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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended July 30, 1994
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
DAIRY MART CONVENIENCE STORES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2497894
(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE VISION DRIVE, ENFIELD, CT 06082
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 741-4444
N/A
(Former name, former address and former fiscal year, if
changed since last report.)
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
Shares of Class A Common Stock outstanding July 30, 1994 - 2,756,784
Shares of Class B Common Stock outstanding July 30, 1994 - 2,786,058
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<TABLE>
<CAPTION> PART I. FINANCIAL INFORMATION
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
FOR THE SECOND FISCAL QUARTER ENDED FOR THE TWO FISCAL QUARTERS ENDED
JULY 30, 1994 JULY 31, 1993 JULY 30, 1994 JULY 31, 1993
<S> <C> <C> <C> <C>
Net Sales of the Company,
Its Subsidiaries and Franchises $ 204,075 $ 205,264 $ 383,167 $ 389,718
Revenues $ 161,564 $ 158,777 $ 302,582 $ 300,792
Cost of goods sold and expenses:
Cost of goods sold 120,746 115,420 226,300 220,685
Selling, general and administrative
expenses 38,740 37,552 74,545 73,258
Nonrecurring charge 1,800 -- 1,800 --
Income (loss) from operations 278 5,805 (63) 6,849
Interest expense (2,400) (1,955) (4,939) (3,873)
Interest income 318 182 620 386
(Loss) gain on disposition of
properties, net (1,360) 16 (1,464) 144
Income (loss) before income taxes
and cumulative effect of
accounting change (3,164) 4,048 (5,846) 3,506
Benefit from (provision for) income
taxes 1,266 (1,624) 2,366 (1,402)
Income (loss) before cumulative
effect of accounting change (1,898) 2,424 (3,480) 2,104
Cumulative effect of accounting change
(net of income tax benefit of $271) -- -- (389) --
Net income (loss) $ (1,898) $ 2,424 $ (3,869) $ 2,104
Weighted average shares outstanding 5,539 5,493 5,534 5,497
Earnings (loss) per share:
Before cumulative effect of
accounting change (0.34) 0.44 (0.63) 0.38
Cumulative effect of accounting
change -- -- (0.07) --
Earnings (loss) per share $ (0.34) $ 0.44 $ (0.70) $ 0.38
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
DAIRY MART CONVENIENCE STORES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS JULY 30, 1994 JANUARY 29, 1994
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,133 $ 6,632
Short-term investments, at cost 3,931 --
Accounts and notes receivable 12,805 11,770
Inventory 27,121 26,269
Prepaid expenses and other current assets 2,998 2,013
Deferred income taxes 2,365 2,098
Total current assets 61,353 48,782
PROPERTY AND EQUIPMENT:
Land and improvements 15,431 15,199
Buildings and leaseholds 53,890 54,231
Equipment 78,522 75,418
147,843 144,848
Less - Accumulated depreciation 56,265 52,834
Net property and equipment 91,578 92,014
PROPERTY UNDER CAPITAL LEASES, net 1,157 1,760
OTHER ASSETS:
Goodwill, net 10,787 10,961
Franchise and operating rights, net 7,488 7,656
Notes receivable 2,526 2,267
Other 8,127 6,002
Total other assets 28,928 26,886
Total assets $ 183,016 $ 169,442
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,223 $ 3,071
Current portion of capital lease obligations 332 1,038
Accounts payable 31,698 28,700
Accrued expenses 17,257 15,510
Accrued interest 3,213 978
Total current liabilities 53,723 49,297
LONG-TERM DEBT, less current portion 87,535 71,604
CAPITAL LEASE OBLIGATIONS, less current portion 1,482 1,630
OTHER LIABILITIES AND DEFERRED CREDITS 5,815 6,222
DEFERRED INCOME TAXES 4,395 6,819
STOCKHOLDERS' EQUITY:
Class A Common Stock 33 33
Class B Common Stock 30 30
Paid-in capital in excess of par value 27,548 27,483
Retained earnings 7,460 11,329
Treasury stock, at cost (5,005) (5,005)
Total stockholders' equity 30,066 33,870
Total liabilities and stockholders' equity $ 183,016 $ 169,442
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
DAIRY MART CONVENIENCE STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
FOR THE TWO FISCAL QUARTERS ENDED
JULY 30, 1994 JULY 31, 1993
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,869) $ 2,104
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change 389 --
Depreciation and amortization 6,366 6,450
(Decrease) increase in deferred income taxes (2,691) 1,186
Loss (gain) on other disposition of properties, net 946 (144)
(Increase) decrease in receivables (1,035) 52
Increase in inventory (852) (798)
Increase in accounts payable 2,998 1,983
Decrease (increase) in other current assets and liabilities, net 3,369 (3,255)
(Decrease) increase in other noncurrent liabilities and
deferred credits (407) 138
Net cash provided by operating activities 5,214 7,716
Cash flows from investing activities:
Purchase of short-term investments (3,931) --
Purchase of property and equipment (6,198) (7,750)
Proceeds from sale of property and equipment 362 453
Proceeds from long-term notes receivable 666 844
Increase in long-term notes receivable (925) (20)
Increase in other assets (454) (206)
Net cash used by investing activities (10,480) (6,679)
Cash flows from financing activities:
Issuance of senior subordinated notes, net of
offering costs 72,743 --
Repayment of term debt (22,000) (2,000)
Retirement of subordinated debentures (27,944) --
Decrease in revolving loan, net (12,100) (2,300)
Additional long-term debt 929 4,128
Repayment of other long-term debt and capital
lease obligations (926) (970)
Other increases in common stock and paid-in capital 65 190
Net cash provided (used) by financing activities 10,767 (952)
Increase in cash and cash equivalents 5,501 85
Cash and cash equivalents at beginning of fiscal year 6,632 6,483
Cash and cash equivalents at end of second fiscal quarter $ 12,133 $ 6,568
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 30, 1994
(Unaudited)
The unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make
the information presented not misleading. The information furnished
reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented, and which are of a normal, recurring nature. It is
suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto included in the
Company's Form 10-K, filed with the Securities and Exchange Commission
on April 29, 1994.
1. Accounting Policies
The financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the
January 29, 1994 audited consolidated financial statements included
in the Company's Form 10-K, except as discussed in Notes 2 and 3
below. Certain prior year amounts have been reclassified to conform to
the presentation used for the current year.
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2. Cumulative Effect of Accounting Change
The Company historically has recorded its self insurance
reserves for certain property and liability insurance risks on a
present value basis using a discount rate based upon the estimated
incremental borrowing rate of the Company which was 8% as of January
29, 1994. As of January 30, 1994, the Company changed its method of
accounting to discount its self insurance reserves at a risk free rate
of return. The cumulative effect of this change in accounting method
was a charge to income of $389,000, net of the applicable income tax
benefit of $271,000,in the first fiscal quarter ended April 30,1994.
3. Short-term Investments
The Company's short-term investments consist of U.S. Treasury
Bills with maturities of less than one year. The Company is
accounting for these investments as being held to maturity in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
As of July 30, 1994, the carrying amount of the Treasury Bills of
$3,931,000 approximated the fair value.
4. Changes in Capital Accounts
An analysis of the capital stock accounts for the two fiscal
quarters ended July 30, 1994 follows:
<TABLE>
<CAPTION> Common Stock
Class A Shares Class B Shares Paid-in capital
issued at issued at in excess of
$.01 par value $.01 par value Amount par value
<S> <C> <C>
Balance January 29, 1994 3,268,729 2,956,015 $ 62,249 $ 27,483,049
Employee stock purchase plan 8,930 -- 89 37,026
Stock options exercised 750 6,000 68 27,870
Balance July 31, 1994 3,278,409 2,962,015 $ 62,406 $ 27,547,945
</TABLE>
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As of July 30, 1994, there were 521,625 shares of Class A Common
Stock and 175,957 shares of Class B Common Stock held as treasury
stock at an aggregate cost of $5,004,847, leaving 2,756,784 Class A
shares and 2,786,058 Class B shares outstanding.
5. Earnings(loss) Per Share
Earnings(loss) per share is based on the weighted average number of
shares outstanding, including the dilutive effect of stock options, if
appropriate, during each period.
6. Seasonality
The results of operations for the fiscal quarter ended July 30,
1994 are not necessarily indicative of results to be expected for the
full fiscal year. The convenience store industry in the Company's
marketing areas experiences a higher percentage of revenues and profit
margins during the summer months than during the winter months.
Historically, the Company has achieved higher earnings in its second
and third fiscal quarters, as compared to its first and fourth fiscal
quarters.
7. Nonrecurring Charge
The Company recorded a nonrecurring charge of $1.8 million
in the second fiscal quarter ended July 30, 1994 for costs,including legal
expenses,associated with the removal of the Company's President and Chief
Executive Officer by the Board of Directors and the settlement of disputes
arising therefrom. See Part II, Item 1 "Legal Proceedings" and Part II,
Item 5 "Other Information - Recent Developments" of this Form 10-Q
for further discussion.
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DAIRY MART CONVENIENCE STORES, INC.
FISCAL QUARTER ENDED JULY 30, 1994
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since most
of its revenues are received in cash. The amount of cash generated
from operations exceeds all of the current debt service
requirements of the Company's long-term debt and capital lease
obligations. The capital expenditures of the Company are primarily
funded by the excess cash flow available after debt service but may
also be funded using cash provided from the Company's financing
activities including mortgage and equipment financing and other forms
of long-term debt. Additionally, the Company has a revolving line of
credit available to address the seasonality of operations and timing
of certain working capital disbursements.
During the second fiscal quarter ended July 30, 1994, the
Company paid its trade payables in an average of 26 days, which
compares to 24 days for the entire fiscal year ended January 29, 1994
and 23 days for the second fiscal quarter ended July 31, 1993. The
cash flow of the Company is also favorably impacted by the Company's
use of funds from the sale of money orders, pending weekly remittance
of such funds to the issuer of the money orders. The amount due the
issuer each week varies, depending on the volume and dollar values of
money orders issued. At July 30, 1994 and January 29, 1994, $5.8
million and 6.2 million, respectively, were due the issuer. The
Company's remittance obligation to the issuer of the money orders is
primarily secured by an outstanding letter of credit in the amount of
$6.5 million.
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During the current year first two fiscal quarters, cash
generated by operations was approximately $2.5 million lower than the
prior year first two fiscal quarters. The decrease was primarily due
to reduced earnings in the current year (see "Results of Operations"),
partially offset by changes in certain of the Company's working
capital accounts.
Cash used by the Company's investing activities was
approximately $3.8 million higher in the current year first two fiscal
quarters as compared to the prior year first two fiscal quarters,
primarily due to the investment of $3.9 million in U.S. Treasury Bills
using excess proceeds realized from the sale of the Company's 10.25%
Senior Subordinated Notes (see below). These short-term investments
were made to mitigate the Company's interest expense related to these
excess proceeds until the funds are used for capital expenditures and/or
general corporate and working capital purposes.Partially offsetting the
above increase was a reduction in capital expenditures in the current year
two fiscal quarters. However, the Company currently intends to increase
its level of capital expenditures in the future due to the increased
development of new stores as well as the replacement or upgrading of certain
of its operating assets.
Such capital expenditures will be financed primarily by cash generated from
operations as well as mortgage and equipment financing and available
short-term investments. In addition, the Company may sell and
leaseback certain of its existing super pumper locations and may in
the future lease, or sell and leaseback, the real estate of new super
pumper locations.
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The Company estimates that future capital expenditure
requirements to comply with federal and state underground gasoline
storage tank regulations will be approximately $16.0 million to $20.0
million in the aggregate through December, 1998, which cost could be
reduced for locations (especially low volume locations) which may be
closed in lieu of the capital costs of compliance. The Company has
also initiated a program to install in all stores within three years a
point-of-sale (POS) system designed to provide more accurate and
timely information regarding store operations and to decrease
administrative overhead. The cost of the POS system, including new
cash registers and personal computers, is currently estimated to be
approximately $7.0 million to $9.0 million, and is anticipated to be
funded by equipment financing. The ultimate amount of discretionary
capital expenditures that the Company will incur in the future will be
determined by the available sources of funds, including, but not
limited to, those described above.
During the current year first fiscal quarter, the Company issued
$75.0 million principal amount of 10.25% senior subordinated notes
(the "Notes"), all of the principal of which is due March 15, 2004.
The net proceeds from the sale of the Notes, were used to repay the
entire outstanding indebtedness under a previous bank term loan and a
bank revolving loan and to redeem in full the Company's 14.25%
subordinated debentures. The Company issued the Notes in order to
facilitate future growth and to improve the Company's financial and
operating flexibility by significantly reducing the Company's debt
amortization requirements by approximately $53 million over the next
five fiscal years.
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In addition to cash flow from operations, potential mortgage,
equipment and other financing and the available excess proceeds from
the sale of the Notes, the Company's sources of liquidity include
borrowing availability under a senior credit facility entered into by
the Company during the current year first fiscal quarter in connection
with the issuance of the Notes and the repayment of the previous bank
term and revolving loans. The new credit facility provides for the
availability of up to $30.0 million in revolving loans reduced by outstanding
letters of credit not to exceed $15.0 million in the aggregate. As of
July 30, 1994, the Company had no outstanding revolving credit loans
under the new credit facility, but did have $12.6 million of letters
of credit outstanding thereunder, including, as discussed above, the $6.5
million letter of credit issued to secure the Company's remittance obligation
to the issuer of money orders. The Company intends to utilize the new
credit facility as needed for working capital and general corporate
purposes, including addressing the seasonality of operations and
the timing of certain working capital disbursements.
In addition to the foregoing, reference is made to the
information contained in Item 5 of Part II included in this Form 10-Q.
Results of Operations
Revenues for the first two fiscal quarters ended July 30, 1994
increased by $1.8 million or 0.6% from the first two fiscal quarters
ended July 31, 1993. For the second fiscal quarter alone, revenues
increased by $2.8 million or 1.8% from the corresponding period of the
prior year. The current year revenue increases for both the first two
fiscal quarters and the second fiscal quarter were due to higher
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revenues from the convenience store and manufacturing and distribution
areas of the Company. In addition, revenues for the second fiscal
quarter alone were further increased due to higher gasoline revenues,
although gasoline revenues were decreased on a current year-to-date
basis.
Convenience store revenues increased from $180.5 million in the
prior year first two fiscal quarters to $183.9 million in the current
year first two fiscal quarters, while for the second fiscal quarter
alone, convenience store revenues increased from $96.5 million in the
prior year to $97.8 million in the current year. These increases were
due primarily to a comparable store sales increase of approximately
2.0% for the current year first two fiscal quarters and 1.8% for the
current year second fiscal quarter, as compared to the corresponding
periods of the prior year. The overall increase in the Company's
convenience store revenues was partially offset in both the current
year first two fiscal quarters and second fiscal quarter by decreased
revenues resulting from the closing of underperforming stores.
Although such closures had a negative impact on revenues, they did not
have a material adverse effect on the results of operations or
earnings (other than the initial write-off of estimated unrecoverable
costs), since the majority of stores closed had been operating at a
loss. The Company owned or franchised 1,004 stores at July 30, 1994,
as compared to 1,022 stores at January 29, 1994 and 1,061 stores at
July 31, 1993.
Manufacturing and distribution revenues increased in the current
year first two fiscal quarters and second fiscal quarter due to
increased sales of ice cream to an external distributor as well as
increased sales of cigarettes and candy to stores in certain marketing
areas of the Company.
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The lower gasoline revenues in the current year first two fiscal
quarters resulted primarily from a decrease in the average selling
price of gasoline of 2.0 cents per gallon for the current year first
two fiscal quarters as compared to the prior year. This decrease was
partially offset by an increase in total gallons sold of approximately
400,000 gallons in the current year first two fiscal quarters, which,
on a per location basis, equated to an average gallonage increase of
approximately 1.8%. For the current year second fiscal quarter alone,
gasoline revenues were increased due primarily to an increase in total
gallons sold of approximately 2.0 million gallons, which, on a per
location basis, resulted in an average gallonage increase of
approximately 4.3% in the current year second fiscal quarter as
compared to the prior year second fiscal quarter. This increase in
gallons sold was partially offset by a decrease in the average selling
price of gasoline of 1.6 cents per gallon for the current year second
fiscal quarter as compared to the prior year second fiscal quarter.
Income from operations decreased by $6.9 million for the current
year first two fiscal quarters and decreased by $5.5 million for the
current year second fiscal quarter alone, as compared to the
corresponding periods of the prior year. This was attributable to a
decrease in earnings from the convenience store, gasoline and
manufacturing and distribution operations of the Company, as well as
the $1.8 million nonrecurring charge in the current year second fiscal
quarter (see Note 7 to the Consolidated Financial Statements).
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Overall, income from convenience store operations decreased for
both the current year first two fiscal quarters and the second fiscal
quarter primarily due to reduced product gross margins partially
offset by the comparable store sales increases discussed above. The
reduced gross margins were caused in part by significant product
promotions, as well as an increase in costs associated with the
Company's last-in, first-out (LIFO) inventory valuation method. (The
LIFO provision was reduced in the prior year due to a decrease in
cigarette prices, which constitutes one of the Company's major product
categories.) Convenience store operations were also impacted by higher
store selling expenses in the current year first two fiscal quarters
and second fiscal quarter due primarily to increased store maintenance
and advertising costs.
Income from gasoline operations also decreased for both the
current year first two fiscal quarters and the second fiscal quarter,
due to a decrease in gasoline gross margins of approximately 0.9 cents
per gallon for the first two fiscal quarters and 2.8 cents per gallon
for the second fiscal quarter alone, as compared to the corresponding
periods of the prior year. Additionally, for both the current year
first two fiscal quarters and the second fiscal quarter, the Company
incurred higher operating costs related to compliance with
environmental regulations, reflecting an increase in the expenses
associated with the remediation of the Company's gasoline locations
after considering expected reimbursements of a portion of the total
remediation costs from various state environmental trust funds. Such
remediation costs are incurred in the ordinary course of business and
can fluctuate from year to year.
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These decreases were partially offset by the increase in gasoline gallons
sold described above.
Income from manufacturing and distribution operations decreased
in the current year first two fiscal quarters and the second fiscal
quarter due primarily to reduced operating margins, resulting in part
from competitive product pricing, as well as increased labor costs.
Other selling, general and administrative expenses remained
relatively constant for the first two fiscal quarters and increased
slightly for the second fiscal quarter alone, when compared to the
corresponding periods of the prior year.
Interest expense, net of interest income, increased by $832,000
in the current year first two fiscal quarters and by $309,000 in the
current year second fiscal quarter alone primarily due to the overall
increase in the Company's long-term debt obligations. In addition,
interest expense for the current year-to-date period was increased due
to duplicative interest expense during March, 1994 associated with the
Company's Notes issued March 3, 1994 and the 14.25% subordinated
debentures which were outstanding through April 4, 1994,
the date on which the debentures were redeemed in full. These
increases were partially offset by increased interest income in the
current year due to the investment of the excess proceeds from the
sale of the Notes in U.S. Treasury Bills and other cash equivalents as
discussed above.
Loss on disposition of properties was negatively impacted in the
current year first two fiscal quarters and second fiscal quarter due to
the writedown of a vacant office building to market value as well as a
charge for the write-off of estimated unrecoverable costs related to
approximately 60 locations that the Company has decided to close or
sell.
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The effective tax rate for the Company was a benefit of 40% for
both the current year first two fiscal quarters and second fiscal quarter
alone as compared to a provision of 40% for both the prior year first
two fiscal quarters and second fiscal quarter. The Company provides
for income taxes at the effective rate expected to be incurred for the
entire year.
Net loss for the current year first two fiscal quarters was
$3,869,000 or $0.70 per share, as compared to net income of $2,104,000
or $0.38 per share. Net loss for the current year second fiscal
quarter was $1,898,000 or $0.34 per share, as compared to $2,424,000
or $0.44 per share for the corresponding period of the prior year. In
addition to the items discussed above, the net loss in the current
year first two fiscal quarters was impacted by a $389,000 charge (net
of the related income tax benefit) for the cumulative effect of an
accounting change related to the rate used to discount the Company's
self-insurance reserves (see Note 2 to the Consolidated Financial
Statements).
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PART II- OTHER INFORMATION
Item 1. Legal Proceedings
On August 30, 1994, the Company commenced a civil action in the
Chancery Court, New Castle County, State of Delaware against Frank
Colaccino, former President and Chief Executive Officer of the
Company. The action arises from Mr. Colaccino's attempt to (i) remove
three Directors (Messrs. Mitchell J.Kupperman, Gregory G.Landry and Robert B.
Stein) of Dairy Mart, and elect new directors as their replacements by
executing a written consent on behalf of DM Associates (the
majority shareholder of Dairy Mart), and (ii) request a call of a special
meeting of shareholders of the Company for September 14, 1994. The action
seeks , among other relief, a declaration that the written consent is null
and void and that the request for a special shareholders' meeting also is
null and void pending further action by the Company's Board of Directors.
In addition, Mr. Colaccino, along with Stephen N. Krevalin,
Albert C. Woodruff, III and J. Ronald Rinaldi (Mr. Colaccino's
replacement director nominees), brought an action against Dairy Mart and
Messrs. Kupperman, Landry and Stein on September 1, 1994 in the
Chancery Court, New Castle County, State of Delaware, seeking to have
the Court declare that Messrs. Kupperman, Landry and Stein were
validly removed as directors and replaced by Mr. Colaccino's designees
and to have the removed directors permanently enjoined from continuing
to act as directors of the Company, or, alternatively, to have the
Court direct the Company and its directors to hold the special meeting
requested by Mr. Colaccino.
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A hearing is scheduled before the Chancery Court later this month
with respect to the forgoing actions.
On September 15, 1994 the Company announced by a press release
that it had reached an agreement in principle with Mr. Colaccino to settle
their disputes,including the above-described actions. The settlement is
subject to the execution of definitive documentation. The proposed terms
of the settlement with Mr. Colaccino include the withdrawal by the Company
and Mr. Colaccino of all litigation, certain severance payments to be made
by the Company to Mr. Colaccino over a three-year period, the vesting of
certain existing stock options that were previously granted by the Company to
Mr. Colaccino and the extension of the exercise period of all options
held by Mr. Colaccino to eighteen months after the date of Mr.Colaccino's
removal, reimbursement and payment by the Company of certain expenses and
the resignation of Mr. Colaccino as a director of the Company. The estimated
costs of settlement and related matters ,including legal expenses, have been
reflected as a nonrecurring charge in the Company's second quarter financial
statements as set forth in Part I, Item 1. Financial Statements hereto.
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Item 5. Other Information
Recent Developments
On August 25, 1994, the Board of Directors of the Company
removed Frank Colaccino as Chief Executive Officer and President of
the Company.
On August 30, 1994, the Company was informed of the dissolution
of the general partner of DM Associates Limited Partnership ("DM
Associates"). DM Associates holds a majority of the voting power of
the Company's outstanding common stock.
The dissolution of DM Associates' former general partner without
the prior written consent of the Connecticut Development Authority
(the "CDA") constitutes a default under the loan agreement between the
CDA and DM Associates (the "CDA Loan Agreement"). On September 1,
1994, the Company received a copy of a notice of default delivered by
the CDA to DM Associates (the "Notice") and, unless such default is
waived by the CDA within 30 days from the date of the Notice, an event
of default will have occurred under the CDA Loan Agreement. If such
event of default occurs, the CDA will have the right to vote and sell
1,220,000 shares of Class B Common Stock of the Company (or
approximately 40% of the total voting power of all classes of stock of
the Company) that were pledged to it as security for the loan.
The Company has been advised that representatives of DM Associates have
commenced discussions with the CDA regarding the foregoing.
The dissolution of the former general partner of DM Associates
and the selection of a new general partner may or may not also
constitute an event of default under the Company's $30 million bank
credit facility and may or may not give rise to a right in favor of
the holders of the Company's 10.25% Senior Subordinated Notes due 2004
in the aggregate principal amount of $75 million to cause the Company
to purchase such notes at a cash price equal to 101% of the principal
amount then outstanding, plus any accrued interest thereon.
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The Company has been in contact with its bank lenders and Bear, Stearns &
Co. Inc., the underwriter of the Company's 10.25% Senior Subordinated
Notes, with respect to these matters. The Company believes that it
will be able to obtain the requisite waivers or amendments to the
underlying agreements, if necessary, in a manner that will not
materially adversely affect the Company's financial condition,
although the Company has not as yet obtained any guarantees or
commitments to this effect.
In connection with the foregoing, on September 8, 1994, the
Company announced that it had been advised that the limited partners
of DM Associates have selected New DM Management Associates, a
Connecticut general partnership, as the new general partner of DM
Associates. Charles Nirenberg, the Chairman of the Board of Directors
and a director of the Company (see below) and a limited partner of DM
Associates,is serving as the managing general partner of new DM Management
Associates.
In addition, at a meeting of the Board of Directors of the Company
held on September 16,1994, the Board, following the recommendation of its
Special Commitee, appointed and elected Charles Nirenberg as a director and as
the Chairman of the Board,and further elected Robert B.Stein,Jr.,as President,
effective immediately. The Special Committee was formed by the Board on August
25,1994 to review various governance matters and make a recommendation for the
selection of a new President.
For certain additional information regarding certain other
recent events see Part II, Item 1 above.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, registrant had duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
Date: September 19, 1994 /s/ Gregory G. Landry
Gregory G. Landry
Executive Vice President
Chief Financial Officer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Statements of Operations and Consolidated Balance Sheets and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-START> JAN-30-1994
<PERIOD-END> JUL-30-1994
<CASH> 12,133
<SECURITIES> 3,931
<RECEIVABLES> 14,935
<ALLOWANCES> 2,130
<INVENTORY> 27,121
<CURRENT-ASSETS> 61,353
<PP&E> 147,843
<DEPRECIATION> 56,265
<TOTAL-ASSETS> 183,016
<CURRENT-LIABILITIES> 53,723
<BONDS> 89,017
<COMMON> 63
0
0
<OTHER-SE> 30,003
<TOTAL-LIABILITY-AND-EQUITY> 183,016
<SALES> 383,167
<TOTAL-REVENUES> 302,582
<CGS> 226,300
<TOTAL-COSTS> 300,845
<OTHER-EXPENSES> 1,800
<LOSS-PROVISION> 398
<INTEREST-EXPENSE> 4,939
<INCOME-PRETAX> (5,846)
<INCOME-TAX> 2,366
<INCOME-CONTINUING> (3,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (389)
<NET-INCOME> (3869)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
