<PAGE> 1
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 MAY 3, 1997
[ ] 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.)
210 BROADWAY EAST, CUYAHOGA FALLS, OHIO 44222
(Address of principal executive offices)
Registrant's telephone number, including area code (330) 923-0421
--------------------
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 MAY 3, 1997 - 3,023,694
SHARES OF CLASS B COMMON STOCK OUTSTANDING MAY 3, 1997 - 2,783,060
-1-
<PAGE> 2
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
--------------------
MAY 3, MAY 4,
1997 1996
<S> <C> <C>
Revenues ..................................... $ 139,929 $ 141,328
--------- ---------
Cost of goods sold and expenses:
Cost of goods sold .................. 102,408 105,082
Operating and administrative expenses 34,730 34,151
Interest expense .................... 2,767 2,748
--------- ---------
139,905 141,981
--------- ---------
Income (loss) before income taxes ... 24 (653)
(Provision for) benefit from income taxes .... (7) 260
--------- ---------
Net income (loss) ................... $ 17 $ (393)
- - ---------------------------------------------------------------------------
Weighted average shares outstanding .......... 4,756 4,371
--------- ---------
Income (loss) per share ...................... $ 0.00 $ (0.09)
- - ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 3
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MAY 3, 1997 FEBRUARY 1, 1997
=================================================================================
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash .................................... $ 13,422 $ 9,290
Short-term investment ................... 1,515 1,533
Accounts and notes receivable ........... 11,585 13,588
Inventory ............................... 19,622 20,184
Prepaid expenses and other current assets 3,206 3,279
Deferred income taxes ................... 1,674 1,811
--------- ---------
Total current assets ................. 51,024 49,685
--------- ---------
Assets Held For Sale ............................. 5,932 9,543
--------- ---------
Property and Equipment, net ...................... 91,707 89,448
--------- ---------
Intangible Assets, net ........................... 16,862 17,039
--------- ---------
Other Assets, net ................................ 9,330 9,790
--------- ---------
Total assets ..................................... $ 174,855 $ 175,505
- - -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ... $ 1,362 $ 1,383
Accounts payable .............................. 31,508 30,640
Accrued expenses .............................. 13,415 13,167
Accrued interest .............................. 1,447 3,335
--------- ---------
Total current liabilities ............ 47,732 48,825
--------- ---------
Long-Term Obligations, less current portion above 110,113 109,045
--------- ---------
Other Liabilities ................................ 8,973 9,722
--------- ---------
Stockholders' Equity:
Preferred Stock (serial) ...................... -- --
Class A Common Stock .......................... 35 35
Class B Common Stock .......................... 30 30
Paid-in capital ............................... 30,667 30,560
Retained earnings (deficit) ................... (7,690) (7,707)
Treasury stock, at cost ....................... (5,005) (5,005)
Note receivable from DM Associates ............ (10,000) (10,000)
--------- ---------
Total stockholders' equity ........... 8,037 7,913
--------- ---------
Total liabilities and stockholders' equity ....... $ 174,732 $ 175,505
- - -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THE FIRST FISCAL QUARTERS ENDED
-------------------------------
MAY 3, 1997 MAY 4, 1996
====================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ 17 $ (393)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ...................... 3,163 3,134
Amortization of original issue discount ............ 49 49
Change in deferred income taxes .................... 431 1,566
Loss (gain) on disposition of properties, net ...... 45 (86)
Net change in assets and liabilities:
Accounts and notes receivable ................. 2,003 (306)
Inventory ..................................... 562 253
Accounts payable .............................. 868 6,716
Accrued interest .............................. (2,188) (2,005)
Other assets and liabilities .................. (428) (5,056)
- - -----------------------------------------------------------------------------------
Net cash provided by operating activities .............. 4,522 3,872
- - -----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and change in short-term investments ..... 18 (1,514)
Purchase of property and equipment ................... (5,124) (3,951)
Proceeds from sale of property, equipment and
assets held for sale .............................. 3,641 889
Increase in long-term notes receivable ............... (168) (298)
Proceeds from collection of long-term notes receivable 163 352
Increase in intangibles and other assets ............. (25) (59)
- - -----------------------------------------------------------------------------------
Net cash used in investing activities .................. (1,495) (4,581)
- - -----------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net ...................... 1,620 100
Repayment of long-term obligations ................... (622) (357)
Issuance of common stock ............................. 107 24
- - -----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities .... 1,105 (233)
- - -----------------------------------------------------------------------------------
Increase(decrease) in cash ............................. 4,132 (942)
Cash at beginning of fiscal year ....................... 9,290 12,654
- - -----------------------------------------------------------------------------------
Cash at end of first fiscal quarter .................... $ 13,422 $ 11,712
- - -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
May 3, 1997
(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
May 1, 1997.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the February 1,
1997 audited consolidated financial statements included in the Company's Form
10-K. Certain prior year amounts have been reclassified to conform to the
presentation used for the current year.
2. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first fiscal quarter
ended May 3, 1997 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 1, 1997 3,509,576 2,959,017 $ 64,677 $ 30,560,173
Employee stock purchase plan 30,125 - 301 85,142
Stock options exercised 5,618 - 56 21,461
---------- ---------- --------- -------------
Balance May 3, 1997 3,545,319 2,959,017 $ 65,034 $ 30,666,776
---------- ---------- --------- -------------
</TABLE>
-5-
<PAGE> 6
As of May 3, 1997, 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 3,023,694 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 treated similar to treasury stock for
earnings (loss) per share purposes.
During 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share". The statement will revise the methods and disclosures
regarding earnings per share. The Company is required to adopt SFAS 128 in
the fourth quarter of fiscal 1998.
4. Seasonality
-----------
The results of operations for the first fiscal quarter ended May 3,
1997 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 on an unsecured, senior subordinated, joint and several basis by each
of the guarantor subsidiaries. The following supplemental financial information
sets forth, on an consolidating basis, statement of operations, balance sheet,
and cash flow information for the Company ("Parent Company Only"), for the
Guarantor Subsidiaries and for Financial Opportunities
-6-
<PAGE> 7
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 purpose 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
May 3, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues ........................... $ 68 $139,774 $ 87 $ -- $ 139,929
Cost of goods sold and expenses:
Cost of goods sold .............. -- 102,408 -- -- 102,408
Operating and administrative
expenses ....................... 69 34,657 4 -- 34,730
Interest expense ................ 2,487 192 88 -- 2,767
--------- --------- --------- --------- ---------
2,556 137,257 92 -- 139,905
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries . (2,488) 2,517 (5) -- 24
(Provision for) benefit from
income taxes ...................... 697 (705) 1 -- (7)
--------- --------- --------- --------- ---------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries ................. (1,791) 1,812 (4) -- 17
Equity in income (loss) of
consolidated subsidiaries ......... 1,808 (4) -- (1,804) --
--------- --------- --------- --------- ---------
Net income (loss) ............... $ 17 $ 1,808 $ (4) $ (1,804) $ 17
========= ========= ========= ========= =========
</TABLE>
-7-
<PAGE> 8
Supplemental Consolidating Balance Sheets
May 3, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash ............................ $ 3,329 $ 8,142 $ 1,951 $ -- $ 13,422
Short-term investment ........... -- -- 1,515 -- 1,515
Accounts and notes receivable ... -- 11,093 492 -- 11,585
Inventory ....................... -- 19,622 -- -- 19,622
Prepaid expenses and
other current assets ........... -- 3,206 -- -- 3,206
Deferred income taxes ........... 809 865 -- -- 1,674
--------- --------- --------- --------- ---------
Total current assets ......... 4,138 42,928 3,958 -- 51,024
--------- --------- --------- --------- ---------
Assets Held For Sale ............... -- 5,932 -- -- 5,932
Property and Equipment, net ........ -- 91,707 -- -- 91,707
Intangible Assets, net ............. -- 16,862 -- -- 16,862
Other Assets, net .................. 1,191 5,949 2,190 -- 9,330
Investment in and advances to
subsidiaries ..................... 123,487 1,658 356 (125,501) --
--------- --------- --------- --------- ---------
Total assets ....................... $ 128,816 $ 165,036 $ 6,504 $(125,501) $ 174,855
- - -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ......... $ 914 $ 448 $ -- $ -- $ 1,362
Accounts payable ................ 14,723 16,785 -- -- 31,508
Accrued expenses ................ 312 13,087 16 -- 13,415
Accrued interest ................ 1,244 -- 203 -- 1,447
--------- --------- --------- --------- ---------
Total current liabilities .... 17,193 30,320 219 -- 47,732
--------- --------- --------- --------- ---------
Long-Term Obligations,
less current portion above ........ 103,586 2,297 4,230 -- 110,113
Other Liabilities .................. -- 8,932 41 -- 8,973
Stockholders' Equity ............... 8,037 123,487 2,014 (125,501) 8,037
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity ............. $ 128,816 $ 165,036 $ 6,504 $(125,501) $ 174,855
========= ========= ========= ========= =========
</TABLE>
-8-
<PAGE> 9
Supplemental Consolidating Statement of Cash Flows
May 3, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
( in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) by operating
activities ............................. $ (1,340) $ 5,590 $ 272 $ -- $ 4,522
-------- -------- -------- ------ --------
Cash flow from investing activities:
Purchase of and change in
short-term investments ................ -- -- 18 -- 18
Purchase of property and equipment ..... -- (5,124) -- -- (5,124)
Proceeds from sale of property,
equipment and assets held for sale .... -- 3,641 -- -- 3,641
Investment in and advances to
subsidiaries .......................... 3,297 (3,784) 487 -- --
Increase in long-term notes receivable . -- (168) -- -- (168)
Proceeds from collection of
long-term receivables ................. -- 163 -- -- 352
Increase in intangibles
and other assets ...................... 1 (28) 2 -- (25)
-------- -------- -------- ------ --------
Net cash provided by (used in) investing
activities ............................. 3,298 (5,300) 507 -- (1,495)
-------- -------- -------- ------ --------
Cash flows from financing activities:
Increase in revolving loan, net ........ 1,620 -- -- -- 1,620
Repayment of long-term obligations ..... (456) (166) -- -- (622)
Issuance of common stock ............... 107 -- -- -- 107
-------- -------- -------- ------ --------
Net cash provided by (used in) financing
activities ............................. 1,271 (166) -- -- 1,105
-------- -------- -------- ------ --------
Increase (decrease) in cash .............. 3,229 124 779 -- 4,132
Cash at beginning of year ................ 100 8,018 1,172 -- 9,290
-------- -------- -------- ------ --------
Cash at end of first fiscal quarter ...... $ 3,329 $ 8,142 $ 1,951 $ -- $ 13,422
======== ======== ======== ====== ========
</TABLE>
Supplemental Consolidating Statement of Operations
May 4, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues ........................... $ 43 $ 141,155 $ 130 $ -- $ 141,328
Cost of goods sold and expenses:
Cost of goods sold .............. -- 105,082 -- -- 105,082
Operating and administrative
expenses ....................... 69 34,078 4 -- 34,151
Interest expense ................ 2,448 211 89 -- 2,748
--------- --------- --------- --------- ---------
2,517 139,371 93 -- 141,981
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and equity in income (loss)
of consolidated subsidiaries . (2,474) 1,784 37 (1,821) (653)
Benefit from (provision for)
income taxes ...................... 985 (710) (15) -- 260
--------- --------- --------- --------- ---------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries ................. (1,489) 1,074 22 -- (393)
Equity in income (loss) of
consolidated subsidiaries ......... 1,096 22 -- (1,118) --
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (393) $ 1,096 $ 22 $ (1,118) $ (393)
========= ========= ========= ========= =========
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Balance Sheets
February 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash ............................ $ 100 $ 8,018 $ 1,172 $ -- $ 9,290
Short-term investments .......... -- -- 1,533 -- 1,533
Accounts and notes receivable ... 20 12,897 671 -- 13,588
Inventory ....................... -- 20,184 -- -- 20,184
Prepaid expenses and
other current assets ........... 20 3,259 -- -- 3,279
Deferred income taxes ........... 933 878 -- -- 1,811
--------- --------- --------- --------- ---------
Total current assets ......... 1,073 45,236 3,376 -- 49,685
--------- --------- --------- --------- ---------
Assets Held For Sale ............... -- 9,543 -- -- 9,543
Property and Equipment, net ........ -- 89,448 -- -- 89,448
Intangible Assets, net ............. -- 17,039 -- -- 17,039
Other Assets, net .................. 1,389 6,209 2,192 -- 9,790
Investment in and advances to
subsidiaries ..................... 126,784 1,175 843 (128,802) --
--------- --------- --------- --------- ---------
Total assets ....................... $ 129,246 $ 168,650 $ 6,411 $(128,802) $ 175,505
- - -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ......... $ 929 $ 454 $ -- $ -- $ 1,383
Accounts payable ................ 13,800 16,840 -- -- 30,640
Accrued expenses ................ 726 12,432 9 -- 13,167
Accrued interest ................ 3,520 -- 115 -- 3,635
--------- --------- --------- --------- ---------
Total current liabilities .... 18,975 29,726 124 -- 48,825
--------- --------- --------- --------- ---------
Long-Term Obligations,
less current portion above ........ 102,358 2,457 4,230 -- 109,045
Other Liabilities .................. -- 9,683 39 -- 9,722
Stockholders' Equity ............... 7,913 126,784 2,018 (128,802) 7,913
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity ............. $ 129,246 $ 168,650 $ 6,411 $(128,802) $ 175,505
========= ========= ========= ========= =========
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Cash Flows
May 4, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used) by operating
activities ............................. $ (5,201) $ 9,065 $ 8 $ -- $ 3,872
-------- -------- -------- ------ --------
Cash flow from investing activities:
Purchase of short-term investments ..... -- -- (1,514) -- (1,514)
Purchase of property and equipment ..... -- (3,951) -- -- (3,951)
Proceeds from sale of property,
equipment and assets held for sale .... -- 889 -- -- 889
Investment in and advances to
subsidiaries .......................... 5,237 (5,046) (191) -- --
Increase in long-term notes receivable . -- (55) (243) -- (298)
Proceeds from collection of
long-term receivables ................. -- -- 352 -- 352
Increase in intangibles
and other assets ...................... -- (57) (2) -- (59)
-------- -------- -------- ------ --------
Net cash provided by (used in) investing
activities .............................. 5,237 (8,220) (1,598) -- (4,581)
-------- -------- -------- ------ --------
Cash flows from financing activities:
Increase in revolving loan, net ........ 100 -- -- -- 100
Repayment of long-term obligations ..... (350) -- (7) -- (357)
Issuance of common stock ............... 24 -- -- -- 24
-------- -------- -------- ------ --------
Net cash used in financing activities .... (226) -- (7) -- (233)
-------- -------- -------- ------ --------
Increase (decrease) in cash .............. (190) 845 (1,597) -- (942)
Cash at beginning of year ................ 1,739 7,871 3,044 -- 12,654
-------- -------- -------- ------ --------
Cash at end of first fiscal quarter ...... $ 1,549 $ 8,716 $ 1,447 $ -- $ 11,712
======== ======== ======== ====== ========
</TABLE>
6. Subsequent Events
-----------------
In March 1997, the Company announced that it had agreed to sell its 161
convenience store locations in Connecticut, Rhode Island, Massachusetts and New
York to the DB Companies, Inc., a Rhode Island based convenience store operator
and gasoline wholesaler and retailer for approximately $39.7 million. This
transaction is subject to certain contingencies but is expected to close on or
about June 20, 1997.
-11-
<PAGE> 12
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 fiscal quarter decreased by $1.4
million from the prior year first fiscal quarter. A summary of revenues by
functional area for the comparative first fiscal quarter is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
MAY 3, MAY 4,
(IN MILLIONS) 1997 1996
-------------------------------------------
<S> <C> <C>
CONVENIENCE STORES $ 80.8 $ 81.1
GASOLINE 58.4 59.6
OTHER 0.7 0.6
-----------------
TOTAL $139.9 $141.3
=================
</TABLE>
Convenience store revenues decreased $0.3 million, or 0.4%, in the
current year first fiscal quarter as compared to the prior year first fiscal
quarter due to a reduction of 63 underperforming stores mostly offset by the
opening of 11 new stores and a 1.9% increase in comparable store sales. 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 decreased $1.2 million in the current year first
fiscal quarter as compared to the prior year first fiscal quarter due to a
decrease in the number of gasoline gallons sold of 3.5 million partially offset
by an increase in the average selling price of gasoline of 5.1 cents per gallon.
-12-
<PAGE> 13
GROSS PROFITS
Gross profits for the current year first fiscal quarter increased $1.3
million from the prior year first fiscal quarter. A summary of the gross profits
by functional area for the comparative first fiscal quarter is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
MAY 3, MAY 4,
(IN MILLIONS) 1997 1996
----------------------------------------------
<S> <C> <C>
CONVENIENCE STORES $ 30.5 $ 30.0
GASOLINE 6.3 5.6
OTHER 0.7 0.6
-------------------
TOTAL $ 37.5 $ 36.2
===================
</TABLE>
Convenience store gross profits increased by $0.5 million in the
current year first fiscal quarter as compared to the prior year first fiscal
quarter due to improved product gross margins and increased marketing
allowances.
Gasoline gross profits increased by $0.7 million in the current year
first fiscal quarter as compared to the prior year first fiscal quarter due to
an increase of 2.24 cents in gross profit per gallon.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the current year first fiscal
quarter increased $0.6 million from the prior year first fiscal quarter. A
summary of expenses by functional area for the comparative first fiscal quarter
is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
MAY 3, MAY 4,
(IN MILLIONS) 1997 1996
----------------------------------------------
<S> <C> <C>
CONVENIENCE STORES $ 24.2 $ 24.1
GASOLINE 3.6 3.6
ADMINISTRATIVE AND OTHER 6.9 6.4
-------------------
TOTAL $ 34.7 $ 34.1
===================
</TABLE>
-13-
<PAGE> 14
Convenience store operating expenses increased $0.1 million in the
current year first fiscal quarter as compared to the prior year first fiscal
quarter due to higher labor, depreciation and maintenance costs.
Gasoline operating expenses remained constant in the current year first
fiscal quarter as compared to the prior year first fiscal quarter.
Administrative and other expenses increased by $0.5 million in the
current year first fiscal quarter as compared to the corresponding period of the
prior year due to incremental costs associated with the relocation and
establishment of the Ohio corporate office and an increase in the Company's
health, workers' compensation and commercial liability insurance expense
attributable to unfavorable claims experience.
INTEREST EXPENSE AND TAXES
Interest expense remained constant in the current year first fiscal
quarter as compared to the prior year first fiscal quarter.
The effective tax rate for the Company was a provision of 29% for the
current year first fiscal quarter and a benefit of 40% for the prior year first
fiscal quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since a majority
of its revenues are received in cash. The amount of cash generated from
operations significantly exceeded the current debt service requirements of the
Company's long-term obligations. The capital expenditures of the Company were
primarily funded by the excess cash flow available after debt service and by the
cash generated from the sale of certain assets. Additionally, the Company has a
revolving line of credit available, to address the seasonality of operations and
the timing of capital expenditures and certain working capital disbursements.
Management believes that the cash flow from operations, the proceeds from the
sale of
-14-
<PAGE> 15
certain assets held for sale and the proceeds from the sale of 161 convenience
store locations (see Note 6 to the Consolidated Financial Statements),
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
Net cash provided by operating activities increased by $0.7 million in
the current year first fiscal quarter as compared to the corresponding period of
the prior year. This was primarily due to improved results of operations in the
current year first fiscal quarter (see "Results of Operations") and a net
favorable change in other assets and liabilities, net of the change in deferred
income taxes partially offset by a net unfavorable change in working capital
accounts. The decrease in other assets and liabilities, net of the change in
deferred income taxes in both the current and prior year first fiscal quarters
was due to a decrease in various accrued expenses related primarily to legal and
professional fee accruals and workers' compensation and liability insurance
reserves. The net unfavorable change in working capital was due to a net
unfavorable change in accounts payable due to the timing of payments to the
issuers of money orders, as noted below, partially offset by a net favorable
change in accounts and notes receivable due to a reduction in the current year
first fiscal quarter as compared to an increase in the prior year first fiscal
quarter. The decrease in the current year first fiscal quarter was due to the
collection of a gasoline excise tax rebate due the Company.
During the current year first fiscal quarter, the Company paid its
trade payables in an average of 28 days, which compares to 26 days for fiscal
1997 and 30 days for the prior year first fiscal quarter. The cash flow of the
Company is also favorably impacted by the Company's use of
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<PAGE> 16
funds from the sale of money orders, pending remittance of such funds to the
issuer of the money orders. As of May 3, 1997, February 1, 1997 and May 4, 1996,
the amounts due the issuer were $7.7 million, $7.9 million and $12.4 million
respectively.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities increased by $1.3 million in the
current year first fiscal quarter as compared to the corresponding period of the
prior year primarily due to the use of the Company's revolving credit facility.
The Company has a $30.0 million senior revolving credit facility with $15.0
million available for issuance of letters of credit. The Company may utilize the
revolving credit facility as needed for working capital and general corporate
purposes. As of May 3, 1997, the Company had $11.9 million in outstanding
revolving credit loans and had $5.6 million in outstanding letters of credit.
CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities decreased by $3.1 million in the
current year first fiscal quarter as compared to the corresponding period of the
prior year primarily due to increased cash flows generated from the sale of
certain assets. Partially offsetting the above decrease in the current year
first fiscal quarter was increased capital expenditures with respect to new
store construction and remodeling of existing store locations.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $35 million for capital
expenditures in fiscal 1998 by purchasing store and gasoline equipment for new
stores, remodeling a certain number of existing store and gasoline locations,
implementing and/or upgrading office and store
-16-
<PAGE> 17
technology and meeting the Company's requirements to comply with federal and
state underground gasoline storage tank regulations (see "Environmental
Responsibility"). These capital expenditures will be funded primarily by cash
generated from operations, the proceeds from the sale of assets held for sale as
of May 3, 1997, the proceeds from the sale of 161 convenience store locations as
noted above, supplemented by the availability of a senior revolving line of
credit or other forms of equipment financing and/or leasing, if necessary. The
Company intends to lease the real estate for the majority of new store
locations.
OTHER LIQUIDITY ITEM
During fiscal 1996, the Company acquired a $10,000,000 note receivable
(Note) from 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.
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 May 3, 1997,
the Company had recorded an accrual of $1,880,000 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
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<PAGE> 18
with the terms and conditions of such trust funds. As of May 3, 1997, the
Company had recorded a net state trust fund reimbursement receivable of
$1,490,000 (representing a gross receivable of $2,460,000 less an allowance of
$970,000). Although there are no assurances as to the timing, the Company
believes that it is probable that reimbursements from the 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 $7.0 to $8.0 million in the aggregate through
December 1998. These costs could be reduced for low volume retail gasoline
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 is based on factors and assumptions that could
change due to modifications of regulatory requirements or detection of
unanticipated environmental conditions.
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<PAGE> 19
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.) Reports on Form 8-K
On March 19, 1997, the Company filed a Current Report on form 8-K, in
which the Company reported that it had agreed to sell its 161 convenience store
locations in Connecticut, Massachusetts, Rhode Island and New York. In addition,
the Company reported that it had agreed to sell it former corporate headquarters
in Enfield, Connecticut. The Company also noted that both transactions were
subject to certain contingencies but were expected to close on or about May 15,
1997. During the first quarter of fiscal 1997, the Company filed no reports on
Form 8-K.
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<PAGE> 20
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: June 17, 1997 /s/ Gregory G. Landry
-----------------------------
Gregory G. Landry
Executive Vice President
Chief Financial Officer
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<PAGE> 1
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 FIRST FISCAL
QUARTER ENDED
----------------------------
MAY 3, MAY 4,
1997 1996
<S> <C> <C>
Net income (loss)................................... $ 17 $ (393)
--------- ---------
Weighted average shares............................. 5,792 5,591
Dilutive options.................................... 184 -
Effect of DM Associates stock....................... (1,220) (1,220)
--------- ---------
Total shares for EPS purposes....................... $ 4,756 $ 4,371
- - --------------------------------------------------------------------------------
Net income (loss) per share......................... $ 0.00 $ (0.09)
================================================================================
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS STATEMENT 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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 13,422
<SECURITIES> 1,515
<RECEIVABLES> 13,126
<ALLOWANCES> 1,541
<INVENTORY> 19,622
<CURRENT-ASSETS> 51,024
<PP&E> 137,962
<DEPRECIATION> 46,255
<TOTAL-ASSETS> 174,855
<CURRENT-LIABILITIES> 47,732
<BONDS> 110,113
<COMMON> 65
0
0
<OTHER-SE> 8,037
<TOTAL-LIABILITY-AND-EQUITY> 174,855
<SALES> 139,929
<TOTAL-REVENUES> 139,929
<CGS> 102,408
<TOTAL-COSTS> 139,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,767
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 7
<INCOME-TAX> 17
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
