<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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X Quarterly Report Pursuant to Section 13 or
- - --- 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended April 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.
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(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
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(Address of principal executive offices)
Registrant's telephone number, including area code (203) 741-4444
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N/A
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(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 April 30, 1994 - 2,751,363
Shares of Class B Common Stock outstanding April 30, 1994 - 2,780,058
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PART I. FINANCIAL INFORMATION
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL QUARTER ENDED
----------------------------------
APRIL 30, 1994 MAY 1, 1993
--------------- ------------
<S> <C> <C>
Net Sales of the Company,
Its Subsidiaries and Franchises $179,092 $184,454
======== ========
Revenues $141,018 $142,015
Cost of goods sold and expenses:
Cost of goods sold 105,554 105,265
Selling, general and administrative expenses 35,805 35,706
-------- --------
Income (loss) from operations (341) 1,044
Interest expense (2,539) (1,918)
Interest income 302 204
(Loss) gain on disposition of properties, net (104) 128
-------- --------
Loss before income taxes and cumulative
effect of accounting change (2,682) (542)
Benefit from income taxes 1,100 222
-------- --------
Loss before cumulative effect of accounting change (1,582) (320)
Cumulative effect of accounting change (net of
income tax benefit of $271) (389) --
-------- --------
Net loss $ (1,971) $ (320)
======== ========
Weighted average shares outstanding 5,529 5,456
-------- --------
Loss per share:
Before cumulative effect of accounting change $ (0.29) $(0.06)
Cumulative effect of accounting change (0.07) --
-------- --------
Loss per share $ (0.36) $(0.06)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
APRIL 30, 1994 JANUARY 29,1994
--------------- ----------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,152 $ 6,632
Accounts and notes receivable 12,766 11,770
Inventory 25,977 26,269
Prepaid expenses and other current assets 2,684 2,013
Deferred income taxes 2,074 2,098
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Total current assets 58,653 48,782
-------- --------
PROPERTY AND EQUIPMENT:
Land and improvements 15,301 15,199
Buildings and leaseholds 53,318 54,231
Equipment 77,847 75,418
-------- --------
146,466 144,848
Less - Accumulated depreciation 54,851 52,834
-------- --------
Net property and equipment 91,615 92,014
-------- --------
PROPERTY UNDER CAPITAL LEASES, net 1,230 1,760
-------- --------
OTHER ASSETS:
Goodwill, net 10,874 10,961
Franchise and operating rights, net 7,571 7,656
Notes receivable 2,548 2,267
Other 7,723 6,002
-------- --------
Total other assets 28,716 26,886
-------- --------
Total assets $180,214 $169,442
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - --------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,071 $ 3,071
Current portion of capital lease obligations 332 1,038
Accounts payable 29,475 29,461
Accrued expenses 14,716 15,727
-------- --------
Total current liabilities 45,594 49,297
-------- --------
LONG-TERM DEBT, less current portion 87,063 71,604
-------- --------
CAPITAL LEASE OBLIGATIONS, less current portion 1,554 1,630
-------- --------
OTHER LIABILITIES AND DEFERRED CREDITS 6,533 6,222
-------- --------
DEFERRED INCOME TAXES 7,550 6,819
-------- --------
STOCKHOLDERS' EQUITY:
Class A Common Stock 33 33
Class B Common Stock 30 30
Paid-in capital in excess of par value 27,504 27,483
Retained earnings 9,358 11,329
Treasury stock, at cost (5,005) (5,005)
-------- --------
Total stockholders' equity 31,920 33,870
-------- --------
Total liabilities and stockholders' equity $180,214 $169,442
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL QUARTER ENDED
----------------------------------
APRIL 30, 1994 MAY 1, 1993
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,971) $ (320)
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change 389 --
Depreciation and amortization 3,274 3,225
Increase in deferred income taxes 755 440
Loss (gain) on other disposition of
properties, net 104 (128)
(Increase) decrease in receivables (996) 307
Decrease in inventory 292 148
Increase in accounts payable 14 1,946
Increase in other current assets and
liabilities, net (1,310) (1,983)
Increase in other noncurrent liabilities
and deferred credits 311 122
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Net cash provided by operating activities 862 3,757
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,619) (4,550)
Proceeds from sale of property and equipment 139 230
Proceeds from long-term notes receivable 341 257
Increase in long-term notes receivable (622) (20)
(Increase) decrease in other assets (99) 497
-------- -------
Net cash used by investing activities (2,860) (3,586)
-------- -------
Cash flows from financing activities:
Issuance of senior subordinated notes, net of
offering costs 73,090 --
Repayment of term debt (22,000) (2,000)
Retirement of subordinated debentures (27,944) --
(Decrease) increase in revolving loan, net (12,100) 1,000
Additional long-term debt -- 2,175
Repayment of other long-term debt and capital
lease obligations (549) (582)
Other increases in common stock and paid-in
capital 21 57
-------- -------
Net cash provided by financing activities 10,518 650
-------- -------
Increase in cash 8,520 821
Cash at beginning of fiscal year 6,632 6,483
-------- -------
Cash at end of first fiscal quarter $ 15,152 $ 7,304
======== =======
</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
APRIL 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 Note 2 below. Certain prior year amounts have been reclassified to
conform to the presentation used for the current year.
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.
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3. Changes in Capital Accounts
-----------------------------
An analysis of the capital stock accounts for the first fiscal quarter ended
April 30, 1994 follows:
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------
Paid-in
Class A Shares Class B Shares capital
issued at issued at in excess of
$.01 par value $0.1 par value Amount par value
-------------- -------------- -------- ------------
<S> <C> <C> <C> <C>
Balance January 29, 1994 3,268,729 2,956,015 $62,249 $27,483,049
Employee stock purchase plan 3,509 -- 35 17,510
Employee stock options 750 -- 8 3,930
exercised ---------- ---------- ------- -----------
Balance April 30, 1994 3,272,988 2,956,015 $62,292 $27,504,489
---------- ---------- ------- -----------
</TABLE>
As of April 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 2,751,363 Class A shares and 2,780,058
Class B shares outstanding.
4. Earnings Per Share
------------------
Earnings per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate,
during each period.
5. Seasonality
-----------
The results of operations for the fiscal quarter ended April 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.
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DAIRY MART CONVENIENCE STORES, INC.
FISCAL QUARTER ENDED APRIL 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 the timing of certain working capital
disbursements.
During the first fiscal quarter ended April 30, 1994, the Company paid
its trade payables in an average of 25 days, which compares to 24 days for the
entire fiscal year ended January 29, 1994 and 25 days for the first fiscal
quarter ended May 1, 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 April 30, 1994 and January 29, 1994, $6.3 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.
During the current year first fiscal quarter, cash generated by
operations was approximately $2.9 million lower than the prior year first fiscal
quarter. The decrease was due in part to reduced earnings in the current year
(see "Results of Operations") as well as changes in certain of the Company's
working capital accounts.
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Cash used by the Company's investing activities was approximately
$700,000 lower in the current year first fiscal quarter as compared to the prior
year first fiscal quarter primarily due to a reduced level of capital
expenditures.
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 proceeds from the sale of
the Notes, net of offering expenses, 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. Excess proceeds of
approximately $11.0 million realized from the sale of the Notes will provide
funds for general corporate and working capital purposes. 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 over the next five fiscal years by approximately $53
million.
The Company plans 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 and mortgage and
equipment financing. 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.
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
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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.
The Company owned or franchised 1,014 stores at April 30, 1994, as
compared to 1,022 stores at January 29, 1994 and 1,074 stores at May 1, 1993.
The decrease in the overall number of stores is due to the continual closing
and/or sale of locations whose performance is deemed to be inadequate, which
closings generally occur at the expiration of their lease terms in order to
minimize the cost to close.
In addition to cash flow from operations, potential mortgage,
equipment and other financing and the available net 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. This 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 April 30, 1994, the Company did not have 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 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, especially to address the
seasonality of operations and timing of certain working capital disbursements.
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<PAGE>
RESULTS OF OPERATIONS
Revenues for the first fiscal quarter ended April 30, 1994 decreased
by $1.0 million or 0.7% from the first fiscal quarter ended May 1, 1993. The
revenue decrease was due to lower revenues from the Company's gasoline
operations, partially offset by increased revenues from the Company's
convenience store group. The lower gasoline revenues in the current year first
fiscal quarter resulted in part from a decrease in the average selling price of
gasoline of 2.6 cents per gallon for the current year first fiscal quarter as
compared to the prior year first fiscal quarter. Additionally, total gasoline
gallons sold decreased by approximately 1.6 million gallons in the current year
first fiscal quarter. On a per location basis, average gallonage decreased by
approximately 0.9% in the current year first fiscal quarter as compared to the
prior year first fiscal quarter.
Convenience store revenues increased to $86.0 million in the current
year first fiscal quarter from $84.0 million in the prior year first fiscal
quarter. This increase was primarily due to a comparable store sales increase
of approximately 2.0% in the current year first fiscal quarter. In addition,
convenience store revenues were impacted by a change in the composition of
stores in the current year first fiscal quarter to include higher volume Company
operated stores and fewer franchise stores. This change in store composition
was due in part to the Company's ongoing review and evaluation of its store base
to determine whether its stores are best suited as either a Company operated or
franchise location, using economic and non-economic criteria. Such transfers
between Company operated and franchise stores have occurred and will continue in
the ordinary course of business, and generally result in minimal transfer costs
to the Company. The overall increase in the Company's convenience store
revenues was partially offset 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, since the majority of stores closed had been operating at a loss.
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Income from operations decreased by $1.4 million in the current year
first fiscal quarter as compared to the prior year first fiscal quarter. This
was attributable to a decrease in earnings from the convenience store and
manufacturing and distribution operations, partially offset by increased
earnings from gasoline operations.
Income from convenience store operations decreased in the current year
first fiscal quarter primarily due to reduced product gross margins caused
primarily by significant product promotions, combined with increased store
selling expenses, including higher snow removal and other equipment maintenance
costs associated with severe winter weather. The overall decrease in earnings
from the convenience store operations was partially offset by the increase in
comparable store sales as well as a higher level of marketing allowances,
related to monies received from vendors for specific product promotions, as
compared to the prior year first fiscal quarter. Income from manufacturing and
distribution operations decreased in the current year due primarily to reduced
operating margins resulting from competitive product pricing as well as
increased manufacturing expenses.
Income from gasoline operations improved due to an increase in
gasoline gross margins in the current year first fiscal quarter as compared to
the prior year first fiscal quarter. Additionally, the Company incurred lower
operating costs in the current year first fiscal quarter related to compliance
with environmental regulations, reflecting a reduction 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.
These increases were partially offset due to the decrease in gasoline gallons
sold described above. In addition to the above items, other selling, general
and administrative expenses decreased in the current year first fiscal quarter
due in part to decreases in group health insurance expense, based on specific
claim experience.
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<PAGE>
Interest Expense, net of interest income, increased by $523,000 in the
current year first fiscal quarter due primarily to duplicative interest expense
during March, 1994 associated with the Company's 10.25% senior subordinated
debentures issued March 3, 1994 and the 14.25% subordinated debentures which
were outstanding through and including April 4, 1994, the date on which the
debentures were redeemed in full following notice to holders of such debentures.
The effective tax rate for the Company was a benefit of 41% for both
the current and prior year first fiscal quarters. 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 fiscal quarter was $1,971,000 or $.36
per share, as compared to a net loss of $320,000 or $.06 per share for the prior
year first fiscal quarter. In addition to the items discussed above, the net
loss in the current year first fiscal quarter was also effected 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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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 14, 1994
DAIRY MART CONVENIENCE STORES, INC.
/s/ Frank Colaccino /s/ Gregory G. Landry
- - -------------------------------- ----------------------------------
Frank Colaccino Gregory G. Landry
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
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