<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 NOVEMBER 1, 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 NOVEMBER 1, 1997 - 3,096,369
SHARES OF CLASS B COMMON STOCK OUTSTANDING NOVEMBER 1, 1997 - 1,528,049
-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 THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------------- ---------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................ $ 118,313 $ 147,344 $ 394,406 $ 444,806
---------- ---------- ---------- ---------
Cost of goods sold and expenses:
Cost of goods sold......... ........... $ 86,087 $ 106,354 $ 288,182 $ 325,896
Operating and administrative expenses.. 30,303 37,776 98,440 107,207
Interest expense....................... 2,607 2,683 8,067 8,187
(Gain) loss on disposition of
properties, net..................... (132) 204 (1,765) 115
---------- ---------- ---------- ----------
118,865 147,017 392,924 441,405
---------- ---------- ---------- ----------
Income (loss) before income taxes...... (552) 327 1,482 3,401
(Provision for) benefit from
income taxes......................... 242 (134) (653) (1,367)
---------- ---------- ---------- ----------
Net income (loss) ................... $ (310) $ 193 $ 829 $ 2,034
----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding..... 4,618 4,705 4,791 4,703
---------- ---------- ---------- ---------
Income (loss) per share ................ $ (0.07) $ 0.04 $ 0.17 $ 0.43
----------------------------------------------------------------------------------------------------------------------
</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>
NOVEMBER 1, 1997 FEBRUARY 1, 1997
- - ---------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash................................................ $ 8,624 $ 9,290
Short-term investments.............................. 7,280 1,533
Accounts and notes receivable....................... 14,799 13,588
Inventory........................................... 17,698 20,184
Prepaid expenses and other current assets........... 2,649 3,279
Deferred income taxes............................... 3,224 1,811
----------- ----------
Total current assets............................. 54,274 49,685
----------- ----------
Assets Held For Sale................................... 5,386 9,543
----------- ----------
Property and Equipment, net............................ 82,145 89,448
----------- ----------
Intangible Assets, net................................. 15,813 17,039
----------- ----------
Other Assets, net...................................... 9,904 9,790
----------- ----------
Total assets........................................... $ 167,522 $ 175,505
--------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations......... $ 1,148 $ 1,383
Accounts payable.................................... 34,245 30,640
Accrued expenses.................................... 15,742 13,167
Accrued interest.................................... 1,272 3,635
----------- ----------
Total current liabilities........................ 52,407 48,825
----------- ----------
Long-Term Obligations, less current portion above...... 95,488 109,045
----------- ----------
Other Liabilities...................................... 10,665 9,722
----------- ----------
Stockholders' Equity:
Preferred Stock (serial)............................ - -
Class A Common Stock................................ 36 35
Class B Common Stock................................ 30 30
Paid-in capital..................................... 30,779 30,560
Retained earnings (deficit)......................... (6,878) (7,707)
Treasury stock, at cost............................. (15,005) (5,005)
Note receivable from DM Associates.................. - (10,000)
Total stockholders' equity....................... 8,962 7,913
----------- ----------
Total liabilities and stockholders' equity............. $ 167,522 $ 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>
FOR THE THREE FISCAL QUARTERS ENDED
------------------------------------
NOVEMBER 1, 1997 NOVEMBER 2, 1996
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 829 $ 2,034
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 8,345 8,850
Amortization of original issue discount .............. 101 146
Change in deferred income taxes ...................... 435 (751)
(Gain) loss on disposition of properties, net ........ (1,765) 115
Net change in assets and liabilities:
Accounts and notes receivable .................. (1,211) (2,961)
Inventory ...................................... 2,486 924
Accounts payable ............................... 3,605 776
Accrued interest ............................... (2,363) (2,032)
Other assets and liabilities ................... 502 3,556
- - ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities .............. 10,964 10,657
- - ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and change in short-term investments ..... (5,747) (1,514)
Purchase of property and equipment ................... (22,427) (17,763)
Net proceeds from sale of property, equipment and
assets held for sale .............................. 28,290 2,839
Increase in long-term notes receivable ............... (18) (1,427)
Proceeds from collection of long-term notes receivable 239 1,261
Decrease (increase) in intangibles and other assets .. 1,706 (384)
- - ----------------------------------------------------------------------------------------------------
Net cash provided by (used by) investing activities .... 2,043 (16,988)
- - ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in revolving loan, net ...................... (10,280) -
Increase in long-term obligations .................... - 650
Repayment of long-term obligations ................... (3,613) (1,060)
Issuance of common stock ............................. 220 488
- - ----------------------------------------------------------------------------------------------------
Net cash (used by) provided by financing activities .... (13,673) 78
- - ----------------------------------------------------------------------------------------------------
Decrease in cash ....................................... (666) (6,253)
Cash at beginning of fiscal year ....................... 9,290 12,654
- - ----------------------------------------------------------------------------------------------------
Cash at end of third fiscal quarter .................... $ 8,624 $ 6,401
- - ----------------------------------------------------------------------------------------------------
</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
NOVEMBER 1, 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. Supplemental Balance Sheet Information
--------------------------------------
The composition of the Company's accrued expenses in the Consolidated
Balance Sheets is as follows:
<TABLE>
<CAPTION>
NOVEMBER 1, 1997 FEBRUARY 1, 1997
---------------- ----------------
<S> <C> <C>
Accrued salaries and wages........................... $ 3,351 $ 4,089
Accrued environmental assessment and remediation..... 4,288 1,782
Accrued income taxes................................. 818 (563)
Other accrued expenses............................... 7,285 7,859
----------- -----------
Total accrued expenses........................ $ 15,742 $ 13,167
----------- -----------
</TABLE>
-5-
<PAGE> 6
3. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first three fiscal
quarters ended November 1, 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 3,543,676 2,924,917 $ 64,686 $30,560,173
Employee stock purchase plan 11,082 - 111 42,934
Exchange of Class B shares
for Class A shares 911 (911) - -
Stock options exercised 62,325 - 623 176,283
----------- ----------- ----------- -----------
Balance November 1, 1997 3,617,994 2,924,006 $ 65,410 $30,779,390
----------- ----------- ----------- -----------
</TABLE>
During fiscal 1996, the Company acquired a $10,000,000 note receivable
("Note") from DM Associates Limited Partnership collateralized by 1,220,000
shares of the Company's Class B Common Stock ("Pledged Shares"). The Note had
been recorded as a reduction to stockholders' equity on the Consolidated Balance
Sheets of the Company. Since the Note was not paid when it became due and
payable on July 31, 1997, the Company has received the Pledged Shares in
satisfaction of the Note. In the third quarter of fiscal 1998, the Company
recorded the Pledged Shares as treasury stock.
As of November 1, 1997, there were 521,625 shares of Class A Common
Stock and 1,395,957 shares of Class B Common Stock held as treasury stock at an
aggregate cost of $15,004,847, leaving 3,096,369 Class A shares and 1,528,049
Class B shares outstanding.
4. 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.
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.
5. Seasonality
-----------
The results of operations for the first three fiscal quarters ended
November 1, 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
-6-
<PAGE> 7
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.
6. Unaudited Pro Forma Information
-------------------------------
In June, 1997, the Company completed the sale of the assets relating to
156 convenience store and retail gasoline locations in Connecticut,
Massachusetts, Rhode Island, and New York. The principal assets sold by the
Company include inventories, convenience store and gasoline fixtures and
equipment, land, buildings, and building and leasehold improvements. The
following unaudited pro forma information of the Company for the fiscal year
ended February 1, 1997 and the first three fiscal quarters ended November 1,
1997, has been prepared assuming that the sale of the 156 convenience store and
retail gasoline locations had occurred as of the beginning of the fiscal year
ended February 1, 1997. The unaudited pro forma information is not necessarily
indicative of the results which would have been reported if the transaction had
occurred at the beginning of the fiscal year ended February 1, 1997, or which
may be reported in the future. The unaudited pro forma information reflects the
exclusion, for both fiscal periods shown, of historical revenues, cost of goods
sold, operating expenses, and direct and indirect administrative expenses
associated with the 156 retail locations sold. Additionally, the unaudited pro
forma information reflects the elimination of historical interest expense
related to debt retired based on the assumption that proceeds from the sale of
the 156 retail locations had been received at the beginning of the fiscal year
ended February 1, 1997, and also reflects the elimination of the estimated
income tax effect of the associated excluded results of operations for the 156
retail locations sold. The unaudited pro forma information is as follows:
-7-
<PAGE> 8
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE FISCAL FOR THE FISCAL
QUARTERS ENDED YEAR ENDED
-------------------- ---------------
NOVEMBER 1, FEBRUARY 1,
1997 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues................................ $ 352,340 $ 471,969
---------- ---------
Loss before income taxes................ (2,472) (4,012)
---------- ----------
Net loss................................ $ (1,384) $ (2,889)
-------------------------------------------------------------------------------------------------------
Loss per share.......................... $ (0.30) $ (0.65)
------------------------------------------------------------------------------------------------------
</TABLE>
7. 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 a 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, 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.
Investments 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 principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
-8-
<PAGE> 9
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended November 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 1,098 $392,973 $ 335 $ - $394,406
Cost of goods sold and expenses:
Cost of goods sold............... - 288,182 - - 288,182
Operating and administrative
expenses....................... 204 98,212 24 - 98,440
Interest expense................. 7,308 495 264 - 8,067
Gain on disposition of
properties, net................ - (1,765) - - (1,765)
-------- ---------- -------- --------- ----------
7,512 385,124 288 - 392,924
-------- ---------- -------- --------- ---------
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries...... (6,414) 7,849 47 - 1,482
(Provision for) benefit from
income taxes....................... 2,822 (3,454) (21) - (653)
-------- ---------- -------- --------- ----------
Income (loss) before equity in
income of consolidated
subsidiaries.................. (3,592) 4,395 26 - 829
Equity in income of
consolidated subsidiaries.......... 4,421 26 - (4,447) -
-------- ---------- -------- --------- --------
Net income....................... $ 829 $ 4,421 $ 26 $ (4,447) $ 829
======== ========== ======== ========= =========
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Balance Sheets
November 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash ............................ $ 3,210 $ 3,807 $ 1,607 $ - $ 8,624
Short-term investments .......... - 4,905 2,375 - 7,280
Accounts and notes receivable ... 733 13,653 413 - 14,799
Inventory ....................... - 17,698 - - 17,698
Prepaid expenses and
other current assets ........... 121 2,528 - - 2,649
Deferred income taxes ........... 1,808 1,416 - - 3,224
--------- --------- --------- --------- ---------
Total current assets ......... 5,872 44,007 4,395 - 54,274
--------- --------- --------- --------- ---------
Assets Held For Sale ............... - 5,386 - - 5,386
Property and Equipment, net ........ - 82,145 - - 82,145
Intangible Assets, net ............. - 15,813 - - 15,813
Other Assets, net .................. 1,095 6,833 1,976 - 9,904
Investment in and Advances to
Subsidiaries ..................... 111,153 1,990 54 (113,197) -
--------- --------- --------- --------- ---------
Total assets ....................... $ 118,120 $ 156,174 $ 6,425 $(113,197) $ 167,522
- - -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ......... $ 808 $ 340 $ - $ - $ 1,148
Accounts payable ................ 16,493 17,752 - - 34,245
Accrued expenses ................ 287 15,432 23 - 15,742
Accrued interest ................ 1,183 - 89 - 1,272
--------- --------- --------- --------- ---------
Total current liabilities .... 18,771 33,524 112 - 52,407
--------- --------- --------- --------- ---------
Long-Term Obligations,
less current portion above ........ 90,387 871 4,230 - 95,488
Other Liabilities .................. - 10,626 39 - 10,665
Stockholders' Equity ............... 8,962 111,153 2,044 (113,197) 8,962
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity ............. $ 118,120 $ 156,174 $ 6,425 $(113,197) $ 167,522
========= ========= ========= ========= =========
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Cash Flows
for the Three Fiscal Quarters Ended November 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities ............................. $ (577) $ 11,269 $ 272 $ - $ 10,964
-------- -------- -------- ------ --------
Cash flows from investing activities:
Purchase of and change in
short-term investments ................ - (4,905) (842) - (5,747)
Purchase of property and equipment ..... - (22,427) - - (22,427)
Net proceeds from sale of property,
equipment and assets held for sale .... - 28,290 - - 28,290
Investment in and advances to
subsidiaries .......................... 15,631 (16,420) 789 - -
Increase in long-term notes receivable . - (18) - - (18)
Proceeds from collection of
long-term receivables ................. - 29 210 - 239
Increase in intangibles
and other assets ...................... 29 1,671 6 - 1,706
-------- -------- -------- ------ --------
Net cash provided by (used by) investing
activities ............................. 15,660 (13,780) 163 - 2,043
-------- -------- -------- ------ --------
Cash flows from financing activities:
Decrease in revolving loan, net ........ (10,280) - - - (10,280)
Repayment of long-term obligations ..... (1,913) (1,700) - - (3,613)
Issuance of common stock ............... 220 - - - 220
-------- -------- -------- ------ --------
Net cash used by
financing activities .................... (11,973) (1,700) - - (13,673)
-------- -------- -------- ------ --------
Increase (decrease) in cash ............... 3,110 (4,211) 435 - (666)
Cash at beginning of fiscal year .......... 100 8,018 1,172 - 9,290
-------- -------- -------- ------ --------
Cash at end of third fiscal quarter ....... $ 3,210 $ 3,807 $ 1,607 $ - $ 8,624
======== ======== ======== ====== ========
</TABLE>
-11-
<PAGE> 12
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended November 2, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 1,027 $ 443,379 $ 400 $ - $ 444,806
Cost of goods sold and expenses:
Cost of goods sold ............. - 325,896 - - 325,896
Operating and administrative
expenses ...................... 208 106,999 - - 107,207
Interest expense ............... 7,540 380 267 - 8,187
Gain on disposition of
properties, net ............... - 115 - - 115
--------- --------- --------- --------- ---------
7,748 433,390 267 - 441,405
--------- --------- --------- --------- ---------
Income (loss) before income taxes
and equity in income
of consolidated subsidiaries . (6,721) 9,989 133 - 3,401
(Provision for) benefit from
income taxes ..................... 2,967 (4,316) (18) - (1,367)
--------- --------- --------- --------- ---------
Income (loss) before equity in
income of consolidated
subsidiaries ................ (3,754) 5,673 115 - 2,034
Equity in income of
consolidated subsidiaries ........ 5,788 115 - (5,903) -
--------- --------- --------- --------- ---------
Net income ..................... $ 2,034 $ 5,788 $ 115 $ (5,903) $ 2,034
========= ========= ========= ========= =========
</TABLE>
-12-
<PAGE> 13
Supplemental Consolidating Balance Sheets
February 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash ............................ $ 100 $ 8,018 $ 1,172 $ - $ 9,290
Short-term investment ........... - - 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>
-13-
<PAGE> 14
Supplemental Consolidating Statement of Cash Flows
for the Three Quarters Ended November 2, 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 .............................. $ (9,377) $ 19,994 $ 40 $ - $ 10,657
-------- -------- -------- ------ --------
Cash flows from investing activities:
Purchase of and increase in
short-term investments ................. - - (1,514) - (1,514)
Purchase of property and equipment ...... - (17,763) - - (17,763)
Net proceeds from sale of property,
equipment and assets held for sale ..... - 2,839 - - 2,839
Investment in and advances to
subsidiaries ........................... 10,810 (10,416) (394) - -
Increase in long-term notes receivable .. - (120) (1,307) - (1,427)
Proceeds from collection of
long-term receivables .................. - 70 1,191 - 1,261
Increase in intangibles
and other assets ....................... - (390) 6 - (384)
-------- -------- -------- ------ --------
Net cash provided by (used by) investing
activities .............................. 10,810 (25,780) (2,018) - (16,988)
-------- -------- -------- ------ --------
Cash flows from financing activities:
Increase in long-term obligations ....... 300 350 - - 650
Repayment of long-term obligations ...... (689) (363) (8) - (1,060)
Issuance of common stock ................ 488 - - - 488
-------- -------- -------- ------ --------
Net cash provided by (used by)
in financing activities ................. 99 (13) (8) - 78
-------- -------- -------- ------ --------
Increase (decrease) in cash ............... 1,532 (5,799) (1,986) - (6,253)
Cash at beginning of fiscal year .......... 1,739 7,871 3,044 - 12,654
-------- -------- -------- ------ --------
Cash at end of third fiscal quarter ....... $ 3,271 $ 2,072 $ 1,058 $ - $ 6,401
======== ======== ======== ====== ========
</TABLE>
-14-
<PAGE> 15
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
----------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
During the current year second fiscal quarter, the Company sold 156 convenience
store and retail gasoline locations based in the northeastern United States (see
Note 6 to the Consolidated Financial Statements). The following discussion and
analysis of Results of Operations is based on unaudited Pro Forma Consolidated
Statements of Operations, as shown below, for the current year first three
fiscal quarters and current year third fiscal quarter as compared to the
corresponding periods of the prior fiscal year. The unaudited Pro Forma
Consolidated Statements of Operations as presented below reflect the exclusion,
for all comparative fiscal periods shown, of the historical revenues, cost of
goods sold, operating expenses, and direct and indirect administrative expenses
associated with the 156 retail locations sold. Additionally, the unaudited Pro
Forma Consolidated Statements of Operations reflect the elimination of
historical interest expense related to debt retired based on the assumption that
proceeds from the sale had been received as of the beginning of the prior fiscal
year, and also reflect the elimination of the estimated income tax effect of the
associated excluded results of operations for the 156 retail locations sold. The
unaudited Pro Forma Consolidated Statements of Operations for the comparative
third fiscal quarter and the first three fiscal quarters are as follows:
-15-
<PAGE> 16
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
----------------------- --------------------------
November 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................ $118,296 $119,187 $352,340 $358,510
--------- --------- --------- --------
Cost of goods sold and expenses:
Cost of goods sold......... ........... $ 86,011 $ 85,220 $256,665 $261,347
Operating and administrative expenses.. 30,271 30,906 88,573 87,659
Interest expense....................... 2,606 2,611 7,785 7,999
Loss on disposition of
properties, net .................... 12 204 1,789 115
--------- --------- --------- --------
118,900 118,941 354,812 357,120
--------- --------- --------- --------
Income (loss) before income taxes....... (604) 246 (2,472) 1,390
Benefit (provision) for income taxes.... 266 (98) 1,088 (563)
--------- --------- --------- ---------
Net income (loss) ................... $ (338) $ 148 $ (1,384) $ 827
- - ---------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding..... 4,618 4,705 4,597 4,703
--------- --------- --------- --------
Income (loss) per share................. $ (0.07) $ 0.03 $ (0.30) $ 0.18
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
REVENUES
Revenues for the current year first three fiscal quarters decreased by
$6.2 million from the prior year first three fiscal quarters, and revenues for
the current year third fiscal quarter decreased by $0.9 million from the prior
year third fiscal quarter. A summary of revenues by functional area for the
comparative third fiscal quarter and the first three fiscal quarters is as
follows:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
-------------------------- ---------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
(IN MILLIONS) 1997 1996 1997 1996
- - -------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
CONVENIENCE STORES $ 73.8 $ 71.5 $216.9 $215.1
GASOLINE 43.2 45.9 132.9 140.2
OTHER 1.3 1.8 2.5 3.2
---------------------- ----------------------
TOTAL $118.3 $119.2 $352.3 $358.5
====================== ======================
</TABLE>
Convenience store revenues increased by $1.8 million in the current
year first three fiscal quarters as compared to the prior year first three
fiscal quarters, and convenience store revenues for the current year third
fiscal quarter increased by $2.3 million as compared to the prior year third
fiscal quarter. These increases were primarily due to an increase in comparable
store sales of 1.8% and 2.9% for the three fiscal quarters and third fiscal
quarter, respectively, partially offset by the closing of approximately 30
underperforming stores in the current fiscal year. Although the closing of
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 $7.3 million in the current year first
three fiscal quarters as compared to the prior year first three fiscal quarters,
and gasoline revenues for the current year third fiscal quarter decreased $2.7
million as compared to the prior year third fiscal quarter. The decrease in
gasoline revenues for the first three fiscal quarters was primarily due to a
decrease in total gallons sold of 7.6 million partially offset by an increase in
the average selling price of gasoline of 0.7 cents per gallon. The decrease in
gasoline revenues for the third fiscal quarter was primarily due to a decrease
in total gallons sold of 2.2 million and also due to a decrease in the average
selling price of gasoline of 0.4 cents per gallon.
-17-
<PAGE> 18
GROSS PROFITS
Gross profits for the current year first three fiscal quarters
decreased $1.5 million from the prior year first three fiscal quarters, and
gross profits for the current year third fiscal quarter decreased $1.7 million
from the prior year third fiscal quarter. A summary of the gross profits by
functional area for the comparative third fiscal quarter and the first three
fiscal quarters is as follows:
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
----------------------------- ----------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
(IN MILLIONS) 1997 1996 1997 1996
----------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
CONVENIENCE STORES $ 26.4 $ 26.0 $ 78.6 $ 78.6
GASOLINE 4.7 6.2 14.7 15.5
OTHER 1.2 1.8 2.4 3.1
---------------------------- ---------------------------
TOTAL $ 32.3 $ 34.0 $ 95.7 $ 97.2
============================ ===========================
</TABLE>
Convenience store gross profits remained constant in the current year
first three fiscal quarters as compared to the prior year first three fiscal
quarters, and convenience store gross profits increased by $0.4 million in the
current year third fiscal quarter as compared to the prior year third fiscal
quarter. The increase in the third fiscal quarter was primarily due to the
increase in comparable store sales, as described above, offset by lower product
gross margins.
Gasoline gross profits decreased by $0.8 million in the current year
first three fiscal quarters as compared to the prior year first three fiscal
quarters, and gasoline gross profits decreased by $1.5 million in the current
year third fiscal quarter as compared to the prior year third fiscal quarter.
These decreases were primarily due to a gasoline excise tax rebate of $1.2
million from the state of Kentucky that was recognized in the prior year third
fiscal quarter. Excluding the excise tax rebate discussed above, gasoline gross
profits increased by $0.4 million in the current year
-18-
<PAGE> 19
first three fiscal quarters as compared to the prior year first three fiscal
quarters and gasoline gross profits in the current year third fiscal quarter
decreased by $0.3 million as compared to the prior year third fiscal quarter.
The increase in the current year first three fiscal quarters as compared to the
corresponding period of the prior year was due to an increase of 1.1 cents in
gross profit per gallon, partially offset by the decrease in gallons sold, as
described above. The decrease in the current year third fiscal quarter as
compared to the corresponding period of the prior year was due to the decrease
in gasoline gallons sold, as described above.
Other gross profits decreased by $0.7 million in the current year first
three fiscal quarters as compared to the prior year three fiscal quarters, and
decreased by $0.6 million in the current year third fiscal quarter as compared
to the prior year third fiscal quarter. These decreases were primarily due to
the recognition in the prior year third fiscal quarter of a $0.4 million
one-time license fee associated with the start up of a foreign consulting
agreement and $0.8 million in interest income associated with the excise tax
rebate discussed above, partially offset by the recognition in the current year
third fiscal quarter of $0.6 million in interest income associated with the
retirement of the note receivable from DM Associates Limited Partnership (see
Note 3 to the Consolidated Financial Statements).
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the current year first
three fiscal quarters increased $0.9 million from the prior year first three
fiscal quarters, and operating and administrative expenses for the current year
third fiscal quarter decreased by $0.6 million from the prior year third fiscal
quarter. A summary of expenses by functional area for the comparative third
fiscal quarter and first three fiscal quarters is as follows:
-19-
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
----------------------------------- ---------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
(IN MILLIONS) 1997 1996 1997 1996
----------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
CONVENIENCE STORES $ 20.9 $ 20.2 $ 61.1 $ 60.8
GASOLINE 2.9 2.8 8.7 8.3
ADMINISTRATIVE AND OTHER 6.5 7.9 18.8 18.6
-------------------------------- --------------------------------
TOTAL $ 30.3 $ 30.9 $ 88.6 $ 87.7
================================ ================================
</TABLE>
Convenience store operating expenses increased by $0.3 million in the
current year first three fiscal quarters as compared to the prior year three
fiscal quarters and increased by $0.7 million for the current year third fiscal
quarter as compared to the prior year third fiscal quarter. Convenience store
operating expenses increased due to higher labor, depreciation and maintenance
costs, partially offset by the overall reduction in the average number of
stores, as described above.
Gasoline operating expenses increased by $0.4 million in the current
year first three fiscal quarters as compared to the prior year first three
fiscal quarters and increased by $0.1 million in the current year third fiscal
quarter as compared to the prior year third fiscal quarter. These increases are
primarily due to higher rent and depreciation expenses.
Administrative and other expenses decreased by $0.2 million in the
current year first three fiscal quarters as compared to the prior year first
three fiscal quarters as a result of higher professional and legal fees offset
in part by lower relocation expenses. Administrative and other expenses
decreased by $1.4 million in the current year third fiscal quarter as compared
to the prior year third fiscal quarter as a result of lower relocation expenses,
salaries, wages and related benefits, and bad debt expense partially offset by
higher professional and legal fees.
-20-
<PAGE> 21
INTEREST EXPENSE, LOSS ON DISPOSITION OF PROPERTIES, AND TAXES
Interest expense decreased by $0.2 million in the current year first
three fiscal quarters as compared to the prior year first three fiscal quarters
due to a reduction in the amount of outstanding letters of credit. Interest
expense remained constant in the current year third fiscal quarter as compared
to the prior year third fiscal quarter.
Loss on disposition of properties increased by $1.7 million in the
current year first three fiscal quarters as compared to the prior year three
fiscal quarters due to an increase of $1.0 million in costs and expenses
associated with the closing of certain underperforming stores and due to a
$0.7 million loss on the sale of the Company's former manufacturing and office
facility in the current fiscal year.
The effective tax rate for the Company was a benefit of 44% for the
current year first three fiscal quarters and the current year third fiscal
quarter and a provision of 40% for the corresponding periods of the prior year.
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
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 certain assets held for sale and the proceeds from the sale of 156
convenience store and retail gasoline locations formerly operated in the
northeastern United States (see Note 6 to the Consolidated Financial
Statements), supplemented by the availability of a revolving line of credit
-21-
<PAGE> 22
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 $0.3 million in
the current year first three fiscal quarters as compared to the corresponding
period of the prior year primarily due to cash provided from working capital
offset in part by reduced results of operations (see Consolidated Statements of
Operations).
During the current year first three fiscal quarters, the Company paid
its trade payables in an average of 28 days, which compares to 26 days for
fiscal 1997 and 26 days for the prior year first three 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 November 1, 1997, February 1, 1997 and November 2, 1996,
the amounts due the issuer were $8.2 million, $7.9 million and $7.9 million
respectively.
CASH PROVIDED BY INVESTING ACTIVITIES
Net cash provided by investing activities increased by $19.0 million in
the current year first three fiscal quarters as compared to the corresponding
period of the prior year primarily due to net proceeds generated from the sale
of property, equipment and related assets, partially offset by an increased
level of capital expenditures and purchase of short-term investments.
-22-
<PAGE> 23
CASH USED BY FINANCING ACTIVITIES
Cash used by financing activities increased $13.7 million in the
current year first three fiscal quarters as compared to the corresponding period
of the prior year primarily due to a reduction in the outstanding balance of the
Company's revolving credit facility and the payment of certain long-term
obligations with the proceeds from the sale of 156 convenience store and retail
gasoline locations, as described above. 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 for working
capital and general corporate purposes. As of November 1, 1997, the Company did
not have any outstanding revolving credit loans and had $7.7 million in
outstanding letters of credit.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $25 to $30 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 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 November
1, 1997, the proceeds from the sale of 156 convenience store and retail
gasoline locations, as described 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.
-23-
<PAGE> 24
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 November 1,
1997, the Company had recorded an accrual of $6,660,000 for such costs, the
majority of which are anticipated to be spent over the next one to five 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 November 1, 1997, the
Company had recorded a net state trust fund reimbursement receivable of
$4,049,000 (representing a gross receivable of $6,260,000 less an allowance of
$2,211,000). 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 five 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 $4.0 to $6.0 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.
-24-
<PAGE> 25
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
During the third quarter of fiscal 1998, the Company
filed no reports on Form 8-K.
-25-
<PAGE> 26
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: December 16, 1997 /s/ Gregory G. Landry
---------------------------------
Gregory G. Landry
Executive Vice President
Chief Financial Officer
-26-
<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 PER SHARE
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------------- ------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) ........... $ (310) $ 193 $ 829 $ 2,034
------- ------- ------- -------
Weighted average shares ..... 4,618 5,692 5,410 5,628
Dilutive options ............ - 233 194 295
Effect of DM Associates stock - (1,220) (813) (1,220)
------- ------- ------- -------
Total shares for EPS purposes 4,618 4,705 4,791 $ 4,703
- - ----------------------------------------------------------------------------------------------------
Net income (loss) per share . $ (0.07) $ 0.04 $ 0.17 $ 0.43
====================================================================================================
</TABLE>
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY 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> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> NOV-01-1997
<CASH> 8,624
<SECURITIES> 7,280
<RECEIVABLES> 16,461
<ALLOWANCES> 1,662
<INVENTORY> 17,698
<CURRENT-ASSETS> 54,274
<PP&E> 97,929
<DEPRECIATION> 10,398
<TOTAL-ASSETS> 167,522
<CURRENT-LIABILITIES> 52,407
<BONDS> 95,488
66
0
<COMMON> 0
<OTHER-SE> 8,962
<TOTAL-LIABILITY-AND-EQUITY> 167,522
<SALES> 0
<TOTAL-REVENUES> 394,406
<CGS> 288,182
<TOTAL-COSTS> 98,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,765)
<INTEREST-EXPENSE> 8,067
<INCOME-PRETAX> 1,482
<INCOME-TAX> (653)
<INCOME-CONTINUING> 829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 829
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
