<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended August 3, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-12497
__________________
Dairy Mart Convenience Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2497894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Vision Drive, Enfield, CT 06082
(Address of principal executive offices)
Registrant's telephone number, including area code (860) 741-4444
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
-------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares of Class A Common Stock outstanding August 3, 1996 - 2,837,541
Shares of Class B Common Stock outstanding August 3, 1996 - 2,783,060
<PAGE>
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 SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------ ----------------------
<S> <C> <C> <C> <C>
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------
Revenues...................................... $156,132 $150,818 $297,460 $284,260
-------- -------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold..........
Operating and administrative expenses........ 114,456 108,601 219,538 206,771
35,193 35,978 69,344 69,458
Interest expense............................. 2,756 2,262 5,504 4,623
-------- -------- -------- --------
152,405 146,841 294,386 280,852
-------- -------- -------- --------
Income before income taxes................... 3,727 3,977 3,074 3,408
Provision for income taxes.................... (1,493) (1,740) (1,233) (1,500)
-------- -------- -------- --------
Net income.................................. $ 2,234 $ 2,237 $ 1,841 $ 1,908
- ------------------------------------------------------------------------------------------------
Weighted average shares outstanding........... 4,700 5,836 4,702 5,773
-------- -------- -------- --------
Earnings per share............................ $0.48 $0.38 $0.39 $0.33
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Dairy Mart Convenience Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
August 3, 1996 February 3, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash....................................... $ 17,654 $ 12,654
Short-term investment...................... 1,532 -
Accounts and notes receivable.............. 11,476 9,752
Inventory.................................. 20,466 20,928
Prepaid expenses and other current assets.. 3,639 3,454
Deferred income taxes...................... 2,282 2,669
-------- --------
Total current assets.................... 57,049 49,457
-------- --------
Assets Held For Sale.......................... 8,685 8,685
-------- --------
Property and Equipment, net................... 82,647 80,387
-------- --------
Intangible Assets, net........................ 17,401 17,277
-------- --------
Other Assets, net............................. 10,275 9,132
-------- --------
Total assets.................................. $176,057 $164,938
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations..... $ 1,465 $ 1,430
Accounts payable................................ 34,656 30,803
Accrued expenses................................ 15,371 14,437
Accrued interest................................ 3,654 3,355
-------- --------
Total current liabilities.................... 55,146 50,025
-------- --------
Long-Term Obligations, less current portion above.. 99,466 99,451
-------- --------
Other Liabilities.................................. 10,238 6,254
-------- --------
Stockholders' Equity:
Preferred Stock (serial)........................ - -
Class A Common Stock............................ 33 33
Class B Common Stock............................ 30 30
Paid-in capital................................. 30,129 29,971
Retained earnings (deficit)..................... (3,980) (5,821)
Treasury stock, at cost.........................
Note receivable from DM Associates..............
(5,005) (5,005)
Total stockholders' equity................... (10,000) (10,000)
-------- --------
11,207 9,208
-------- --------
Total liabilities and stockholders' equity......... $176,057 $164,938
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Dairy Mart Convenience Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE TWO FISCAL QUARTERS ENDED
---------------------------------
August 3, 1996 July 29, 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income.............................................. $ 1,841 $ 1,908
Adjustments to reconcile net income to net cash
provided by operating activities:
Cash flow effect of corporate governance and restructuring
initiatives and other operating costs................ (1,788) (2,080)
Depreciation and amortization......................... 5,833 5,915
Amortization of original issue discount............... 97 -
Change in deferred income taxes....................... (866) 1,625
(Gain) loss on other disposition of properties, net... (89) 176
Net change in assets and liabilities:
Accounts and notes receivable...................... (1,724) (1,095)
Inventory.......................................... 462 4,705
Accounts payable................................... 3,853 1,197
Accrued interest................................... 299 (56)
Other assets and liabilities....................... 6,521 (2,043)
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities................. 14,439 10,252
- ----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and increase in short-term investments...... (1,532) (61)
Purchase of property and equipment...................... (9,429) (7,962)
Proceeds from sale of property, equipment and
assets held for sale................................. 2,233 10,671
Increase in long-term notes receivable.................. (1,368) (507)
Proceeds from collection of long-term notes receivable.. 971 516
Increase in intangibles and other assets................ (425) (92)
- ----------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities....... (9,550) 2,565
- ----------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in long-term obligations....................... 650 -
Repayment of long-term obligations...................... (697) (1,022)
Increase in common stock and paid-in capital............ 158 77
- ----------------------------------------------------------------------------------------
Net cash provided (used)by financing activities........... 111 (945)
- ----------------------------------------------------------------------------------------
Increase in cash.......................................... 5,000 11,872
Cash at beginning of fiscal year.......................... 12,654 4,512
- ----------------------------------------------------------------------------------------
Cash at end of second fiscal quarter...................... $ 17,654 $ 16,384
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Dairy Mart Convenience Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1996
(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/A Amendment No. 2, filed with the Securities and
Exchange Commission on August 23, 1996.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in accordance
with the accounting policies described in Note 1 to the February 3, 1996 audited
consolidated financial statements included in the Company's Form 10-K/A
Amendment No. 2. Certain prior year amounts have been reclassified to conform
to the presentation used for the current year.
<PAGE>
2. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first two fiscal quarters
ended August 3, 1996 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> <C> <C>
Balance February 3, 1996 3,326,296 2,959,017 $ 62,854 $ 29,970,606
Employee stock purchase plan 5,245 - 52 25,669
Stock options exercised 27,625 - 276 133,068
-------------- ------------- -------- ----------------
Balance August 3, 1996 3,359,166 2,959,017 $ 63,182 $ 30,129,343
-------------- ------------- -------- ----------------
</TABLE>
As of August 3, 1996, 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 2,837,541 Class A shares and 2,783,060 Class B
shares outstanding.
3. Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate,
during each period. The Company's note receivable from DM Associates Limited
Partnership is secured by 1,220,000 shares of the Company's Class B Common
Stock, which shares are being treated similar to treasury stock for earnings
(loss) per share purposes.
4. Seasonality
-----------
The results of operations for the first two fiscal quarters ended August 3,
1996 are not necessarily indicative of results to be expected for the full
fiscal year. The convenience store industry in the Company's marketing areas
experiences a higher percentage of revenues and profit margins during the summer
months than during the winter months. Historically, the Company has achieved
more favorable financial results in its second and third fiscal quarters, as
compared to its first and fourth fiscal quarters.
5. Supplemental Consolidating Financial Information (unaudited)
------------------------------------------------------------
The Company's payment obligations under the Series A and Series B Senior
Subordinated Notes are guaranteed by certain of the Company's subsidiaries
("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed
<PAGE>
on an unsecured, senior subordinated, joint and several basis by each of the
Guarantor Subsidiaries. The following supplemental financial information sets
forth, on an unconsolidated basis, statement of operations, balance sheet, and
cash flows information for the Company ("Parent Company Only"), for the
Guarantor Subsidiaries and for Financial Opportunities Inc. ("FINOP"), the
Company's non-guarantor subsidiary. Separate complete financial statements of
the respective Guarantor Subsidiaries would not provide additional information
which would be useful in assessing the financial condition of the Guarantor
Subsidiaries, and are accordingly omitted.
Investment in subsidiaries are 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 principle elimination entries eliminate
the Parent Company's investment in subsidiaries and intercompany balances and
transactions.
Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
(in thousands)
Revenues............................. $ 135 $297,054 $ 271 $ - $297,460
-------- -------- ------ --------- ---------
Cost of goods sold and expenses:
Cost of goods sold.................. - 219,538 - - 219,538
Operating and administrative
expenses........................... 138 69,206 - - 69,344
Interest expense.................... 5,077 253 174 - 5,504
-------- -------- ------ --------- ---------
5,215 288,997 174 - 294,386
-------- -------- ------ --------- ---------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries....... (5,080) 8,057 97 - 3,074
Benefit from (provision for)
income taxes....................... 2,037 (3,264) (6) - (1,233)
-------- -------- ------ --------- ---------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries..................... (3,043) 4,793 91 - 1,841
Equity in income (loss) of
consolidated subsidiaries.......... 4,884 91 - (4,975) -
-------- -------- ------ --------- ---------
Net income (loss)................ $ 1,841 $ 4,884 $ 91 $ (4,975) $ 1,841
======== ======== ====== ========= =========
</TABLE>
<PAGE>
Supplemental Consolidating Balance Sheets
as of August 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------------- ------------ ------ ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash........................... $ 6,125 $ 10,768 $ 761 $ - $ 17,654
Short-term investment.......... - - 1,532 - 1,532
Accounts and notes receivable.. 610 10,036 830 - 11,476
Inventory...................... - 20,466 - - 20,466
Prepaid expenses and
other current assets.......... 127 3,512 - - 3,639
Deferred income taxes.......... 1,217 1,065 - - 2,282
------ -------- ------ --------- --------
Total current assets........ 8,079 45,847 3,123 - 57,049
------ -------- ------ --------- --------
Assets Held For Sale.............. - 8,685 - - 8,685
Property and Equipment, net....... - 82,647 - - 82,647
Intangible Assets, net............ - 17,401 - - 17,401
Other Assets, net................. 3,433 4,170 2,672 - 10,275
Investment in and advances to
subsidiaries.................... 114,678 1,258 758 (116,694) -
------- -------- ------ --------- --------
Total assets...................... $126,190 $160,008 $6,553 $(116,694) $176,057
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations........ $ 1,145 $ 320 $ - $ - $ 1,465
Accounts payable............... 17,137 17,510 9 - 34,656
Accrued expenses............... 723 14,494 154 - 15,371
Accrued interest............... 3,552 - 102 - 3,654
------- -------- ------ --------- --------
Total current
liabilities................ 22,557 32,324 265 - 55,146
------- -------- ------ --------- --------
Long-Term Obligations,
less current portion above....... 92,294 2,942 4,230 - 99,466
Other Liabilities................. 132 10,064 42 - 10,238
Stockholders' Equity.............. 11,207 114,678 2,016 (116,694) 11,207
------- -------- ------ --------- --------
Total liabilities and
stockholders' equity............ $126,190 $160,008 $6,553 $(116,694) $176,057
======== ======== ======= ========= ========
</TABLE>
<PAGE>
Supplemental Consolidating Statement of Cash Flows
for the Two Fiscal Quarters ended August 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.............................. $ (5,215) $ 19,580 $ 74 $ - $14,439
-------- -------- ------- --------- -------
Cash flow from investing activities:
Purchase of and increase in short-term
investments............................ - - (1,532) - (1,532)
Purchase of property and equipment...... - (9,429) - - (9,429)
Proceeds from sale of property,
equipment and assets held for sale..... - 2,233 - - 2,233
Investment in and advances to
subsidiaries........................... 9,606 (9,123) (483) - -
Increase in long-term notes receivable.. - (120) (1,248) - (1,368)
Proceeds from collection of
long-term receivables.................. - 60 911 - 971
Increase in intangibles
and other assets....................... - (428) 3 - (425)
-------- -------- ------- --------- -------
Net cash provided by (used in) investing
activities............................ 9,606 (16,807) (2,349) - (9,550)
-------- -------- ------- --------- -------
Cash flows from financing activities:
Increase in revolving loan, net......... 300 350 - - 650
Repayment of long-term obligations...... (463) (226) (8) - (697)
Increase in common stock and paid-in
capital................................. 158 - - - 158
-------- -------- ------- --------- -------
Net cash provided by (used in) financing
activities.............................. (5) 124 (8) - 111
-------- -------- ------- --------- -------
Increase (decrease) in cash............... 4,386 2,897 (2,283) - 5,000
Cash at beginning of year................. 1,739 7,871 3,044 - 12,654
-------- -------- ------- --------- -------
Cash at end of second fiscal quarter...... $ 6,125 $ 10,768 $ 761 $ - $17,654
======== ======== ======= ========= =======
</TABLE>
Supplemental Consolidating Statement of Operations
for the Two fiscal Quarters ended July 29, 1995
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 376 $283,601 $283 $ - $284,260
--------- -------- ---- -------- ---------
Cost of goods sold and expenses:
Cost of goods sold....................... - 206,771 - - 206,771
Operating and administrative
expenses................................ 203 69,255 - - 69,458
Interest expense.......................... 4,127 316 180 - 4,623
--------- -------- ---- -------- ---------
4,330 276,342 180 - 280,852
--------- -------- ---- -------- ---------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries.......... (3,954) 7,259 103 - 3,408
Benefit from (provision for)
income taxes.............................. 1,740 (3,231) (9) - (1,500)
--------- -------- ---- -------- ---------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries............................ (2,214) 4,028 94 - 1,908
Equity in income (loss) of
consolidated subsidiaries................. 4,122 94 - (4,216) -
--------- -------- ---- -------- ---------
Net income (loss)....................... $ 1,908 $ 4,122 $ 94 $ (4,216) $ 1,908
========= ======== ==== ======== =========
</TABLE>
<PAGE>
Supplemental Consolidating Balance Sheets
as of February 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................. $ 1,739 $ 7,871 $3,044 $ - $ 12,654
Accounts and notes receivable.... - 9,081 671 - 9,752
Inventory........................ - 20,928 - - 20,928
Prepaid expenses and
other current assets............ 60 3,394 - - 3,454
Deferred income taxes............ 859 1,810 - - 2,669
--------- ----------- ------ ----------- ----------
Total current assets.......... 2,658 43,084 3,715 - 49,457
--------- ----------- ------ ----------- ----------
Assets Held For Sale................ - 8,685 - - 8,685
Property and Equipment, net......... - 80,387 - - 80,387
Intangible Assets, net.............. - 17,277 - - 17,277
Other Assets, net................... 2,442 4,352 2,338 - 9,132
Investment in and advances to
subsidiaries...................... 119,309 1,650 275 (121,234) -
--------- ----------- ------ ----------- ----------
Total assets........................ $ 124,409 $ 155,435 $6,328 $ (121,234) $ 164,938
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations... $ 932 $ 490 $ 8 $ - $ 1,430
Accounts payable.......... 15,919 14,875 9 - 30,803
Accrued expenses.......... 2,211 12,221 5 - 14,437
Accrued interest.......... 3,236 - 119 - 3,355
--------- ----------- ------ ----------- ----------
Total current liabilities 22,298 27,586 141 - 50,025
--------- ----------- ------ ----------- ----------
Long-Term Obligations,
less current portion above.. 92,573 2,648 4,230 - 99,451
Other Liabilities............ 330 5,892 32 - 6,254
Stockholders' Equity......... 9,208 119,309 1,925 (121,234) 9,208
--------- ----------- ------ ----------- ----------
Total liabilities and
stockholders' equity.............. $ 124,409 $ 155,435 $6,328 $ (121,234) $ 164,938
========= =========== ====== =========== ==========
</TABLE>
<PAGE>
Supplemental Consolidating Statement of Cash Flows
for the Two Quarters ended July 29, 1995
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities.............................. $ (1,713) $ 11,858 $ 107 $ - $ 10,252
--------- ----------- ------ ----------- ----------
Cash flow from investing activities:
Purchase of and increase in short-term
investments............................ - - (61) - (61)
Purchase of property and equipment...... - (7,962) - - (7,962)
Proceeds from sale of property,
equipment and assets held for sale..... - 10,671 - - 10,671
Investment in and advances to
subsidiaries........................... 17,494 (17,438) (56) - -
Increase in long-term notes receivable.. - - (507) - (507)
Proceeds from collection of
long-term receivables.................. - 67 449 - 516
Increase in intangibles
and other assets....................... (14) (80) 2 - (92)
--------- ----------- ------ ----------- ----------
Net cash provided by (used in)
investing activities................... 17,480 (14,742) (173) - 2,565
--------- ----------- ------ ----------- ----------
Cash flows from financing activities:
Repayment of long-term obligations...... (536) (486) - - (1,022)
Increase in common stock and paid-in
capital................................ 77 - - - 77
--------- ----------- ------ ----------- ----------
Net cash used in financing activities..... (459) (486) - - (945)
--------- ----------- ------ ----------- ----------
Increase (decrease) in cash.............. 15,308 (3,370) (66) - 11,872
Cash at beginning of year................. - 3,418 1,094 - 4,512
--------- ----------- ------ ----------- ----------
Cash at end of second fiscal quarter...... $ 15,308 $ 48 $1,028 $ - $ 16,384
========= =========== ====== =========== ==========
</TABLE>
<PAGE>
Dairy Mart Convenience Stores, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
Revenues for the current year first two fiscal quarters increased by
$13.2 million from the prior year first two fiscal quarters, and revenues for
the second fiscal quarter increased by $5.3 million from the prior year second
fiscal quarter. A summary of revenues by functional area for the comparative
second fiscal quarter and the first two fiscal quarters is as follows:
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
-------------------------- ------------------------
Aug 3, July 29, Aug 3, July 29,
(in millions) 1996 1995 1996 1995
- ----------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Convenience store $ 90.6 $ 90.4 $171.7 $169.4
Gasoline 64.5 59.8 124.0 113.6
Other 1.0 0.6 1.8 1.3
-------------------------- -----------------------
Total $156.1 $150.8 $297.5 $284.3
========================== =======================
</TABLE>
Convenience store revenues increased $2.3 million, or 1.4%, in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters, and convenience store revenues for the current year second
fiscal quarter increased $0.2 million as compared to the prior year second
fiscal quarter. These increases were primarily due to a 1.7% increase and a 1.2%
increase in comparable store sales for the two fiscal quarters and second fiscal
quarter, respectively, partially offset by a reduction of approximately 60
underperforming stores in the current fiscal year. Although the reduction in
stores had a negative impact on revenues they did not have a material adverse
effect on results of operations, since the majority of stores closed or sold had
been operating at a loss.
Gasoline revenues increased $10.4 million in the current year first two
fiscal quarters as compared to the prior year first two fiscal quarters, and
gasoline revenues for the current year second fiscal quarter increased $4.7
million as compared to the prior year second fiscal quarter. These increases
were due to an increase in the average selling price of gasoline of 7.0 cents
per
<PAGE>
gallon and 5.0 cents per gallon for the two fiscal quarters and second fiscal
quarter, respectively, combined with an increase in total gasoline gallons sold
of 2.2 million and 1.5 million for the two fiscal quarters and second fiscal
quarter, respectively. The increase in gasoline gallons sold was achieved
despite a decrease in the average number of gasoline retailing facilities.
The Company operated on average twenty-five fewer gasoline retailing facilities
during the current year first two fiscal quarters and seventeen fewer gasoline
retailing facilities during the second fiscal quarter, as compared to the
corresponding periods of the prior year. On a per location basis, average store
gallons sold increased by 3.8% and 7.7% in the current year first two fiscal
quarters and second fiscal quarter, respectively, as compared to the
corresponding periods of the prior year. The increase in gallons sold was due
primarily to further development of new stores having a major gasoline presence
and the remodeling and expansion of gasoline facilities at certain existing
locations offset by the closure of certain low volume gasoline locations.
Gross Profits
Gross profits for the current year first two fiscal quarters increased
by $0.4 million from the prior year first two fiscal quarters, and gross profits
for the current year second fiscal quarter decreased by $0.5 million from the
prior year second fiscal quarter. A summary of the gross profits by functional
area for the comparative second fiscal quarter and the first two fiscal quarters
is as follows:
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ---------------------
Aug 3, July 29, Aug 3, July 29,
(in millions) 1996 1995 1996 1995
- -------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
Convenience store $34.1 $34.8 $64.0 $64.3
Gasoline 6.6 6.8 12.1 11.9
Other 1.0 0.6 1.8 1.3
--------------------- ---------------------
Total $41.7 $42.2 $77.9 $77.5
===================== =====================
</TABLE>
Convenience store gross profits decreased by $0.3 million in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters, and convenience store gross profits for the current year second
fiscal
<PAGE>
quarter decreased by $0.7 million as compared to the prior year second fiscal
quarter. These decreases were primarily due to lower product gross margins and
due to the overall reduction in the average number of stores, as described
above, partially offset by increased marketing allowances and an increase in
comparable store sales, as described above.
Gasoline gross profits increased by $0.2 million in the current year
first two fiscal quarters as compared to the prior year first two fiscal
quarters due to an increase in the gasoline gallons sold, as described above.
Gasoline gross profits in the current year second fiscal quarter decreased by
$0.2 million as compared to the prior year second fiscal quarter primarily due
to a decrease of 0.87 cents in gross profit per gallon, partially offset by an
increase in the gasoline gallons sold, as described above.
Other gross profits increased by $0.5 million in the current year
first two fiscal quarters as compared to the prior year first two fiscal
quarters, and other gross profits for the current year second fiscal quarter
increased by $0.4 million as compared to the prior year second fiscal quarter
primarily due to marketing allowances from third-party dairy manufacturers.
Operating and Administrative Expenses
Operating and administrative expenses for the current year first two
fiscal quarters decreased $0.2 million from the prior year first two fiscal
quarters, and operating and administrative expenses for the second fiscal
quarter decreased by $0.8 million from the prior year second fiscal quarter. A
summary of expenses by functional area for the comparative second fiscal quarter
and the first two fiscal quarters is as follows:
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------- ------------------
Aug 3, July 29, Aug 3, July 29,
(in millions) 1996 1995 1996 1995
- ------------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Convenience store $25.5 $25.3 $49.6 $49.0
Gasoline 3.4 3.4 7.0 6.4
Administrative and other 6.3 7.3 12.7 14.1
----------------- ----------------
Total $35.2 $36.0 $69.3 $69.5
================= ================
</TABLE>
<PAGE>
Convenience store operating expenses increased by $0.6 million in the
current year first two fiscal quarters as compared to the prior year first two
fiscal quarters, and convenience store operating expenses for the current year
second fiscal quarter increased by $0.2 million as compared to the prior year
second fiscal quarter. These increases were primarily due to higher labor, rent
and depreciation costs on a per store basis, partially offset by the closure or
sale of underperforming stores, as described above.
Gasoline operating expenses increased by $0.6 million in the current
year first two fiscal quarters as compared to the prior year first two fiscal
quarters primarily due to an increase in environmental expenses associated with
the remediation of gasoline locations after considering probable reimbursements
from various state environmental trust funds and due to the operation of higher
volume new or remodelled and expanded facilities, as described above. Gasoline
operating expenses remained constant in the current year second fiscal quarter
as compared to the prior year second fiscal quarter.
Administrative and other expenses decreased by $1.4 million in the
current year first two fiscal quarters, and decreased by $1.0 million in the
current year second fiscal quarter as compared to the corresponding periods of
the prior year. The decreases were due to a reduced level of administrative
support staff and lower professional fees.
Interest Expense and Taxes
Interest expense increased in the current year first two fiscal
quarters and the second fiscal quarter as compared to the corresponding periods
of the prior year due to an increased level of borrowing associated with the
issuance of $13.5 million principal amount of 10.25% senior subordinated notes
(Series B) in December 1995.
The effective tax rate for the Company was a provision of 40% for both
the current year first two fiscal quarters and the current year second fiscal
quarter as compared to a provision of 44% for the corresponding periods of the
prior
<PAGE>
fiscal year. The Company provides for income taxes at the effective rate
expected to be incurred for the entire fiscal year.
<PAGE>
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 in
the current year first two fiscal quarters significantly exceeded the current
debt service requirements of the Company's long-term obligations. The current
year capital expenditures of the Company were funded by the excess operating
cash flow and by the cash generated in the current year from the sale of
certain assets. In addition, the Company has a revolving line of credit
available to address the timing of certain working capital and capital
expenditure disbursements. Management believes that the cash flow from
operations and the proceeds from the sale of certain assets, supplemented by the
availability of a revolving line of credit, will provide the Company with
adequate liquidity and the capital necessary to achieve its expansion
initiatives in its retail operations (see Capital Expenditures).
Cash Provided by Operating Activities
During the current year first two fiscal quarters, net cash generated by
operations was $4.2 million higher than the prior year first two fiscal quarters
as a result of the net change in accounts payable, inventory and other assets
and liabilities, net of the change in deferred income taxes. The cash flow
associated with inventory decreased due to an overall lower amount of store and
gasoline inventory and due to a reduced amount of inventory liquidations
associated with a lower number of store closures or sales of underperforming
stores. The increase in other assets and liabilities, net of the change in
deferred income taxes, in the current year first two fiscal quarters was due to
the receipt of marketing allowances from a grocery wholesaler under the terms of
a new supply agreement which expires in fiscal 2006. The Company is deferring
these marketing allowances over the life of the agreement.
During the current year first two fiscal quarters, the Company paid its
<PAGE>
trade payables in an average of 27 days, compared to 27 days for the fiscal year
ended February 3, 1996 and 25 days for the prior year first two fiscal quarters.
The cash flow of the Company is also favorably impacted by the Company's use of
funds from the sale of money orders, pending remittance of such funds to the
issuer of the money orders. As of August 3, 1996 and February 3, 1996, the
amounts due the issuer were $7.8 million and $7.6 million, respectively. As of
April 30, 1996, the Company changed its money order issuer and settled its
remittance obligation with the former money order issuer in May 1996, which
resulted in the release of an outstanding letter of credit in the amount of $7.5
million. The Company is not required to issue a letter of credit to the current
issuer of money orders.
Cash Used by Financing Activities
Cash provided by financing activities increased by $1.1 million in the
current year first two fiscal quarters as compared to the corresponding period
of the prior year primarily due to lower debt service requirements and due to an
increase in the Company's long-term obligations.
During the current year first two fiscal quarters, the Company entered into
a new $30.0 million senior revolving credit facility with $15.0 million
available for the issuance of letters of credit. The Company may utilize the
new revolving credit facility as needed for working capital and general
corporate purposes. As of August 3, 1996 the Company had no outstanding
revolving credit loans and had $6.5 million in outstanding letters of credit.
Cash Used by Investing Activities
Net cash used by investing activities increased by $12.1 million in the
current year first two fiscal quarters as compared to the corresponding period
of the prior year due to reduced cash flows generated from the sale of certain
assets, including the sale and leaseback of existing store properties. In
addition, the Company increased its capital expenditure requirements with
respect to new store construction and remodeling of existing store locations.
Finally,
<PAGE>
the Company's investing activities were increased due to the purchase in the
current year first fiscal quarter of a U.S. Treasury Bill.
Capital Expenditures
The Company anticipates spending approximately $20 to $25 million for
capital expenditures in fiscal 1997 by purchasing store and gasoline equipment
for new stores, remodeling a certain number of existing stores, installing fast
food concepts, such as Taco Bell/R/, Subway/R/ and Pizza Hut/R/ in the new and
remodeled stores, installing store automation in a number of locations,
significantly upgrading certain gasoline locations to provide credit card
readers at the pump, improve outdoor lighting and to meet current environmental
standards (see "Environmental Responsibility"). These capital expenditures will
be funded primarily by cash generated from operations and from cash generated by
the disposition of assets held for sale as of August 3, 1996, supplemented by
the availability of the Company's senior revolving line of credit. The Company
intends to lease the real estate for the majority of new store locations.
Other Liquidity Item
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). This
Note is due and payable in September 1997 and if collected, would favorably
impact the liquidity of the Company. The Company does not, however, currently
anticipate collection of this Note and may therefore take direct ownership and
control of the Pledged Shares in full satisfaction of the Note. If the Pledged
Shares are acquired from DM Associates, it is the current intention of the
Company to retire such shares.
<PAGE>
Environmental Responsibility
The Company accrues its estimate of all costs to be incurred for assessment
and remediation with respect to releases of regulated substances from existing
and previously operated retail gasoline facilities. As of August 3, 1996, the
Company had recorded an accrual of $1,441,000 for such costs, the majority of
which are anticipated to be spent over the next 3 to 5 years.
The Company is entitled to reimbursement of a portion of the above costs
from various state environmental trust funds based upon compliance with the
terms and conditions of such trust funds. As of August 3, 1996, the Company has
recorded a net state trust fund reimbursement receivable of $878,000
(representing a gross receivable of $1,446,000 less an allowance of $568,000).
Although there are no assurances as to the timing, the Company believes that it
is probable that reimbursements from state environmental trust funds will be
received within one to four years from the payment of the reimbursable
assessment and remediation expenses.
In addition, the Company estimates that future capital expenditure
requirements to comply with federal and state underground gasoline storage tank
regulations will be approximately $10.0 to $12.0 million in the aggregate
through December 1998. These costs could be reduced for low volume locations
closed in lieu of the capital cost of compliance.
The Company's estimate of costs to be incurred for environmental assessment
and remediation and for required underground storage tank upgrading and other
regulatory compliance are based on factors and assumptions that could change due
to modifications of regulatory requirements or detection of unanticipated
environmental conditions.
<PAGE>
Part II.
Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits:
1. Exhibit (11)- Statement re Computation of Per-Share Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
(b.) 8-K Reports:
On July 10, 1996, the Company filed a report on Form 8-K which
indicated that a stipulation settlement had been filed with Delaware
Court of Chancery in connection with a shareholder derivative action
captioned Kahn vs. Dairy Mart Convenience Stores in which the Company
was named as a nominal defendant.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
Date: September 17, 1996 /s/ Gregory G. Landry
----------------------------------
Gregory G. Landry
Executive Vice President
Chief Financial Officer
<PAGE>
Exhibit 11
Dairy Mart Convenience Stores, Inc. and Subsidiaries
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per share amounts)
CALCULATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
-------------------------- ---------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income................. $ 2,234 $ 2,237 $ 1,841 $ 1,908
---------- ---------- ---------- ----------
Weighted average shares.... 5,602 5,577 5,596 5,571
Dilutive options........... 318 259 326 202
Effect of DM Associates stock (1,220) - (1,220) -
---------- ---------- ---------- ----------
Total shares for EPS purposes $ 4,700 $ 5,836 $ 4,702 $ 5,773
- ----------------------------------------------------------------------------------------------
Net income per share............... $ 0.48 $ 0.38 $ 0.39 $ 0.33
==============================================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<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> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> AUG-03-1996
<CASH> 17,654
<SECURITIES> 1,532
<RECEIVABLES> 13,079
<ALLOWANCES> 1,603
<INVENTORY> 20,466
<CURRENT-ASSETS> 57,049
<PP&E> 120,750
<DEPRECIATION> 39,434
<TOTAL-ASSETS> 176,057
<CURRENT-LIABILITIES> 55,146
<BONDS> 99,466
<COMMON> 63
0
0
<OTHER-SE> 11,207
<TOTAL-LIABILITY-AND-EQUITY> 176,057
<SALES> 0
<TOTAL-REVENUES> 297,460
<CGS> 219,538
<TOTAL-COSTS> 288,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 427
<INTEREST-EXPENSE> 5,504
<INCOME-PRETAX> 3,074
<INCOME-TAX> (1,233)
<INCOME-CONTINUING> 1,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,841
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
