital leases 6,259 2,815
--------- ---------
152,711 133,180
Less accumulated depreciation
and amortization (53,882) (50,591)
--------- ---------
Property and equipment, net $ 98,829 $ 82,589
================================================================================
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $2,329,000 and $
2,106,000 as of January 30, 1999 and January 31, 1998, respectively.
================================================================================
5. INTANGIBLE ASSETS:
A summary of intangibles as of January 30, 1999 and January 31, 1998 is as
follows:
1999 1998
---------- ------------
(in thousands)
Goodwill $ 14,091 $ 13,890
Franchise and operating rights 10,144 10,144
--------- ---------
24,235 24,034
Less accumulated amortization (8,783) (8,017)
--------- ---------
Intangible assets, net $ 15,452 $ 16,017
================================================================================
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.
Management has determined that there has been no material impairment to
goodwill or franchise and operating rights as of January 30, 1999.
================================================================================
-41-
42
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
6. ACCRUED EXPENSES:
A summary of accrued expenses as of January 30, 1999 and January 31, 1998
is as follows:
1999 1998
---------- ----------
(in thousands)
Accrued salaries and wages $ 4,286 $ 3,984
Accrued environmental assessment and
remediation 2,797 5,341
Other accrued expenses 8,295 8,852
------- -------
Total accrued expenses $15,378 $18,177
================================================================================
7. LONG-TERM OBLIGATIONS:
The Company had the following long-term obligations as of January 30, 1999
and January 31, 1998
Jan. 31,
January 30, 1999 1998
--------------------------------------
Interest Maturity
Rate (Fiscal Yr.) 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 - 12,337 12,337 12,183
Senior revolving credit facility Various 2003 - 10,200 10,200 -
Real estate mortgage notes payable 6.25%-12.0% 2000-2012 2,652 341 2,993 3,163
Small Business Administration debentures 6.9%-9.6% 2001-2006 - 3,130 3,130 4,230
Equipment financing Various 2000-2009 1,404 3,443 4,847 1,872
--------------------------------------
$4,056 $104,451 $108,507 $ 96,448
- -------------------------------------------------------------------------------------------------------------
===============================================================================
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 15). 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 four 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.
-42-
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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
the principal amount reduced annually through March 15, 2002, at which time they
become redeemable at 100% of the 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, 2003; however, the Company may extend
such date for up to two additional one-year periods with the consent of the
lenders. Certain provisions of the revolving credit facility were amended
effective November 27, 1998. Interest on revolving credit loans is computed at
an applicable margin over the agent bank's base rate or the LIBOR rate, at the
option of the Company. The applicable margin, if any, is based upon the ratio
of consolidated indebtedness to consolidated EBITDA, as defined below. The
credit agreement also provides for a commitment fee of 1/2 % on any unused
portion of the revolving credit facility. Among other restrictions, the credit
agreement contains financial covenants relating to specified levels of:
indebtedness (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. At January 30, 1999, the Company was in
compliance with all covenants. 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.
In January 1999, the Company entered into a capital lease agreement of
approximately $3.8 million for the lease of certain equipment. The lease term
is 48 months with monthly installments of principal and interest with interest
at 10.05%. The Company intends to fund payments out of working capital.
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 30, 1999, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of January 30, 1999 and January 31, 1998, 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 30, 1999 and January 31, 1998, the fair value of the Series A and Series
B Notes, net of original issue discount, approximated the carrying amount. The
fair values of the Notes were based on quoted market prices as of January 30,
1999 and January 31, 1998, respectively. The revolving credit facility is a
variable rate loan, and thus, the fair value approximates the carrying amount as
of January 30, 1999.
As of January 30, 1999, maturities on long-term obligations for the next five
years, are as follows:
- -------------------------------------------------------------------------------
Fiscal Year
-------------
(in thousands)
2000 $ 4,056
2001 1,189
2002 3,589
2003 11,313
2004 219
- -------------------------------------------------------------------------------
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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 30, 1999 is as follows:
Operating Net
Fiscal Year Ending Leases Operating Operating
Payable Subleases Leases
-------------------------------------- -------------------------
(in thousands)
2000 $13,177 $ 994 $12,183
2001 10,761 804 9,957
2002 8,600 641 7,959
2003 6,914 539 6,375
2004 5,785 519 5,266
Thereafter 41,189 2,169 39,020
----------- -------------------------
Total $86,426 $5,666 $80,760
=================================================================
===============================================================================
Rental expense for all operating leases was as follows:
1999 1998 1997
--------- --------- ---------
(in thousands)
Leases $13,516 $13,038 $15,523
Less subleases 1,999 2,509 4,000
--------- --------- ---------
Net $11,517 $10,529 $11,523
===============================================================================
9. FEDERAL AND STATE INCOME TAXES:
The (provision) benefit from income taxes for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 was as follows:
1999 1998 1997
------- ------- -------
(in thousands)
Current (provision) benefit
Federal $ (23) $ (286) $ 207
State and Local -- (472) (345)
------- ------- -------
Total current provision (23) (758) (138)
------- ------- -------
Deferred (provision) benefit
Federal (103) 811 518
State and Local (24) 478 313
------- ------- -------
Total deferred (127) 1,289 831
(provision) benefit
------- ------- -------
Total (provision) benefit $ (150) $ 531 $ 693
================================================================================
-44-
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. A reconciliation of the
difference between the statutory federal income tax rate and the effective
income tax rate follows:
Percent of Pretax Income
(Loss)
---------------------------
1999 1998 1997
-------- -------- -------
Statutory federal income 34% (34%) (34%)
tax rate
Increase (decrease) from:
State income tax
net of federal tax 14 (1) 2
effect
Nondeductible expenses
and amortization of 38 8 5
acquired assets
-------- -------- -------
Effective income tax rate 86% (27%) (27%)
===============================================================================
Deferred tax assets and liabilities are determined based on the differences
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 30, 1999
and January 31, 1998 were as follows:
1999 1998
---------- ----------
(in thousands)
Capitalized leases $ 161 $ 158
Depreciation and amortization (13,624) (12,504)
Vacation accrual 277 269
Reserve for asset valuations 842 910
Insurance reserves not deductible 1,082 1,508
for tax purposes
Income deferred for financial 3,341 2,210
statement purposes
Reserve for closed stores and 455 1,358
renovations
Accrued restructuring and 27 357
severance reserves
Write-down of non-operating 1,185 1,185
properties
Tax credits and net operating 9,650 8,223
loss carryforwards
Other (54) 223
-------- --------
Net deferred tax asset $ 3,342 $ 3,897
As of January 30, 1999, the Company had alternative minimum tax credits
aggregating $435,000 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 years
2007 to 2011 and $332,000 of foreign tax credit carryforwards that expire, if
unused, in fiscal years 2000 to 2004. The Company and its subsidiaries file a
consolidated federal income tax return but generally file separate state income
tax returns. As of January 30, 1999, the Company had a capital loss
carryforward of $1,728,000 that will expire in fiscal year 2003. As of January
30, 1999, the Company had regular federal income tax net operating loss
carryforwards of $15,374,000 which expire, if unused, from fiscal years 2010 to
2019 and net operating loss carryforwards for state income tax purposes of
$18,903,000 which expire, if unused, from fiscal years 2000 to 2013. Realization
of the net operating loss carryforwards and tax credits are 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 30, 1999 and January 31, 1998.
================================================================================
Additionally, the Company changed its method of inventory valuation from the
LIFO method during fiscal year 1999 (see Note 3). As a result of this change,
the Company will recognize $7.4 million of income for tax purposes.
The Company expects to offset a significant portion of this taxable income with
its available net operating loss carryforwards.
================================================================================
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
================================================================================
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.
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, 1,002,307 shares remained available for issuance as of January
30, 1999.
As of January 30, 1999, January 31, 1998 and February 1, 1997, the Company held
521,625 shares of Class A Common Stock as treasury stock. The Company held
1,395,957, 1,395,957 and 175,957 shares of Class B Common Stock as treasury
shares as of January 30, 1999, January 31, 1998 and February 1, 1997,
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 for the purchase of 61,906 Class A Common Shares
pursuant to these Plans in fiscal year 1999. No options were granted from these
plans in either fiscal year 1998 or fiscal year 1997. As of January 30, 1999,
the Company had no Class A or Class B Common Stock available for grant under the
1990 Plan. In addition to the incentive stock options granted under the above
Plans, the Company has granted 0, 47,500 and 25,125, non-qualified stock options
in fiscal years 1999, 1998 and 1997 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"). Both plans were amended in June, 1998. The Award
Plan provides for granting of stock awards and options to employees up to a
total of 1,150,000 shares of either Class A or Class B Common Stock. In fiscal
1999, 1998 and 1997, the Company granted incentive stock options for the
purchase of 120,594, 125,000 and 22,500 Class A Shares, respectively. In fiscal
year 1999, the Company granted incentive stock options for the purchase of
137,500 shares of Class B Common Stock. As of January 30, 1999, the Company had
available for grant under the Award Plan options to purchase 341,906 shares of
Class A and Class B 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, as amended,
is 150,000 shares of Class A and Class B Common Stock. The Company granted
40,000, 17,500 and 17,500 nonqualified Class A Common Stock options to Outside
Directors in fiscal years 1999, 1998 and 1997, respectively. In fiscal year
1999, the Company granted nonqualified stock options for the purchase of 25,000
shares of Class B Common Stock. As of January 30, 1999, the Company had
available for grant under the Outside Directors Plan options to purchase 60,000
shares of Class A and Class B Common Stock, after considering lapses.
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:
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
1999 1998 1997
-------- -------- --------
Risk-free interest rates 5.73% 6.19% 6.24%
Expected dividend yield - % - % - %
Expected volatility Class A 40.12% 42.64% 39.00%
Expected volatility Class B 46.58% N/A N/A
Expected life in years 9.50 9.50 6.72
===============================================================================
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:
1999 1998 1997
-------- ---------- ------------
Pro forma net loss $(243) $(1,645) $(1,978)
Pro forma loss per share $(0.05) $(0.35) $(0.45)
===============================================================================
The pro forma effect on net loss for fiscal years 1999, 1998 and 1997 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 30, 1999, January 31, 1998 and February 1, 1997, is
as follows:
Weighted-Average
Options Exercise Price
--------- ----------------
(in thousands)
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
Granted 385 4.20
Exercised (53) 2.80
Forfeited (75) 5.03
------- --------
Outstanding January 30, 1999 924 $4.03
===============================================================================
The weighted-average fair values of stock options granted during fiscal years
1999, 1998 and 1997 were $4.20, $3.26 and $3.12, respectively.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
The following table summarizes information about the Company's stock options
outstanding as of January 30, 1999:
Weighted Weighted-Average
Average Remaining
Grant Options Options Exercise Contractural
Price Range Outstanding Exercisable Price Life (Years)
--------------- -------------- -------------- ----------------------------
$2.75 to $2.88 206,488 206,488 $2.80 4.0
$3.63 to $4.60 562,387 136,415 4.05 8.4
$5.00 to $6.00 155,500 76,875 5.58 7.8
-----------------------------------------------------------------------
Total 924,375 419,778
=========================================================================================
During fiscal years 1998 and 1997, the Company awarded, pursuant to the Award
plan, restricted stock grants consisting of an aggregate of 137,500 and 45,000
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
year 1998. No shares were awarded in fiscal year 1999. 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 15) 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. 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 1999, 1998 and
1997.
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 50% of such contributions during fiscal year 1999 and 25% during
fiscal year 1998 and 1997, up to 6% of the employees' annual compensation.
Matching contributions from the Company for fiscal years 1999, 1998 and
1997 were $252,000, $103,000 and $117,000, respectively. The Company does not
offer any additional post retirement and post-employment benefits to its
employees.
===============================================================================
13. 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
included inventories, convenience store and gasoline fixtures and equipment,
land, buildings, and building and leasehold improvements. In fiscal year 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 year January 31, 1998 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 all 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:
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
1999 1998
---------- ----------
(in thousands, except
per share amounts)
Revenues $ 477,047 $ 459,348
Cost of goods sold and expenses:
Cost of goods sold 339,308 333,012
Operating and administrative
expenses 126,758 121,957
Interest expense 10,806 10,330
--------- ---------
476,872 465,299
--------- ---------
Income (loss) before income taxes 175 (5,951)
(Provision) benefit from
income taxes (150) 1,674
--------- ---------
Net income (loss) $ 25 $ (4,277)
Income (loss) per share $ .01 $ (0.93)
================================================================================
14. COMMITMENTS AND CONTINGENCIES:
As of January 30, 1999, the Company was contingently liable for outstanding
letters of credit amounting to $7,000,000.
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 30, 1999 and
January 31, 1998, the Company had recorded an accrual of $4,589,000 and
$6,770,000, 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 30, 1999 and January 31, 1998, the Company had recorded a
reimbursement receivable of $4,522,000 and $ 4,770,000, respectively. For the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, the
Company recorded a provision for environmental expenses of $98,000, $3,354,000
and $2,109,000, respectively. Additionally, under current federal and state
regulatory programs, the Company was obligated by December 1998 to upgrade or
replace most of its existing underground storage tanks ("USTs"). The Company met
this obligation prior to December 22, 1998 for all locations but 14. These 14
locations were closed prior to December 22, 1998. The Company is in the process
of selling these locations.
In fiscal year 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 eight 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.
In fiscal year 1999, the Company entered into a long-term supply and branding
agreement with Chevron Products Company to brand certain high-volume retail
gasoline locations. The agreement obligates the Company to purchase a minimum
volume of gasoline over a ten year period. Management believes that the purchase
volume is readily achievable over the term of the agreement. In addition, the
agreement provides for the Company to be reimbursed for costs incurred in
the conversion of equipment and display facilities.
In fiscal year 1999, the Company entered into an agreement with Coca-Cola U.S.A.
Fountain to exclusively sell Coca-Cola fountain products in the Company's
fountain centers. The agreement calls for the purchase of a minimum quantity of
fountain syrups over the next five years. Management believes that the level of
purchases is easily attainable.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
In fiscal year 1999, the Company entered into an agreement with Millstone
Coffee. The agreement calls for the Company to exclusively sell Millstone brand
coffee blends over the next five years.
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. The two cases have been consolidated as DAIRY MART
CONVENIENCE STORES, INC. DERIVATIVE LITIGATION, and the case is currently
pending in the Delaware Court of Chancery of New Castle County as Consolidated
C.A. No. 14713. 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, that
certain interests in the general partner of DM Associates should be vested in
the company, and that the voting rights associated with the Class B Common Stock
held by DM Associates should be neutralized. On August 9, 1996, the Court
granted in part and denied in part defendants' motions to dismiss. The Court
held the plaintiffs failed to state (1) a claim of 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 now closed and both sides have moved for
summary judgment and are awaiting the Court's decision. 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. Both sides have moved for summary judgment and are awaiting the
court's decision. 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 has recognized no provision for any possible loss in the
accompanying consolidated financial statements.
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.
===============================================================================
15. RESTRUCTURING INITIATIVE
During fiscal year 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
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.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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 30, 1999, 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.
16. 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.
-51-
52
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 30, 1999
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ --------- ------------ ------------
Revenues (including excise taxes of $31,265) $ 155 $ 476,470 $ 422 $ - $ 477,047
Cost of goods sold and expenses:
Cost of goods sold - 339,308 - - 339,308
Operating and administrative expenses 276 126,460 22 - 126,758
Interest expense 9,749 752 305 - 10,806
--------- --------- --------- --------- ---------
10,025 466,520 327 - 476,872
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries (9,870) 9,950 95 - 175
Benefit from (provision for)
income taxes 4,342 (4,454) (38) - (150)
--------- --------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries (5,528) 5,496 57 - 25
Equity in income of
consolidated subsidiaries 5,553 57 - (5,610) -
--------- --------- --------- --------- ---------
Net income $ 25 $ 5,553 $ 57 $ (5,610) $ 25
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 30, 1999
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
---------- ------------ ----- ------------ ------------
Assets
Current Assets:
Cash $ 519 $ 2,848 $ - $ - $ 3,367
Short-term investments 138 3 2,583 - 2,724
Accounts and notes receivable 1,327 13,093 1,121 - 15,541
Inventory - 24,293 - - 24,293
Prepaid expenses and other current assets - 2,324 - - 2,324
Deferred income taxes - 1,520 - - 1,520
--------- --------- --------- --------- ---------
Total current assets 1,984 44,081 3,704 - 49,769
--------- --------- --------- --------- ---------
Assets Held for Sale - 6,327 - - 6,327
Property and Equipment, net - 98,829 - - 98,829
Intangible Assets, net - 15,452 - - 15,452
Other Assets, net 1,689 11,271 1,134 (3,140) 10,954
Investment in and Advances to Subsidiaries 140,880 1,602 290 (142,772) -
--------- --------- --------- --------- ---------
Total assets $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations $ 3,807 $ 249 $ - $ - $ 4,056
Accounts payable 23,776 11,885 24 - 35,685
Accrued expenses 183 15,186 9 - 15,378
Accrued income taxes 2,593 - - (2,593) -
Accrued interest 3,641 (1) 73 - 3,713
--------- --------- --------- --------- ---------
Total current liabilities 34,000 27,319 106 (2,593) 58,832
--------- --------- --------- --------- ---------
Long-Term Obligations, less current portion above 100,749 572 3,130 - 104,451
Other Liabilities 547 8,791 - (547) 8,791
Stockholders' Equity 9,257 140,880 1,892 (142,772) 9,257
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
- --------------------------------------------------------------------------------
-52-
53
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 30, 1999
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Net cash provided by (used in) operating activities $ 7,221 $ 4,129 $ (459) $ - $ 10,891
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of and change in short-term investments (138) - 1,043 - 905
Purchase of property and equipment - (52,398) - - (52,398)
Proceeds from sale of property,
equipment and assets held for sale - 30,760 - - 30,760
Investment in and advances to subsidiaries (15,909) 15,909 - - -
Increase in long-term notes receivable - (1,816) 640 - (1,176)
Proceeds from collection of long-term
notes receivable - 1,544 - - 1,544
Increase in intangibles and other assets (448) 1,198 (108) - 642
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities (16,495) (4,803) 1,575 - (19,723)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in revolving loan, net 10,200 - - - 10,200
Repayment of long-term obligations (651) (300) (1,100) (2,051)
Payment of dividend - 250 (250) - -
Issuance of common stock 244 - - - 244
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 9,793 (50) (1,350) - 8,393
-------- -------- -------- -------- --------
Increase (decrease) in cash 519 (724) (234) - (439)
Cash at beginning of year - 3,572 234 - 3,806
-------- -------- -------- -------- --------
Cash at end of year $ 519 $ 2,848 $ - $ - $ 3,367
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
Supplemental disclosures:
Cash paid during the year -
Interest $ 9,876 $ 435 $ 350 - $ 10,661
Income taxes refunded (381) - - - (381)
Non-cash inventory and financing activities -
Capital lease obligation 3,756 - - - 3,756
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ ----- ------------ ------------
Revenues (including excise taxes of $29,641) $ 1,144 $ 499,737 $ 478 $ - $ 501,359
Cost of goods sold and expenses:
Cost of goods sold - 364,525 - - 364,525
Operating and administrative expenses 269 127,919 33 - 128,221
Interest expense 9,776 485 351 - 10,612
--------- --------- --------- --------- ---------
10,045 492,929 384 - 503,358
--------- --------- --------- --------- ---------
Income (loss) before income taxes and equity
in income of consolidated subsidiaries (8,901) 6,808 94 - (1,999)
Benefit from (provision for) income taxes 2,573 (2,015) (27) - 531
--------- --------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries (6,328) 4,793 67 - (1,468)
Equity in income of consolidated subsidiaries 4,860 67 - (4,927) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1,468) $ 4,860 $ 67 $ (4,927) $ (1,468)
- --------------------------------------------------------------------------------
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54
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 31, 1998
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ ----- ------------ ------------
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 - 21,088 - - 21,088
Prepaid expenses and other current assets 69 2,162 - - 2,231
Deferred income taxes 852 196 - - 1,048
--------- --------- --------- --------- ---------
Total current assets 2,175 40,061 4,536 - 46,772
--------- --------- --------- --------- ---------
Assets Held for Sale - 10,715 - - 10,715
Property and Equipment, net - 82,589 - - 82,589
Intangible Assets, net - 16,017 - - 16,017
Other Assets, net 1,580 8,192 1,782 - 11,554
Investment in and Advances to Subsidiaries 121,215 1,948 137 (123,300) -
--------- --------- --------- --------- ---------
Total assets $ 124,970 $ 159,522 $ 6,455 $(123,300) $ 167,647
- --------------------------------------------------------------------------------------------------------------------------------
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 90,460 802 3,130 - 94,392
portion above
Other Liabilities - 9,170 - - 9,170
Stockholders' Equity 8,988 121,215 2,085 (123,300) 8,988
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 124,970 $ 159,522 $ 6,455 $(123,300) $ 167,647
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ------- ------------ ------------
Net cash provided by (used in) operating activities $ 3,844 $ 3,993 $ 39 $ - $ 7,876
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of and change in 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 used in investing activities 8,140 (6,649) (977) - 514
-------- -------- -------- -------- --------
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
- --------------------------------------------------------------------------------
-54-
55
- --------------------------------------------------------------------------------
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
Supplemental disclosures:
Cash paid during the year -
Interest $ 9,710 $485 $349 - $10,544
Income taxes refunded (1,188) - - - (1,188)
Non-cash inventory and financing
activities -
Note Receivable from DM Associates 10,000 - - - 10,000
Purchase of treasury stock (10,000) - - - (10,000)
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
Revenues (including excise taxes of $36,427) $ 253 $ 584,981 $ 512 $ - $ 585,746
Cost of goods sold and expenses:
Cost of goods sold - 431,767 - - 431,767
Operating and administrative expenses 277 145,326 28 - 145,631
Interest expense 10,050 472 355 - 10,877
--------- --------- --------- --------- ---------
10,327 577,565 383 - 588,275
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
equity in income of consolidated subsidiaries (10,074) 7,416 129 - (2,529)
Benefit from (provision for) income taxes 2,802 (2,074) (35) - 693
--------- --------- --------- --------- ---------
Income (loss) before equity in income
of consolidated subsidiaries (7,272) 5,342 94 - (1,836)
Equity in income of consolidated subsidiaries 5,436 94 - (5,530) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1,836) $ 5,436 $ 94 $ (5,530) $ (1,836)
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 1, 1997
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ------- ------------ ------------
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 - 24,057 - - 24,057
Prepaid expenses and other current 20 3,309 - - 3,329
assets
Deferred income taxes 933 878 - - 1,811
--------- --------- --------- --------- ---------
Total current assets 1,073 49,159 3,376 - 53,608
--------- --------- --------- --------- ---------
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 4,637 2,192 - 8,218
Investment in and Advances to Subsidiaries 129,085 1,175 843 (131,103) -
--------- --------- --------- --------- ---------
Total assets $ 131,547 $ 171,001 $ 6,411 $(131,103) $ 177,856
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56
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET (CONTINUED)
AS OF FEBRUARY 1, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
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 10,214 129,085 2,018 (131,103) 10,214
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 131,547 $ 171,001 $ 6,411 $(131,103) $ 177,856
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ---------- ------------ ------------
Net cash provided by (used in) operating activities $ (4,406) $ 13,925 $ 91 $ - $ 9,610
-------- -------- -------- ----- --------
Cash flows from investing activities:
Purchases 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 10,580 350 - - 10,930
related warrants
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)
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57
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
17. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information is as follows:
Fiscal Quarter Ended
-------------------------
May 1, August 1, October 31, January 30,
Fiscal Year Ended January 30, 1999 1998 1998 1998 1999
- ---------------------------------- --------- ---------- ---------- -----------
(in thousands, except per share amounts)
Revenues $ 109,849 $ 126,129 $ 126,183 $ 114,886
Gross profit 31,221 35,724 37,522 33,272
Net Income (loss) (629) 846 637 (829)
Basic and Diluted earnings (loss)
per share (0.13) 0.18 0.13 (0.17)
================================================================================
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 37,566 36,522 32,301 30,546
Net Income (loss) 44 1,148 (265) (2,395)
Basic and Diluted earnings (loss)
per share 0.01 0.24 (0.06) (0.51)
===========================================================================
In the quarter ended January 30, 1999, the Company changed its method for
valuing inventory (See Note 3). The quarterly financial information above
reflects the retroactive application of this change. For fiscal year 1999,
the change in inventory valuation method increased gross profit $90,000,
$30,000 and $60,000 and increased net income $53,000, $18,000 and $36,000
for the quarters ended May 1, August 1 and October 31, 1998, respectively.
For fiscal year 1998, the change in inventory valuation method increased
gross profit by $45,000, $45,000, $75,000 and $242,000 and increased net
income by $27,000, $26,000, $45,000 and $144,000 for the quarters ended May
3, August 2 and November 1, 1997 and January 31, 1998, respectively.
---------------------------------------------------------------------------
18. OPERATING SEGMENT
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, and is
established for reporting information about a company's operating segments.
It also established standards for related disclosures about products,
services, geographic areas and major customers.
The Company operates in one segment. That segment is the operating and
franchising of convenience food stores. Revenues from external customers
are derived primarily from three major categories - merchandise, gasoline
and food service. The Company's merchandise sales are comprised of
groceries, beverages, beer/wine, tobacco products, dairy products,
candy/snacks, non-food merchandise and services. Services include lottery,
and money order services. Food service sales are comprised of branded
restaurant sales such as Mr. Hero, Taco Bell, Subway and Pizza Hut.
The Company does not rely on any major customers as a source of revenue.
Excluding license royalties, the Company's operations are concentrated in
seven states in the midwest and southeastern part of the United States.
-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 23, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
April 23, 1999
-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 of Costs and Other and Accounts End of
Description Period Expenses Recoveries Written-off Period
----------------------------------- ------------ ----------- ---------- ------------- -----------
Reserve for Doubtful Accounts:
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
Fiscal Year Ended January 30, 1999 2,240,638 421,905 - (588,436) 2,074,107
-59-