<PAGE> 1
FORM 10-K
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 fiscal year ended FEBRUARY 1, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ______ to ______
Commission File Number 0-12497
------------------
DAIRY MART CONVENIENCE STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2497894
(State or other jurisdiction of (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
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (Par Value $.01)
Class B Common Stock (Par Value $.01)
(Titles of class)
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
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 1, 1997, 2,987,951 shares of Class A Common Stock and 2,783,060
shares of Class B Common Stock were outstanding, and the aggregate market value
of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES,
INC., held by nonaffiliates was approximately $18,036,470.00.
-1-
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1997 definitive proxy statement to be filed
pursuant to Registration 14A within 120 days after the end of Registrant's
fiscal year are incorporated by reference in Part III.
PART I
------
ITEM 1. BUSINESS
GENERAL
Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company"
or "Dairy Mart"), operates one of the nation's largest convenience store chains.
Founded in 1957, the Company operates or franchises approximately 811 stores
under the "Dairy Mart" name in 11 states located in the Northeast, Midwest and
Southeast. Approximately 360 stores sell gasoline and approximately 268 stores
are franchised.
In March 1997, the Company announced that it had agreed to sell its
161 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 May 15, 1997.
Dairy Mart stores offer a wide range of products and services which
cater to the convenience needs of its customers, including milk, ice cream,
groceries, beverages, snack foods, candy, deli products, publications, health
and beauty aids, tobacco products, lottery tickets and money orders. The stores
are typically located in densely populated, suburban areas on sites which are
easily accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli items,
coffee, fountain drinks and other fast food items.
The Company is incorporated in Delaware and maintains its principal
executive offices at 210 Broadway East, Cuyahoga Falls, Ohio 44222. The
Company's telephone number is (330) 923-0421.
STORES
The Company's stores are generally located in densely populated suburban
areas, and are situated close to single-family homes and apartments to attract
neighborhood shoppers. Store location, design, lighting and layout are intended
to cater to customers' desire for fast and convenient access. Approximately 360
locations also sell gasoline, which the Company believes is an important
convenience for customers. Shelving and displays, including refrigeration units,
deli and other fast food counters and displays, are designed to encourage
customers to purchase high profit margin products including impulse purchase
items such as candy, fountain drinks and ice cream novelties. Stores are located
on sites which are well-lit, easily accessible by customers and provide ample
parking. All of the Company's stores also offer extended hours for additional
convenience, with over one-half of the stores open 24 hours per day. A typical
Dairy Mart store ranges between 2,400 and 3,700 square feet and is a free
standing structure.
-2-
<PAGE> 3
As of February 1, 1997, the Company operated and franchised retail
convenience stores in the following three regions of the United States:
<TABLE>
<CAPTION>
NUMBER OF
NORTHEAST REGION STORES
------
<S> <C>
Massachusetts ...................................................... 58
Connecticut ........................................................ 52
New York ........................................................... 35
Rhode Island ....................................................... 16
---
Total Northeast Stores ........................................ 161
---
MIDWEST REGION
Ohio ............................................................... 401
Michigan ........................................................... 33
Pennsylvania ....................................................... 34
---
Total Midwest Stores .......................................... 468
---
SOUTHEAST REGION
Kentucky ........................................................... 142
Indiana ............................................................ 20
Tennessee .......................................................... 13
North Carolina ..................................................... 7
---
Total Southeast Stores ........................................ 182
---
Total Stores .............................................. 811
===
</TABLE>
UPGRADE AND REMODEL OF EXISTING STORE BASE AND CLOSING
UNDERPERFORMING STORES
The Company has an ongoing program to upgrade and remodel the Company's
retail and gasoline locations to cater to the always changing convenience needs
of today's customer. The program includes modernizing and re-imaging the store's
appearance, upgrading the gasoline facilities and installing the most modern
environmental protection equipment.
The Company has historically evaluated the performance of each of its
stores in order to determine its contribution to the Company's overall
profitability. Management has raised the acceptable level that a store's
performance must meet in order for the store to be eligible for on-going capital
expenditure support from the Company. Accordingly, in fiscal year 1997, the
Company closed 75 of its retail convenience stores and 24 of its retail gasoline
facilities due to their inability to meet the Company's economic and
non-economic criteria for long-term stability and growth.
NEW STORES
A major component in the Company's growth strategy is to continue to
build new stores and increase its level of gasoline sales. All new store
locations have significantly expanded gasoline retailing capacity and devote a
greater amount of selling space to high profit margin products.
-3-
<PAGE> 4
TECHNOLOGICAL UPGRADE
The Company's Information Systems group will begin rolling out in June
1997 a comprehensive store automation program which will significantly improve
the efficiency of the existing store operations and corporate support functions.
These enhancements, once implemented, will provide more detailed and timely
information regarding store operations, including composition of sales,
inventory levels and product pricing and profit analysis.
GASOLINE OPERATIONS
Gasoline sales enable the Company to significantly increase a store's
total level of sales without a commensurate increase in overhead. Gasoline sales
accounted for approximately 42% of total revenues of the Company in fiscal year
1997, approximately 40% for fiscal year 1996 and approximately 35% in fiscal
year 1995. As of February 1, 1997, 360 stores sold gasoline. Financial
information related to the Company's gasoline operations for the last three
fiscal years is set forth in Note 11 to the Consolidated Financial Statements.
The Company's gasoline pricing strategy is designed, in part, to provide
value to customers by offering the same quality gasoline offered by major oil
companies at prices which are generally below nationally advertised brands and
comparable to other convenience store chains. The Company obtains its gasoline
from major oil company suppliers, primarily through spot market purchases, and
believes that there are adequate supplies of fuel available from a number of
sources at competitive prices.
Gasoline profit margins have a significant impact on the Company's
income. Such profit margins could be adversely influenced by factors beyond the
Company's control, such as volatility in the wholesale gasoline market due to
supply interruptions. In addition, gasoline profit margins are continually
influenced by competition in each local market area.
PRODUCT SELECTION
All stores generally offer more than 3,000 food and non-food items
limited to well-known brand names, as well as the Company's private label
products. Most of these items would typically be offered in supermarkets. Food
items include a wide variety of products, including canned foods and groceries,
dairy products, beverages, snack items, candy, baked goods and food service
items, such as fountain soft drinks, coffee, hot dogs, deli meats and deli
sandwiches and similar foods. Non-food products and services include gasoline,
cigarettes, health and beauty aids, publications, lottery tickets and money
orders. In addition to selling well-known brand name products, the stores offer
many products that bear the "Dairy Mart" private label, including milk, bakery
products, juices and other non-carbonated beverages, ice cream and other dairy
products such as dips and cheeses.
-4-
<PAGE> 5
In recent years, the Company has been altering the mix of products to
emphasize the sale of items carrying higher profit margins. Fast food items not
only carry higher profit margins but also tend to lead to the purchase of other
high profit margin products and impulse items, including salty-snacks, candy and
beverages. Dairy Mart has introduced a number of private label products, which
generally carry a higher gross profit margin than the Company's average gross
profit margin on comparable products.
FRANCHISE OPERATIONS
The Company franchises 268 stores throughout its three geographic
regions. Franchise stores generally follow the same operating policies as
Company stores, and are subject to Company supervision under franchise
agreements. Company operated and franchise stores are of the same basic store
design and sell substantially the same products. Most franchisees purchase their
products through the same supplier used by the Company.
The Company offers two types of franchising arrangements- the "full"
franchise and the "limited" franchise. Under a full franchise agreement, the
franchisee purchases and owns both the merchandise inventory and the equipment
located in the store, and leases or subleases the store from the Company. Under
a limited franchise agreement, the franchisee owns only the merchandise
inventory while the Company retains ownership of the store equipment. Franchise
fees are higher for limited franchisees. As of February 1, 1997, there were 118
full franchise locations and 150 limited franchise locations.
The Company's franchising strategy seeks to: (i) improve the level of
retail experience of its new franchisees; and (ii) increase the level of
financial commitment by new franchisees. As part of this strategy, new
franchisees are now required to undergo more rigorous and thorough interviews
and background checks, receive increased levels of financial and retail
training, and typically make larger initial cash payments.
The following table sets forth the number of stores, on both a Company
operated and franchise operated basis, that were opened or acquired, closed or
sold, and transferred between Company operated and franchise operated, during
the last three fiscal years:
<TABLE>
<CAPTION>
February 1, 1997 February 3, 1996 January 28, 1995
----------------------------- ------------------------------- ---------------------------------
Company Franchise Company Franchise Company Franchise
Operated Operated Total Operated Operated Total Operated Operated Total
-------- --------- ----- -------- --------- ----- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At beginning of period.. 587 290 877 644 317 961 687 335 1,022
Opened or acquired ..... 9 -- 9 8 -- 8 10 1 11
Closed or sold ......... (55) (20) (75) (68) (24) (92) (57) (15) (72)
Transferred (net) ...... 2 (2) -- 3 (3) -- 4 (4) --
--- ------ ------ ------ ------ ------ ------ ------ ------
At end of period ....... 543 268 811 587 290 877 644 317 961
==== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
-5-
<PAGE> 6
INTERNATIONAL OPERATIONS
The Company conducts business outside the United States as a licensor or
as a consultant. Currently, the Company is a party to two agreements with
convenience store operators in South Korea and Malaysia. As with the Company's
prior international arrangements, both agreements require a specified commitment
of Company personnel, but do not require any significant commitment of capital.
ADVERTISING
To promote a uniform image for all stores, the Company designs and
coordinates advertising for all stores to complement its marketing strategy,
which is derived, in part, from market surveys and research. In-store,
newspaper, and direct-mail advertising, special promotions and seasonal radio
and television advertising usually feature certain items which can be purchased
at the stores, and frequently include national brand items for which advertising
costs are often supplemented by the national brand suppliers. Sales promotions
are generally established and maintained on a bi-weekly or monthly basis.
COMPETITION
The convenience store and retail gasoline industries are highly
competitive. The number and type of competitors vary by location. The Company
presently competes with other convenience stores, large integrated gasoline
service station operators, supermarket chains, neighborhood grocery stores,
independent gasoline service stations, fast food operations and other similar
retail outlets, some of which are well recognized national or regional retail
chains. Some of the Company's competitors have greater financial resources than
the Company. Key competitive factors include, among others, location, ease of
access, store management, product selection, pricing, hours of operation, store
safety, cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the Company's stores generally experience higher
revenues and profit margins during the warmer weather months, which fall within
the Company's second and third fiscal quarters.
EMPLOYEES
As of February 1, 1997 exclusive of franchisees and franchisees'
employees, the Company employed, on a full-time or part-time basis,
approximately 4,100 employees.
-6-
<PAGE> 7
ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing USTs to prevent future releases; (v)keeping appropriate
records; and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. A number of states in which the Company operates
also have adopted UST regulatory programs.
In the ordinary course of business, the Company periodically detects
releases of gasoline or other regulated substances from USTs it owns or
operates. As part of its program to manage USTs, the Company is involved in
environmental assessment and remediation activities with respect to releases of
regulated substances from its existing and previously operated retail gasoline
facilities. The Company accrues its estimates of all costs to be incurred for
assessment and remediation for known releases. These accruals are adjusted if
and when new information becomes known. Additionally, the Company records as
receivables the estimated reimbursements of a portion of the total costs from
various state environmental trust funds which have provisions for sharing or
reimbursing certain costs incurred by UST owners or operators based upon
compliance with the terms and conditions of such funds. Due to the nature of
such releases, the actual costs of assessment and remediation activities may
vary significantly from year to year. Under current federal and state regulatory
programs, the Company also will be obligated by December 22, 1998 to upgrade or
replace most existing USTs it owns or operates to meet certain corrosion,
overfill- and spill-protection and leak-detection requirements. The Company has
been evaluating each site on an individual basis to determine the type of
expenditures required to comply with these and other requirements under the
federal and state UST regulatory programs.
In addition to ongoing assessment and remediation costs, the Company
presently estimates that it will be required to make capital expenditures,
including those requiring upgrading or replacing of existing USTs, ranging from
approximately $7.0 to $8.0 million in the aggregate over the next three fiscal
years to comply with current federal and state UST regulations, which capital
expenditures could be reduced for locations (especially low volume locations)
which may be closed in lieu of the capital costs of compliance (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Environmental Responsibility").
The Company's estimate of costs to be incurred for environmental
assessment and remediation and for UST upgrading and other regulatory compliance
are based on factors and assumptions that could change due to modifications of
regulatory requirements, detection of unanticipated environmental conditions, or
other unexpected circumstances. As a result, the actual costs incurred may vary
significantly from the estimate noted above.
-7-
<PAGE> 8
BUSINESS OUTLOOK
This Form 10-K contains forward-looking statements within the meaning of
the "safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include plans and objectives to upgrade
and remodel store locations, to build new stores and increase gasoline sales, to
improve certain aspects of the franchisee program, to sell or lease certain
assets, as well as the availability of supplies of gasoline, the estimated costs
for environmental remediation and the sufficiency of the Company's liquidity and
the availability of capital. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Such factors and uncertainties include, but are not
limited to, the availability of financing and additional capital to fund the
Company's business strategy on acceptable terms, if at all, the future
profitability of the Company, the availability of desirable store locations, the
Company's ability to negotiate and enter into lease, acquisition and supply
agreements on acceptable terms, competition and pricing in the Company's market
area, volatility in the wholesale gasoline market due to supply interruptions,
modifications of environmental regulatory requirements, detection of
unanticipated environmental conditions, the timing of reimbursements from state
environmental trust funds, the Company's ability to manage its long-term
indebtedness, weather conditions, the favorable resolution of certain pending
and future litigation, and general economic conditions.
ITEM 2. PROPERTIES
Of the 811 stores in operation as of February 1, 1997, 109 store
locations were owned by the Company and 702 were leased. In addition, the
Company owns 23 locations and is the primary lessee for 92 locations not
currently operated as Dairy Mart stores. The Company's policy is to endeavor to
lease or sublease such locations to third parties. From time to time the Company
enters into sale-leaseback transactions whereby the Company sells retail
locations and leases such locations back from the purchasers.
Subsequent to year-end, the Company entered into an agreement to sell
its former administrative office building and plant facility located in Cuyahoga
Falls, Ohio (see Note 17 to the Consolidated Financial Statements). In addition,
the Company agreed to lease its new corporate headquarters facility in Hudson,
Ohio. The new facility is expected to be ready for occupancy by the fall of
1997. The Company also leases administrative offices for its Southeast regional
offices. The Company owns its former corporate headquarters facility in Enfield,
Connecticut. This facility has approximately 77,000 square feet and is located
on eighty-eight acres of land. The Company also owns its former Northeast
regional operating office building and former manufacturing and processing plant
located in a 33,000 square foot building in Enfield, Connecticut. In an effort
to redirect capital from within the business to enhance overall returns and
increase liquidity, management has agreed to sell the property noted above. In
addition, the Company is attempting to sell its former corporate headquarters in
Enfield, Connecticut and the former Northeast regional operating office and
distribution facility in Enfield, Connecticut.
-8-
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a nominal defendant, along with certain of
those persons who were directors of the Company in fiscal 1996, in two
shareholder derivative actions captioned KAHN V. NIRENBERG (C.A. No. 14893) and
UNI-MARTS, INC. V. STEIN (C.A. No. 14713), both of which are pending in the
Delaware Court of Chancery of New Castle County. The plaintiffs allege, among
other things, that in connection with the settlement of the dispute between
Charles Nirenberg and the Company's management with respect to control of the
Company, the directors violated their fiduciary duty to the Company and its
stockholders, violated provisions of Delaware corporate law and wasted corporate
assets. Mr. Nirenberg is a former shareholder, director and officer of the
Company. The plaintiffs seek, among other things, a declaration that the current
structure of the general partner of DM Associates Limited Partnership ("DM
Associates") is invalid and that certain voting rights with respect to the Class
B Common Stock held by DM Associates should be vested in the Company. The
Company is contesting these claims and, at this time is not able to determine
what the outcome of this litigation will be.
In the ordinary course of business, the Company is party to various
other actions which the Company believes are routine in nature and incidental to
the operation of its business. The Company believes that the outcome of the
proceedings to which the Company currently is party will not have a material
adverse effect upon its future results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 30, 1996, the Company held its Annual Meeting of its
stockholders. The following matters were voted on at the Annual Meeting:
1. The election of Thomas W. Janes and Truby G. Proctor, Jr. as
Class A Directors and Frank W. Barrett, J. Kermit Birchfield,
Jr., John W. Everets, Jr., Gregory G. Landry and Robert B.
Stein, Jr. as Class B Directors; and
2. The ratification of the appointment of Arthur Andersen LLP as
the Company's independent accountants for the fiscal year ending
February 1, 1997.
The following chart shows the number of votes cast for each matter voted on at
the Annual Meeting, the votes with respect to each constituting a majority of
the votes cast with respect to each matter:
<TABLE>
<CAPTION>
Votes
---------
<S> <C>
1. Election of Mr. Janes............ 894,545
2. Election of Mr. Proctor.......... 894,545
3. Election of Mr. Barrett.......... 2,111,004
4. Election of Mr. Birchfield....... 2,111,004
5. Election of Mr. Everets.......... 2,111,004
6. Election of Mr. Landry........... 2,111,004
7. Election of Mr. Stein............ 2,111,004
8. Ratification of Independent
Accountants .................... 2,250,941
</TABLE>
-9-
<PAGE> 10
PART II
-------
ITEM 5. MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company has not paid any cash dividends during the last three fiscal
years, and pursuant to loan covenants contained in the Company's new senior
revolving credit facility, is currently restricted from paying any dividends and
from repurchasing its capital stock. On September 30, 1996, the Company's Class
A Common Stock and Class B Common Stock began trading on the American Stock
Exchange under the symbols DMC.A and DMC.B, respectively. The Company's Class A
Common Stock and Class B Common Stock were previously traded on the NASDAQ Stock
Market under the symbols DMCVA and DMCVB, respectively. The following table sets
forth the high and low sales prices per share of both classes of the Company's
Common Stock, as quoted on The American Stock Exchange and The NASDAQ Stock
Market, for the last two fiscal years.
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock
------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Fiscal Year Ended February 1, 1997:
- --------------------------------------------------------------------------------------------------------------
First Quarter 6 1/4 5 1/2 6 3/4 5 3/8
Second Quarter 6 3/8 5 1/8 6 1/2 5
Third Quarter 6 4 1/4 6 4 3/4
Fourth Quarter 5 7/8 4 5 13/16 3 7/8
- --------------------------------------------------------------------------------------------------------------
Fiscal Year Ended February 3, 1996:
- --------------------------------------------------------------------------------------------------------------
First Quarter 4 5/8 3 5/8 4 7/8 3 3/4
Second Quarter 5 4 3/4 5 1/2 4 3/4
Third Quarter 6 3/8 5 5/8 7 1/4 6 2/15
Fourth Quarter 6 1/4 5 1/2 6 3/4 5 1/2
- --------------------------------------------------------------------------------------------------------------
</TABLE>
There were approximately 3,000 stockholders as of April 1, 1997. Included in
this number are shares held in nominee or street names.
-10-
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Five Years Ended February 1, 1997 1997 1996 1995 1994 1993
- --------------------------------- -------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues ................................................................$ 585,746 $ 571,311 $ 596,782 $ 591,500 $ 580,014
-------------------------------------------------------
Interest Expense ........................................................ 10,877 9,661 10,435 7,644 7,456
-------------------------------------------------------
Income (Loss) Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Change ......................... (2,613) (9,220) (17,319) 3,102 (4,797)
-------------------------------------------------------
Net Income (Loss) ....................................................... (1,886) (6,000) (11,150) 866 (6,850)
-------------------------------------------------------
Earnings (Loss) Per Share:
Before Extraordinary Item and Cumulative Effect of Accounting Change (.42) (1.12) (1.94) .33 (.53)
-------------------------------------------------------
Net Earnings (Loss) Per Share ...................................... (.42) (1.12) (2.01) .16 (1.26)
-------------------------------------------------------
BALANCE SHEET DATA:
Net Property and Equipment ..............................................$ 89,448 $ 80,387 $ 70,578 $ 93,774 $ 93,076
-------------------------------------------------------
Total Assets ............................................................ 175,505 164,938 172,228 169,442 175,178
-------------------------------------------------------
Long-Term Obligations (a) ............................................... 110,428 100,881 90,268 77,343 81,035
-------------------------------------------------------
Stockholders' Equity .................................................... 7,913 9,208 22,817 33,870 32,732
-------------------------------------------------------
OTHER DATA:
Earnings Before Interest Expense, Income Taxes,
Depreciation and Amortization (EBITDA)(b) ..........................$ 20,138 $ 12,831 $ 5,593 $ 23,646 $ 16,323
================================================================================================================================
</TABLE>
(a) Long-term obligations include the current portion of long-term obligations.
(b) EBITDA is significant to the Company's calculations of its financial
covenants and is defined as earnings before interest expense, income taxes
and depreciation and amortization expenses. EBITDA should not be viewed as
a substitute for Generally Accepted Accounting Principles (GAAP)
measurements such as net income (loss) or cash flow from operations.
-11-
<PAGE> 12
FINANCIAL HIGHLIGHTS
For the Years Ended February 1, 1997, February 3, 1996 and January 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
(in thousands, except number of locations, gross
profits and per share data)
FINANCIAL DATA:
Revenues:
<S> <C> <C> <C>
Merchandise Sales ........................................ $ 335,661 $ 341,526 $ 355,435
Gasoline Sales ........................................... 245,718 226,505 210,541
Dairy Sales .............................................. -- --(1) 28,563
Other .................................................... 4,367 3,280 2,243
-------------------------------------
Total Revenues .................... $ 585,746 $ 571,311 $ 596,782
-------------------------------------
Net loss(2) ................................................... $ (1,886) $ (6,000) $ (11,150)
-------------------------------------
STORE DATA:
Company Operated:
Gross Profit ............................................. $ 106,182 $ 111,153 $ 110,577
Average Sales Per Store .................................. $ 585 $ 550 $ 522
Average Gross Profit Per Store ........................... $ 196 $ 189 $ 172
Number of Stores at Year End ............................. 543 587 644
Franchise Operated:
Franchise Fee ............................................ $ 18,264 $ 18,805 $ 19,426
Average Sales Per Store .................................. $ 600 $ 586 $ 556
Average Franchise Fees Per Store ......................... $ 68 $ 65 $ 61
Number of Stores at Year End ............................. 268 290 317
Total Stores:
Gross Profit ............................................. $ 124,446 $ 129,958 $ 130,003
Average Sales Per Store .................................. $ 590 $ 562 $ 533
Average Combined Gross Profit and Franchise Fees Per Store $ 153 $ 148 $ 135
Number of Stores at Year End ............................. 811 877 961
Gasoline Data:
Gallons Sold ............................................. 209,478 212,832 206,441
Gross Profit ............................................. $ 25,082 $ 24,525 $ 24,079
Average Gallons Sold Per Location ........................ 582 566 508
Gross Profit Per Gallon .................................. $ 0.1138 $ 0.1152 $ 0.1166
Number of Gasoline Locations at Year End ................. 360 376 406
OTHER DATA:
Weighted Average Number of Shares ........................... 4,441 5,374 5,541
Book Value Per Share (3) .................................... $ 1.20 $ 1.41 $ 4.02
========================================================================================================
</TABLE>
(1) - In fiscal 1996, the Company discontinued its manufacturing and
distribution operations. The losses resulting from this operation were
included in operating and administrative expenses (see Note 14 to the
Consolidated Financial Statements).
(2) - Net loss for fiscal years 1996 and 1995 included special and/or
unusual items. For a discussion of these special and/or unusual charges,
see Note 14 to the Consolidated Financial Statements.
(3) - The calculation utilizes total outstanding shares including the
dilutive effect of stock options, stock grants and stock warrants as of
February 1, 1997, February 3, 1996, and January 28, 1995, respectively.
-12-
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY RESULTS OF OPERATIONS
The Company's net loss for fiscal 1997 was $1.9 million as compared to a net
loss of $6.0 million and $11.2 million for fiscal years 1996 and 1995,
respectively. Fiscal years 1996 and 1995 results included special and/or unusual
items. For a discussion of these special and/or unusual charges, see Note 14 to
the Consolidated Financial Statements.
RESULTS OF OPERATIONS
REVENUES
Revenues for fiscal 1997 increased $14.4 million from fiscal 1996 and revenues
for fiscal 1996 decreased $25.5 million from fiscal 1995. Fiscal 1997 and 1995
included 52 weeks whereas fiscal 1996 included 53 weeks. A summary of revenues
by functional area for the three fiscal years is shown below:
<TABLE>
<CAPTION>
Fiscal Years
----------------------------
(in millions) 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Convenience stores $335.7 $341.5 $355.4
Gasoline 245.7 226.5 210.5
Manufacturing and distribution - - 28.6
Other 4.3 3.3 2.3
----------------------------
Total $585.7 $571.3 $596.8
============================
</TABLE>
Convenience store revenues decreased $5.8 million, or 1.7%, in fiscal 1997 as
compared to fiscal 1996 due to a reduction of 75 underperforming stores, offset
by a 2.9% 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 the results of operations, since the majority of stores closed or sold had
been operating at a loss. Convenience store revenues decreased $13.9 million or
3.9%, in fiscal 1996 as compared to fiscal 1995 due to a reduction of 92
underperforming stores, offset by a 1.3% increase in comparable store sales.
Gasoline revenues increased $19.2 million in fiscal 1997 as compared to fiscal
1996 due to an increase in the average selling price of gasoline of 10.9 cents
per gallon partially offset by a decrease in gasoline gallons sold of 3.4
million. The decrease in gasoline gallons sold was due to the unfavorable impact
of fiscal 1997 having one less week of operating activity in comparison to
fiscal 1996, as noted above. On a per location basis, average gallonage
increased by approximately 3% in fiscal 1997 as compared to fiscal 1996. The
increase in average store 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. Gasoline revenues
increased in fiscal 1996 as compared to fiscal 1995 due to an increase in total
gallons sold of 6.4 million, combined with an increase in the average selling
price of gasoline of 4.4 cents per gallon.
-13-
<PAGE> 14
Manufacturing and distribution revenues are not reflected in fiscal 1997 or
fiscal 1996 due to the closing and divestiture of the dairy manufacturing and
distribution operations.
GROSS PROFITS
Gross profits for fiscal 1997 decreased $3.9 million from fiscal 1996 and gross
profits for fiscal 1996 increased $0.8 million from fiscal 1995. A summary of
the gross profits by functional area for the three fiscal years is shown below:
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------
(in millions) 1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Convenience stores $124.5 $130.0 $130.0
Gasoline 25.1 24.5 24.1
Manufacturing and distribution - - 0.6
Other 4.3 3.3 2.3
-----------------------------
Total $153.9 $157.8 $157.0
=============================
</TABLE>
Convenience store gross profit decreased by $5.5 million in fiscal 1997 as
compared to fiscal 1996. The decrease was 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. Convenience store gross
profits remained constant in fiscal 1996 as compared to fiscal 1995. Improved
product gross margins and higher lottery commissions were offset by the overall
reduction in the number of stores, as described above.
Gasoline gross profits increased by $0.6 million in fiscal 1997 as compared to
fiscal 1996 due to a gasoline excise tax rebate due the Company of $1.2 million
from the State of Kentucky since the Kentucky Supreme Court ruled that these
taxes were improperly assessed and collected. Excluding the excise tax rebate
discussed above, gasoline gross profits for fiscal 1997 decreased by $0.6
million as compared to fiscal 1996 primarily due to a decrease in gasoline
gallons sold, as described above, combined with a decrease of 0.14 cents in
gross profit per gallon. Gasoline gross profits increased by $0.4 million in
fiscal 1996 as compared to fiscal 1995 due to an increase in gasoline gallons
sold, as described above, partially offset by a decrease of 0.14 cents in gross
margin per gallon.
Manufacturing and distribution gross profits are not reflected in fiscal 1997 or
fiscal 1996 due to the closing and divestiture of the dairy manufacturing and
distribution operations.
Other gross profits increased by $1.0 million in fiscal 1997 as compared to
fiscal 1996 due to the recognition of a $0.4 million one-time license fee earned
upon the start up of a foreign consulting agreement and approximately $0.8
million in interest income associated with the excise tax rebate discussed
above.
-14-
<PAGE> 15
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for fiscal 1997 increased $0.5 million
from fiscal 1996 and operating and administrative expenses for fiscal 1996
decreased $6.0 million from fiscal 1995, as adjusted to exclude special and/or
unusual costs and expenses (see Note 14 to the Consolidated Financial
Statements). A summary of expenses by functional area for the three fiscal years
is shown below:
<TABLE>
<CAPTION>
Fiscal Years
--------------------------
(in millions) 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C>
Convenience stores $ 99.7 $100.2 $104.3
Gasoline 14.0 13.3 11.9
Administrative and Other(*) 31.9 31.6 34.9
--------------------------
Total(*) $145.6 $145.1 $151.1
--------------------------
</TABLE>
(*) adjusted to exclude special and/or unusual costs and expenses
(see Note 14 to the Consolidated Financial Statements).
Convenience store operating expenses decreased $0.5 million in fiscal 1997 as
compared to fiscal 1996 primarily due to the closure or sale of underperforming
stores as described above, offset by higher labor, rent and depreciation costs
on a per store basis. Convenience store operating expenses decreased $4.1
million in fiscal 1996 as compared to fiscal 1995 primarily due to the closure
or sale of underperforming stores as described above, partially offset by higher
labor, rent and maintenance costs on a per store basis. The increase in
maintenance costs was primarily attributable to snow removal expenses caused by
severe weather conditions in certain geographic areas in which the Company
operates.
Gasoline operating expenses increased $0.7 million in fiscal 1997 as compared to
fiscal 1996 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. Gasoline operating
expenses increased $1.4 million in fiscal 1996 as compared to fiscal 1995
primarily due to the operation of higher-volume new or remodeled expanded
facilities, as described above, partially offset by a decrease in environmental
expenses associated with the remediation of gasoline locations after considering
probable reimbursements from various state environmental trust funds.
Administrative and other expenses as adjusted, increased by $0.3 million as
compared to fiscal 1996. Administrative and other expenses, as adjusted
decreased $3.3 million in fiscal 1996 as compared to fiscal 1995 primarily due
to the full year impact of operating with a reduced level of administrative
support staff.
-15-
<PAGE> 16
INTEREST EXPENSES, INFLATION AND TAXES
Interest expense, as adjusted to exclude special and/or unusual interest charges
(see Note 14 to the Consolidated Financial Statements), increased in fiscal 1997
as compared to fiscal 1996 and fiscal 1995, due to an increased level of
borrowing associated with the issuance of the Series A Notes in March 1994 and
Series B Notes in December 1995 (see Notes 6 and 14 to the Consolidated
Financial Statements).
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administrative expenses in fiscal 1997, fiscal 1996 and
fiscal 1995, respectively.
The effective tax rate for the Company was a benefit of 28%, 35% and 38% for
fiscal year 1997, fiscal year 1996 and fiscal year 1995, respectively.
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 are 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.
For the fiscal year ended February 1, 1997, the cash flow from operations after
meeting all of the Company's debt service requirements and the cash generated
from the sale of certain assets was insufficient to fund an increased level of
capital expenditures. As a result, the Company increased its borrowings under
its revolving line of credit. 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 161 convenience store locations (see Note 17 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
During fiscal 1997, net cash generated by operations was $0.3 million lower than
the prior fiscal year. This decrease was primarily due to a net unfavorable
change in working capital accounts offset by a net favorable change in other
assets and liabilities, deferred income taxes (see Note 8 to the Consolidated
Financial Statements) and improved results of operations in the current fiscal
year (see "Results of Operations"). The net unfavorable change in working
capital was due to a reduction in accounts and notes receivable in the prior
year as compared to an increase in the current year due primarily from a
gasoline excise tax rebate due the Company (see "Results of Operations") and a
net unfavorable change in inventory due to a reduced amount of inventory
liquidations in the current year associated with store closures or sales
-16-
<PAGE> 17
of underperforming stores. The net favorable change in other assets and
liabilities 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 deferred these marketing allowances and will recognize the
related revenue over the life of the agreement.
During fiscal 1997, the Company paid its trade payables in an average of 26
days, which compares to 27 days for fiscal 1996 and 24 days for fiscal 1995. 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 February 1, 1997 and February 1, 1996, the
amounts due the issuer were $7.9 million and $7.6 million, respectively.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities increased by $8.5 million from the prior
fiscal year. The prior fiscal year included the acquisition of the interests of
a former majority stockholder of the Company and certain of his affiliates in DM
Associates Limited Partnership (DM Associates) for $10.0 million (see Note 14 to
the Consolidated Financial Statements), combined with lower debt service
requirements in the current fiscal year.
During the current fiscal year, 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. Any outstanding balance is due and payable on April 30,
1999 (see Note 6 to the Consolidated Financial Statements). As of February 1,
1997, the Company had $10.3 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 increased by $19.7 million, primarily due
to a lower amount of proceeds generated from the sale of certain assets. In
addition, the Company increased its capital expenditures with respect to new
store construction and remodeling of existing store locations. Finally, the
Company's investing activities included the purchase in the current fiscal year
of a U.S. Treasury Bill as compared to the maturation of a U.S. Treasury Bill in
the prior fiscal year.
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 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 February 1, 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
-17-
<PAGE> 18
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 (see Note 14 to
the Consolidated Financial Statements).
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 February 1, 1997, the
Company had recorded an accrual of $1,782,000 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 February 1, 1997, the Company had recorded
a net state trust fund reimbursement receivable of $1,450,000 (representing a
gross receivable of $2,362,000 less an allowance of $912,000). 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.
-18-
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its
subsidiaries and notes thereto, appear on Pages F-1 through F-21 of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
-19-
<PAGE> 20
PART III
--------
Information required by Items 10, 11 and 12 (DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT, EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT) is incorporated herein by reference from the
sections entitled "ITEM 1-ELECTION OF DIRECTORS-Nominees for Election As
Directors," "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND
VOTING RIGHTS," "PRINCIPAL SHAREHOLDERS," AND "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its 1997 fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under "CERTAIN TRANSACTIONS"
in the Company's definitive proxy statement, and is incorporated herein by
reference.
-20-
<PAGE> 21
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part
of this Form 10-K, see Page F-1.
(2) Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II - Valuation Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits:
Exhibit Number:
(3) Articles of Incorporation and Bylaws.
(3.1) The Company's Restated Certificate of Incorporation, as
amended, was filed as Exhibit 3.1 to the Company's Form 10-K
for the fiscal year ended February 1, 1992 and is incorporated
herein by reference.
(3.2) A Certificate of Designation was filed as Exhibit 1 of the
Company's Form 8-K for the January 19, 1996 event and is
incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed as
Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter
ended November 2, 1996 and are incorporated herein by
reference.
(4) Instruments defining the rights of security holders, including
indentures.
-21-
<PAGE> 22
(4.1) The instruments defining the rights of the holders of the
Company's Common Stock include the Company's Restated
Certificate of Incorporation, Certificate of Designation,
Amended and Restated Bylaws and Rights Agreement, filed as
Exhibits 3.1, 3.2, 3.3 and 10.23 hereto, and those instruments
filed as Exhibit 4.1 of the Company's Registration Statement
on Form S-1 (Registration No. 33-639) dated November 5, 1985,
which are incorporated herein by reference.
(4.2) Amended and Restated Indenture, dated as of December 1, 1995,
by and among the Company, Certain Subsidiaries of the Company,
as Guarantors, and First Bank National Association, as
Trustee, was filed as Exhibit 4.1 of the Company's Form 10-Q
for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(4.3) The instruments defining the rights of the holder's of the
Company's Warrants include the Form of Stock Purchase Warrants
filed as Exhibits 10.13 and 10.14 thereto was filed as
Exhibit 4.3 of the Company's Form 10-K for the fiscal year
ended February 3, 1996 and is incorporated herein by
reference.
(10) Material Contracts.
(10.1) Credit Agreement dated as of April 24, 1996, among the
Company, Bank of Boston Connecticut as agent, and the banks
from time to time parties thereto was filed as Exhibit 10.1 of
the Company's Form 10-K for the fiscal year ended February 3,
1996 and is incorporated herein by reference.
(10.2) Amended Credit Agreement dated as of April 24, 1997, among the
Company, Bank of Boston Connecticut as agent, and the banks
from time to time parties thereto is filed as Exhibit 10.2
attached hereto.
(10.3) 1985 Incentive Stock Option Plan, as amended, and form of
Incentive Stock Option Agreement, were filed as Exhibit 10.4
to the Company's annual report on Form 10-K for the fiscal
year ended January 30, 1988, and are incorporated herein by
reference.
(10.4) 1983 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement thereunder were filed as Exhibit 4.1 and 4.2,
respectively, to the Company's Registration Statement on Form
S-8 (File No. 33-8209) filed on August 26, 1986, and are
incorporated herein by reference.
(10.5) 1990 Stock Option Plan and forms of qualified and
non-qualified stock option agreements thereunder were filed as
Exhibit 10.4 to the Company's Form 10-K for the fiscal year
ended February 2, 1991, and are incorporated herein by
reference.
(10.6) 1995 Stock Option and Incentive Award Plan was filed as
Exhibit 10.1 of the Company's Form 10-Q for the fiscal
-22-
<PAGE> 23
quarter ended July 29, 1995 and is incorporated herein by
reference.
(10.7) 1995 Stock Option Plan for Outside Directors was filed as
Exhibit 10.6 of the Company's Form 10-K for the fiscal year
ended January 28, 1995 and is incorporated herein by
reference.
(10.8) Employment agreement between the Company and Robert B. Stein,
Jr. dated June 8, 1995 was filed as Exhibit 10.2 of the
Company's Form 10-Q for the fiscal quarter ended July 29, 1995
and is incorporated herein by reference.
(10.9) Employment agreement between the Company and Gregory G. Landry
dated June 8, 1995 was filed as Exhibit 10.3 of the Company's
Form 10-Q for the fiscal quarter ended July 29, 1995 and is
incorporated herein by reference.
(10.10) Employment agreement between the Company and Gary A. Payne
dated June 8, 1995 was filed as Exhibit 10.4 of the Company's
Form 10-Q for the fiscal quarter ended July 29, 1995 and is
incorporated herein by reference.
(10.11) Employment agreement between the Company and Gregg O. Guy
dated June 8, 1995 was filed as Exhibit 10.5 of the Company's
Form 10-Q for the fiscal quarter ended July 29, 1995 and is
incorporated herein by reference.
(10.12) Settlement agreement dated January 27, 1995 between the
Company and Frank Colaccino was filed as Exhibit 10.10 of the
Company's January 28, 1995 Form 10-K and is incorporated
herein by reference.
(10.13) Note Purchase Agreement, dated as of December 1, 1995, between
the Company and the Purchasers Listed in the Schedule of
Purchasers therein, relating to 10-1/4% Senior Subordinated
Notes (Series B) due March 15, 2004, was filed as Exhibit 10.1
of the Company's Form 10-Q for the fiscal quarter ended
October 28, 1995 and is incorporated herein by reference.
(10.14) Form of Stock Purchase Warrant to Subscribe for and Purchase
Shares of Class A Common Stock of the Company (Initially
Exercisable for an Aggregate of 1,215,000 Shares of Class A
Common Stock) was filed as Exhibit 10.2 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(10.15) Form of Stock Purchase Warrant to Subscribe for and Purchase
Shares of Class A Common Stock of the Company (Initially
Exercisable for an Aggregate of 500,000 Shares of Class A
Common Stock) was filed as Exhibit 10.3 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
(10.16) Registration Rights Agreement, dated December 1, 1995,
-23-
<PAGE> 24
by and among the Company and the Holders of (i) 10-1/4% Senior
Subordinated Notes (Series B) of the Company, due March 15,
2004, and (ii) Warrants to Purchase 1,715,000 shares of Class
A Common Stock, par value $.01 per share, of the Company was
filed as Exhibit 10.4 of the Company's Form 10-Q for the
fiscal quarter ended October 28, 1995 and is incorporated
herein by reference.
(10.17) Agreement dated as of October 30, 1995 among the Company,
Charles Nirenberg, FCN Properties Corporation and The
Nirenberg Family Charitable Foundation, Inc. was filed as
Exhibit 10.1 of the Company's Form 8-K/A Amendment No.1 for
the October 30, 1995 event and is incorporated herein by
reference.
(10.18) Modification Agreement, dated as of December 1, 1995, by and
among the Company, Charles Nirenberg, FCN Properties
Corporation, The Nirenberg Foundation, Inc., formerly known as
the Nirenberg Family Charitable Foundation, Inc., Robert B.
Stein, Jr., and Gregory G. Landry was filed as Exhibit 10.6 of
the Company's Form 10-Q for the fiscal quarter ended October
28, 1995 and is incorporated herein by reference.
(10.19) Amended and Restated Letter Agreement, dated December 1, 1995,
to Mitchell J. Kupperman from the Company, Robert B. Stein,
Jr., and Gregory G. Landry was filed as Exhibit 10.7 of the
Company's Form 10-Q for the fiscal quarter ended October 28,
1995 and is incorporated herein by reference.
(10.20) DM Associates Limited Partnership Agreement, dated March 12,
1992. Incorporated herein by reference to Exhibit E of the
Schedule 13D, dated March 12, 1992, filed by DM Associates
Limited Partnership, DM Management Associates and Frank
Colaccino.
(10.21) First Amendment to Partnership Agreement of DM Associates
Limited Partnership, dated as of September 8, 1994.
Incorporated herein by reference to Exhibit F of the Schedule
13D, Amendment No. 4, dated January 27, 1995, filed by DM
Associates Limited Partnership, New DM Management Associates
I, New DM Management Associates II, Charles Nirenberg, Robert
B. Stein, Jr., Gregory G. Landry, Mitchell J. Kupperman and
Frank Colaccino.
(10.22) Partnership Agreement of New DM Management Associates I, dated
as of September 8, 1994. Incorporated herein by reference to
Exhibit G of the Schedule 13D, Amendment No. 4, dated January
27, 1995, filed by DM Associates Limited Partnership, New DM
Management Associates I, New DM Management Associates II,
Charles Nirenberg, Robert B. Stein, Jr., Gregory G. Landry,
Mitchell J. Kupperman and Frank Colaccino.
(10.23) First Amendment to Partnership Agreement of New DM Management
Associates I, dated as of December 1, 1995, between Robert B.
Stein, Jr., Gregory G. Landry and
-24-
<PAGE> 25
Mitchell J. Kupperman was filed as Exhibit 10.10 of the
Company's Form 10-Q for the fiscal quarter ended October 28,
1995 and is incorporated herein by reference.
(10.24) Rights Agreement dated as of January 19, 1996 between the
Company and the First National Bank of Boston, as Rights
Agent, including form of Rights Certificate, was filed as
Exhibit 1 of the Company's Form 8-K for the January 19, 1996
event and is incorporated herein by reference.
(11) Calculation of earnings (loss) per share.
(18) Preferability letter of Arthur Andersen LLP regarding change
in accounting policy relating to the calculation of self
insurance reserves was filed as Exhibit 18 of the Company's
Form 10-K for the fiscal year ended February 3, 1996 and is
incorporated herein by reference.
(21) Subsidiaries of the Company was filed as Exhibit 21 of the
Company's Form 10-K for the fiscal year ended February 3, 1996
and is incorporated herein by reference.
(23) Consent of Arthur Andersen LLP to the incorporation of their
reports included in this Form 10-K, for the fiscal year ended
February 1, 1997, into the Company's previously filed
Registration Statements on Forms S-8.
(27) Financial Data Schedule.
(99) Additional Exhibits.
(99.1) 9% secured promissory note dated March 12, 1992 issued by DM
Associates Limited Partnership in favor of the Connecticut
Development Authority (subsequently assigned to FCN Properties
Corporation and then to the Company.)
(99.2) The Section entitled "Information regarding DM Associates and
the Nirenberg Transaction" on pages 19 through 21 of the
Company's Proxy Statement dated December 26, 1995 was filed as
Exhibit 99 of the Company's Form 10-K for the fiscal year
ended February 3, 1996 and is incorporated herein by
reference.
(b) Reports on Form 8-K
On July 10, 1996, the Company filed a current report on Form
8-K which indicated that a stipulation settlement has 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 defendent.
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.
-25-
<PAGE> 26
No Financial Statements were filed with any of the Current
Reports.
(c) See (3) above.
(d) See (2) above.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 30, 1997
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Robert B. Stein, Jr.
-----------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer
and Chairman of the Board of Directors
By /s/ Gregory G. Landry
-----------------------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
-27-
<PAGE> 28
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: April 30, 1997 /s/ Robert B. Stein, Jr.
---------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: April 30, 1997 /s/ Gregory G. Landry
---------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: April 30, 1997 /s/ Frank W. Barrett
---------------------------------------
Frank W. Barrett
Director
Dated: April 30, 1997 /s/ J. Kermit Birchfield, Jr.
---------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: April 30, 1997 /s/ John W. Everets, Jr.
---------------------------------------
John W. Everets, Jr.
Director
Dated: April 30, 1997 /s/ Thomas W. Janes
---------------------------------------
Thomas W. Janes
Director
Dated: April 30, 1997 /s/ Truby G. Proctor, Jr.
---------------------------------------
Truby G. Proctor, Jr.
Director
-28-
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Dairy Mart Convenience
Stores, Inc. and subsidiaries (the Company) included in this Form 10-K and have
issued our report thereon dated April 10, 1997 (except with respect to the
matter discussed in Note 6, as to which the date is April 29, 1997). Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
April 10, 1997
-29-
<PAGE> 30
SCHEDULE II
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- ------------------------ ----------- ---------
Additions
------------------------
Balance at Charge to Deductions Balance at
Beginning Costs and Other and Accounts End of
Description of period Expenses Recoveries Written off Period
- -------------------------------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
Fiscal Year Ended January 28, 1995 1,824,177 1,053,818 14,057 (1,163,810) 1,728,242
Fiscal Year Ended February 3, 1996 1,728,242 1,220,153 -- (1,101,173) 1,847,222
Fiscal Year Ended February 1, 1997 1,847,222 1,210,771 -- (1,513,256) 1,544,737
</TABLE>
-30-
<PAGE> 31
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Form 10-K
Page
------------
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Statements of Operations and Stockholders'
Equity for the Fiscal Years Ended February 1, 1997,
February 3, 1996 and January 28, 1995 F-3
Consolidated Balance Sheets as of February 1, 1997
and February 3, 1996 F-4
Consolidated Statements of Cash Flows for the Fiscal
Years Ended February 1, 1997, February 3, 1996
and January 28, 1995 F-5
Notes to Consolidated Financial Statements for the
Fiscal Years Ended February 1, 1997, February 3, 1996
and January 28, 1995 F-6 to F-21
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart
Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of
February 1, 1997 and February 3, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended February 1, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dairy Mart Convenience Stores,
Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended February 1, 1997, in conformity with generally accepted
accounting principles.
Hartford, Connecticut
April 10, 1997 (except with respect
to the matter discussed in Note 6,
as to which the date is April 29, 1997)
F-2
<PAGE> 33
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS Dairy Mart Convenience Stores, Inc and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
For the Years Ended February 1, 1997, February 3, 1996 and
January 28, 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues (including excise taxes of $36,427, $36,331, and $36,332) $ 585,746 $ 571,311 $ 596,782
------------------------------------------
Cost of goods sold and expenses:
Cost of goods sold .......................................... 431,851 413,548 439,757
Operating and administrative expenses ....................... 145,631 157,322 163,909
Interest expense ............................................ 10,877 9,661 10,435
------------------------------------------
588,359 580,531 614,101
------------------------------------------
Loss before income taxes and cumulative
effect of accounting change ........................ (2,613) (9,220) (17,319)
Benefit from income taxes ........................................ 727 3,220 6,558
------------------------------------------
Loss before cumulative effect of
accounting change ................................... (1,886) (6,000) (10,761)
Cumulative effect of accounting change ........................... - - (389)
------------------------------------------
Net loss ............................................... $ (1,886) $ (6,000) $ (11,150)
===================================================================================================================
Loss per share:
Before cumulative effect of accounting change ................ $ (0.42) $ (1.12) $ (1.94)
Cumulative effect of accounting change ....................... - - (0.07)
------------------------------------------
Loss per share ................................................... $ (0.42) $ (1.12) $ (2.01)
===================================================================================================================
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended February 1, 1997, February 3, 1996 and January 28, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Common Stock Note
--------------------------- Retained Treasury Stock Receivable
Class A Class B Paid-in Earnings ---------------- from DM
Shares Shares Amount Capital (Deficit) Shares Amount Associates
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 29, 1994 .................... 3,269 2,956 $ 63 $ 27,483 $ 11,329 698 $ (5,005) $ -
Issuance of common stock .................... 21 6 - 97 - - - -
Net loss .................................... - - - - (11,150) - - -
--------------------------------------------------------------------------------------
Balance January 28, 1995 .................... 3,290 2,962 63 27,580 179 698 (5,005) -
Issuance of common stock .................... 33 - - 110 - - - -
Exchange of Class B shares for Class A shares 3 (3) - - - - - -
Issuance of warrants ........................ - - - 2,281 - - - -
Note receivable from DM Associates .......... - - - - - - - (10,000)
Net loss .................................... - - - - (6,000) - - -
--------------------------------------------------------------------------------------
Balance February 3, 1996 .................... 3,326 2,959 63 29,971 (5,821) 698 (5,005) (10,000)
Issuance of common stock .................... 184 - 2 589 - - - -
Net loss .................................... - - - - (1,886) - - -
--------------------------------------------------------------------------------------
Balance February 1, 1997 .................... 3,510 2,959 $ 65 $ 30,560 $ (7,707) 698 $ (5,005) $(10,000)
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 35
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------
February 1, 1997 and February 3, 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except
<S> <C> <C>
ASSETS per share amounts)
Current Assets:
Cash .................................................................... $ 9,290 $ 12,654
Short-term investment ................................................... 1,533 -
Accounts and notes receivable ........................................... 13,588 9,752
Inventory ............................................................... 20,184 20,928
Prepaid expenses and other current assets ............................... 3,279 3,454
Deferred income taxes ................................................... 1,811 2,669
-------------------------
Total current assets ................................................ 49,685 49,457
-------------------------
Assets Held For Sale ...................................................... 9,543 8,685
Property and Equipment, net ............................................... 89,448 80,387
Intangible Assets, net .................................................... 17,039 17,277
Other Assets, net ......................................................... 9,790 9,132
-------------------------
Total assets .............................................................. $ 175,505 $ 164,938
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ............................. $ 1,383 $ 1,430
Accounts payable ........................................................ 30,640 30,803
Accrued expenses ........................................................ 13,167 14,437
Accrued interest ........................................................ 3,635 3,355
-------------------------
Total current liabilities ........................................... 48,825 50,025
-------------------------
Long-Term Obligations, less current portion above...................... 109,045 99,451
-------------------------
Other Liabilities ......................................................... 9,722 6,254
-------------------------
Commitments and Contingencies (Notes 6, 7, and 13)
Stockholders' Equity:
Preferred Stock (serial), par value $.01, 1,000,000 shares
authorized, no shares issued ......................................... - -
Class A Common Stock, par value $.01, 20,000,000 shares
authorized, 3,509,576 and 3,326,296 issued .......................... 35 33
Class B Common Stock, par value $.01, 10,000,000 shares
authorized, 2,959,017 issued ........................................ 30 30
Paid-in capital ......................................................... 30,560 29,971
Retained deficit ........................................................ (7,707) (5,821)
Treasury stock, at cost ................................................. (5,005) (5,005)
Note receivable from DM Associates ...................................... (10,000) (10,000)
-------------------------
Total stockholders' equity .......................................... 7,913 9,208
-------------------------
Total liabilities and stockholders' equity ................................ $ 175,505 $ 164,938
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 36
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------
For the Years Ended February 1, 1997, February 3, 1996 and
January 28,1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (1,886) $ (6,000) $(11,150)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change ............. - - 389
Depreciation and amortization ...................... 11,874 12,390 12,477
Change in deferred income taxes .................... (865) (2,873) (5,160)
Loss(gain)on other disposition of properties, net .. 958 (376) 880
Net change in assets and liabilities:
Accounts and notes receivable ..................... (3,836) 2,646 (628)
Inventory ......................................... 744 5,116 225
Accounts payable .................................. (163) 1,861 242
Accrued interest .................................. 280 303 1,961
Other assets and liabilities ...................... 2,504 (3,172) 7,456
--------------------------------------
Net cash provided by operating activities ................. 9,610 9,895 6,692
--------------------------------------
Cash flows from investing activities:
Purchase of short-term investments ................... (1,533) - (3,953)
Proceeds from sale of short-term investments ......... - 2,053 1,900
Purchase of property and equipment ................... (23,782) (20,232) (17,772)
Proceeds from sale of property, equipment and
assets held for sale ................................ 2,628 14,741 1,120
Increase in long-term notes receivable ............... (1,435) (1,579) (1,621)
Proceeds from collection of long-term notes receivable 1,513 1,706 1,394
(Increase) decrease in intangibles and other assets .. (372) 79 (334)
--------------------------------------
Net cash used by investing activities ..................... (22,981) (3,232) (19,266)
--------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations and related warrants 10,930 13,500 74,064
Repayment of long-term obligations ................... (1,514) (2,131) (63,707)
Note receivable from DM Associates ................... - (10,000) -
Issuance of common stock ............................. 591 110 97
--------------------------------------
Net cash provided by financing activities ................. 10,007 1,479 10,454
--------------------------------------
(Decrease) increase in cash ............................... (3,364) 8,142 (2,120)
Cash at beginning of year ................................. 12,654 4,512 6,632
--------------------------------------
Cash at end of year ....................................... $ 9,290 $ 12,654 $ 4,512
=========================================================================================================
Supplemental disclosures:
Cash paid during the year-
Interest ............................................. $ 10,466 $ 9,359 $ 9,509
Income taxes (refunded) paid ......................... (97) (1,172) 879
Noncash investing and financing activities-
Issuance of warrants ................................. - 665 -
Capital lease obligations ............................ - 828 -
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dairy Mart Convenience Stores, Inc. and Subsidiaries
February 1, 1997, February 3, 1996 and January 28, 1995
1. SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND CONSOLIDATION - The accompanying financial statements
include the accounts of Dairy Mart Convenience Stores, Inc. and its subsidiaries
(the Company). All intercompany transactions have been eliminated.
NATURE OF THE BUSINESS - The Company owns, operates and franchises convenience
retail stores, a number of which also sell gasoline. The convenience stores are
primarily located in eleven states with approximately 60% in the Midwest, and
the remainder in the Northeast and Southeast. The stores offer a wide range of
products including groceries, tobacco products, beverages, general merchandise,
health and beauty aids and deli products. The Company also manufactured and
distributed certain dairy and other products for sale at the majority of these
locations, which operations were discontinued in fiscal 1996 (see Note 14).
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January
31. There were 52 weeks included in the fiscal years ended February 1, 1997 and
January 28, 1995 and 53 weeks included in the fiscal year ended February 3,
1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SHORT-TERM INVESTMENT - As of February 1, 1997, the Company's short-term
investment consisted of a U.S. Treasury Bill with a maturity of less than one
year. The Company accounted for this investment as being available for sale in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". As of
February 1, 1997, the fair market value of the U.S. Treasury Bill approximated
its cost.
INVENTORY - Store inventory is stated primarily at the lower of last-in,
first-out (LIFO) cost or market. Gasoline inventory is stated at the lower of
first-in, first-out (FIFO) cost or market.
ASSETS HELD FOR SALE - Assets held for sale represent operating and
non-operating assets which the Company intends to sell in the near term and are
carried at the lower of cost or estimated net realizable value. The Company
reduced the carrying value of certain of these assets to their estimated net
realizable value by taking a special charge to earnings in fiscal years 1996 and
1995 (see Note 14). The amounts the Company will realize could differ materially
from the amounts assumed in arriving at the carrying value.
PROPERTY, EQUIPMENT AND DEPRECIATION - Property is stated at cost and is
depreciated on the straight-line basis for financial reporting purposes over the
following estimated useful lives:
- --------------------------------------------------------------------------------
Buildings 30-40 years
- --------------------------------------------------------------------------------
Equipment 5-30 years
- --------------------------------------------------------------------------------
Leasehold improvements are amortized primarily over the lesser of 10 years or
the term of the lease.
During fiscal 1997, the Company changed its estimate of the useful lives of new
store and gasoline equipment placed in service in fiscal 1995 and thereafter.
The change was made in order to reflect the actual useful lives of such assets.
The change had the effect of decreasing net loss in fiscal 1997 by $395,000
($.09 per share).
LONG-LIVED ASSETS - The Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
effective February 4, 1996. The statement establishes accounting standards for
the impairment of long-lived assets to be held and used and for long-lived
assets to be disposed of. Impairment of long-lived assets is recognized when
events or changes in circumstances indicate that the carrying amount of the
asset, or related group of assets, may not be recoverable. Measurement of the
amount of the impairment may be based on market values of similar assets or
estimated discounted future cash flows resulting from use and ultimate
disposition of the asset. Management has determined that there has been no
material impairment to any long-lived assets as of February 1, 1997, other than
as provided for assets held for sale, as discussed above.
INCOME TAXES - The Company calculates income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements and tax returns.
SELF INSURANCE RESERVES - The Company is self-insured for certain property and
liability, and accident and health insurance risks and establishes reserves for
estimated outstanding claims based on its historical claims experience and
reviews by third-party loss reserve specialists. The Company has purchased
insurance coverage for losses that may occur above certain levels. As of
February 1, 1997, February 3, 1996 and January 28, 1995, the Company had
established reserves for these risks of $5,350,000, $7,305,000 and $8,702,000,
respectively, which are recorded on a present value basis. In fiscal 1997, the
Company changed its estimate of incurred but not reported claims with respect to
its property and liability insurance reserve to reflect favorable claims
experience and a reduction in the Company's convenience store base. The change
had the effect of decreasing net loss in fiscal 1997 by $470,000 ($.11 per
share). Prior to January 30, 1994, the Company recorded its self insurance
reserves using a discount rate based upon the Company's incremental borrowing
rate which was 8% as of January 29, 1994. As of January 30, 1994, the Company
changed its method of accounting to discount its self insurance reserves at a
risk free rate of return. The cumulative effect of this change in accounting
method was a charge to income of $389,000, net of the applicable income tax
benefit of $271,000. As of February 1, 1997, February 3, 1996 and January 28,
1995, the risk free rate of return was 6.39%, 5.53% and 7.62%, respectively.
While management believes these reserves are adequate, the ultimate amount of
these liabilities could differ from these estimates.
F-6
<PAGE> 38
Dairy Mart Convenience Stores, Inc. and Subsidiaries
FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", the Company has
disclosed the fair value, related carrying value and method for determining fair
value for the following financial instruments in the accompanying notes as
referenced: short-term investments (see Note 1), accounts and notes receivable
(see Note 2) and long-term obligations (see Note 6).
REVENUE RECOGNITION - The Company recognizes revenues as earned, including
franchise revenues and interest income. Franchise revenues represent a
percentage of franchise store sales remitted to the Company on a weekly or
monthly basis, for providing merchandising, advertising, store audits, and other
operating and administrative support services, as well as revenues derived from
initial fees and the gain on sale of store assets to franchisees. Franchise
revenues were $18,264,000, $18,805,000 and $19,426,000 for the fiscal years
ended February 1, 1997, February 3, 1996 and January 28, 1995, respectively.
STORE PREOPENING AND CLOSING COSTS - Expenditures of a non-capital nature
associated with opening a new store are expensed as incurred. At the time the
decision is made to close a store, estimated unrecoverable costs are charged to
expense. Such costs include the net book value of abandoned fixtures, equipment,
leasehold improvements and a provision for the present value of future lease
obligations, less the present value of estimated future sub-rental income. The
Company utilizes a risk free rate of return to discount its future lease
obligations and sub-rental income. As of February 1, 1997, February 3, 1996 and
January 28, 1995, the risk free rate of return was 6.39%, 5.53% and 7.62%,
respectively.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share have been calculated based
on the weighted average number of shares of common stock outstanding and the
effect of stock options, if dilutive, during each year. Additionally 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). The Company does
not, however, currently anticipate collection of this Note (see Note 14) and
therefore has reflected the Pledged Shares as treasury stock for earnings (loss)
per share purposes. The Company does recognize, however, that DM Associates has
the right to pay this Note at or before maturity and retain direct ownership and
control of the Pledged Shares. If such payment were to occur, Pledged Shares
would no longer be reflected as treasury stock for earnings (loss) per share
purposes. Additionally, in the interim, to the extent that the market value of
the Pledged Shares exceeds the face value of the Note and related accrued
interest, the dilutive effect of the Pledged Shares, measured using the treasury
stock method, will be considered in calculating earnings per share. The number
of shares used in the calculation for earnings (loss) per share was 4,440,997,
5,373,784 and 5,540,874 for the fiscal years ended February 1, 1997, February 3,
1996 and January 28, 1995, respectively.
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.
RECLASSIFICATIONS - Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used for the
current year.
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of February 1, 1997 and February
3, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Franchise accounts receivable ............................. $ 4,905 $ 4,349
Franchise notes receivable ................................ 3,071 3,134
Marketing allowances and other ............................ 9,446 6,483
--------------------
17,422 13,966
Less allowance for doubtful accounts and notes receivable . 1,545 1,847
--------------------
Net accounts and notes receivable ......................... 15,877 12,119
Less noncurrent notes receivable (included in other assets) 2,289 2,367
--------------------
Current accounts and notes receivable ..................... $13,588 $ 9,752
======================================================================================
</TABLE>
The carrying amount of current accounts and notes receivable approximates fair
value because of the short maturity of those receivables. The fair value of the
Company's noncurrent notes receivable is estimated by discounting the future
cash flows using the rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. As of
February 1, 1997, the fair value of the noncurrent notes receivable approximates
their carrying value. As of February 3, 1996, the fair value of the noncurrent
notes receivable exceeded the carrying value by approximately $87,000.
F-7
<PAGE> 39
Dairy Mart Convenience Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3. INVENTORY:
A summary of inventory as of February 1, 1997, February 3, 1996 and January 28,
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Inventory valued at FIFO cost........................ $24,775 $25,435 $30,800
LIFO reserve......................................... (4,591) (4,507) (4,756)
------------------------------------------------------
Inventory primarily valued at LIFO cost.............. $20,184 $20,928 $26,044
==============================================================================================================
</TABLE>
The LIFO reserve reflects the difference between stating the inventory at
historical LIFO cost and the more current FIFO cost. Had the FIFO method been
used, cost of goods sold would have been decreased by $84,000 in 1997, increased
by $249,000 in 1996 and decreased by $173,000 in 1995. Loss per share would have
been decreased by $.01 in 1997, increased by $.03 in 1996, and decreased by $.02
in 1995, had the FIFO method been used.
During 1997, 1996 and 1995, the Company liquidated certain LIFO inventory that
was carried at lower costs prevailing in prior years. The effect of the
liquidation was to decrease net loss by approximately $380,000 ($.09 per share),
$488,000 ($.09 per share) and $56,000 ($.01 per share) in 1997, 1996 and 1995,
respectively.
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of February 1, 1997 and February 3, 1996
is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land and improvements.................................................... $ 8,898 $ 9,529
Building and leasehold improvements...................................... 35,603 32,970
Equipment................................................................ 85,785 73,686
Assets under capital leases.............................................. 3,397 3,432
-------------------------------
133,683 119,617
Less accumulated depreciation and amortization .......................... (44,235) (39,230)
-------------------------------
Property and equipment, net.............................................. $ 89,448 $ 80,387
==============================================================================================================
</TABLE>
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $2,244,000 and
$1,937,000 as of February 1, 1997 and February 3, 1996, respectively.
- --------------------------------------------------------------------------------
5. INTANGIBLE ASSETS:
A summary of intangibles as of February 1, 1997 and February 3, 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Goodwill................................................................ $ 14,345 $ 13,874
Franchise and operating rights.......................................... 10,144 10,144
------------------------------
24,489 24,018
Less accumulated amortization........................................... (7,450) (6,741)
------------------------------
Intangible assets, net.................................................. $ 17,039 $ 17,277
==============================================================================================================
</TABLE>
Goodwill represents the excess of cost over fair value of net assets purchased
and is being amortized on a straight-line basis over a period of 40 years.
Franchise and operating rights represent the value of franchise relationships
purchased in connection with past acquisitions and are being amortized on a
straight-line basis over 30 years. The Company assesses the recoverability of
these intangibles by determining whether the amortization of the goodwill and
franchise and operating rights over the remaining lives can be recovered through
projected future operating results on an undiscounted basis. The Company's
management anticipates a return to profitability in fiscal year 1998 and
therefore no provision for impairment was recorded in any period.
- --------------------------------------------------------------------------------
F-8
<PAGE> 40
Dairy Mart Convenience Stores, Inc. and Subsidiaries
6. LONG-TERM OBLIGATIONS:
The Company had the following long-term obligations as of February 1, 1997:
<TABLE>
<CAPTION>
February 1, 1997
Interest Maturity -----------------------------------------
Rate (Fiscal Year) Current Long-Term Total
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Senior subordinated notes (Series A Notes)................. 10.25% 2005 $ - $ 75,000 $ 75,000
Senior subordinated notes (Series B Notes), net of original
issue discount of $1,454.................................. 10.25% 2005 - 12,046 12,046
Revolving credit facility.................................. Various 2000 - 10,280 10,280
Real estate mortgage notes payable......................... 6.25%-12.0% 1998-2012 268 5,459 5,727
Small Business Administration debentures................... 6.9%-9.6% 1998-2006 - 4,230 4,230
Equipment financing........................................ Various 1998-2000 714 799 1,513
Capital leases, net of interest and executory costs of $443 Various 1998-2009 401 1,231 1,632
----------------------------------------
$ 1,383 $ 109,045 $ 110,428
================================================================================================================================
</TABLE>
In March 1994, the Company issued $75,000,000 principal amount of 10.25% senior
subordinated notes (the "Series A Notes") due March 15, 2004. The proceeds
received from the sale of the Series A Notes, net of offering costs of
$2,298,000, were used to repay the entire outstanding indebtedness under the
then existing bank term loan and bank revolving loan and to redeem in full the
Company's 14.25% subordinated debentures due November, 2000.
In December 1995, the Company issued an additional $13,500,000 principal amount
of 10.25% senior subordinated notes (the "Series B Notes") due March 15, 2004.
The proceeds received from the sale of the Series B Notes were used primarily to
purchase the interests of a former majority stockholder of the Company and
certain of his affiliates in DM Associates (see Note 14). The Indenture pursuant
to which the Company issued the Series A Notes was amended and restated to apply
to the Series B Notes.
In conjunction with the issuance of the Series B Notes, the Company issued to
the purchasers of the Series B Notes warrants to purchase 1,215,000 shares of
Class A Common Stock of the Company. In addition, the Company issued to the
holders of the Series A Notes warrants to purchase 500,000 shares of the Class A
Common Stock of the Company. The warrants may be exercised any time during the
next five years. The initial exercise price of the warrants was $6.95 per share,
which was adjusted in December, 1996, to $5.45 per share. The exercise price may
be adjusted further based upon the occurrence of various events, including stock
dividends and issuances of Common Stock by the Company for a per share price
less than the exercise price of the warrants or less than the current market
value of the Company's Class A Common Stock.
The Series A and Series B Notes, (collectively, the "Notes") are redeemable, at
the option of the Company, after March 15, 1999 at rates starting at 104.75% of
principal amount reduced annually through March 15, 2002 at which time they
become redeemable at 100% of principal amount. The terms of the Notes may
restrict, among other things, the payment of dividends and other distributions,
investments, the repurchase of capital stock and the making of certain other
restricted payments by the Company and its subsidiaries, the incurrence of
additional indebtedness and new operating lease obligations by the Company or
any of its subsidiaries, and certain mergers, consolidations and dispositions of
assets. Additionally, according to the terms of the Notes, if a change of
control occurs, as defined, each holder of Notes will have the right to require
the Company to repurchase such holder's Notes at 101% of the principal amount
thereof.
The Company has a $30,000,000 senior revolving credit facility, of which up to
$15,000,000 is available for the issuance of letters of credit. The outstanding
balance is due and payable on April 30, 1999; however, the Company may extend
such due date for up to two additional one-year periods, with the consent of the
lenders. In April 1997, certain provisions of the revolving credit facility were
amended. Revolving credit loans under the amended credit agreement bear
interest, at the Company's option, at an applicable margin over the agent bank's
base rate or the LIBOR rate. The applicable margin, if any, is based upon the
ratio of adjusted consolidated indebtedness to consolidated EBITDA, as defined
below. The adjusted credit agreement also provides for a commitment fee of 1/2%
on any unused portion of the revolving credit facility. Among other
restrictions, the amended credit agreement contains financial covenants relating
to specified levels of: indebtedness reduced by an amount equal to cash to
earnings before interest expense, taxes, depreciation and amortization (EBITDA);
EDITDA to interest expense; earnings before interest expense, taxes,
depreciation, amortization and rent, less taxes paid in cash to interest
expense, rent expense and principal payment required to be made on indebtedness;
and the maintenance of minium net worth. In connection with the credit
agreement, the Company granted a security interest in substantially all of its
non-real estate assets and pledged as collateral the shares of capital stock of
certain subsidiary corporations of the Company.
The Company is limited in the amount of cash dividends that it may pay and the
amount of capital stock and subordinated indebtedness that it may repurchase by
applicable covenants contained in the senior revolving credit facility and
Notes. As of February 1, 1997, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of February 1, 1997 and February 3, 1996, respectively, the fair value of
the real estate mortgage notes payable and Small Business Administration
debentures approximated their carrying amounts. As of February 1, 1997, the
fair value of the Series B Notes, net of original issue discount, was
$11,795,000. As of February 3, 1996, the fair value of the Series B notes, net
of original issue discount, approximated the carrying amount. As of February 1,
1997 and February 3, 1996, the fair value of the Series A Notes was $73,605,000
and $65,500,000, respectively. The fair values of the Series A and B notes were
based on quoted market prices as of February 1, 1997 and February 3. 1996,
respectively. The revolving credit facility is a variable rate loan, and thus,
the fair value approximates the carrying amount as of February 1, 1997.
F-9
<PAGE> 41
Dairy Mart Convenience Stores, Inc. and Subsidiaries
As of February 1, 1997, maturities on long-term obligations for the next five
years, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
February 1
Fiscal Year 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C>
1998........................................ $1,383
1999........................................ 2,260
2000........................................ 4,309
2001........................................ 399
2002........................................ 2,685
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
7. OPERATING LEASES:
The Company leases operating properties, including store locations and office
space, under various lease agreements expiring through 2020. Certain of these
locations are sublet to the Company's franchisees. The future minimum lease
payments related to these properties are included in the following summary.
A summary of future minimum lease payments and sublease receipts as of February
1, 1997 is as follows:
<TABLE>
<CAPTION>
Net
Operating Operating Operating
Payable/Receivable in Fiscal Year Ending Leases Subleases Leases
==========================================================================================
(in thousands)
<S> <C> <C> <C>
1998.......................................... $14,427 $3,318 $11,109
1999.......................................... 12,143 2,350 9,793
2000.......................................... 9,516 1,385 8,131
2001.......................................... 6,887 833 6,054
2002.......................................... 4,887 448 4,439
Thereafter.................................... 23,712 217 23,495
------------------------------------
Total......................................... $71,572 $8,551 $63,021
==========================================================================================
</TABLE>
Rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Leases................................ $15,523 $15,297 $15,321
Less subleases........................ 4,000 4,169 4,631
------------------------------------------------------
Net................................... $11,523 $11,128 $10,690
=================================================================================================================
</TABLE>
F-10
<PAGE> 42
Dairy Mart Convenience Stores, Inc. and Subsidiaries
8. FEDERAL AND STATE INCOME TAXES:
The benefit from income taxes for the fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current benefit (provision)
Federal ........................................................ $ 207 $ 495 $ 2,015
State and local ................................................ (345) (148) (346)
-----------------------------------
Total current benefit (provision)............................. (138) 347 1,669
-----------------------------------
Deferred benefit
Federal ........................................................ 547 2,101 3,423
State and local ................................................ 318 772 1,737
-----------------------------------
Total deferred benefit ....................................... 865 2,873 5,160
-----------------------------------
Total benefit .................................................... $ 727 $ 3,220 $ 6,829
==============================================================================================================
</TABLE>
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. These minimum taxes are
included in the current provision for state and local income taxes. In addition,
the Company records a reduction in the provision (increase in the benefit) for
income taxes for the benefit to be realized from targeted jobs credits in the
year in which they arise. A reconciliation of the difference between the
statutory federal income tax rate and the effective income tax rate follows:
<TABLE>
<CAPTION>
Percent of Pretax Income
------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate ............................... 34 % 34 % 34 %
(Increase) decrease from:
State income tax benefit (provision), net of federal tax effect (1) 5 5
Nondeductible expenses and amortization of acquired assets .... (5) (5) (1)
Targeted jobs credit .......................................... - 1 2
Regulatory audit settlement ................................... - - (2)
-----------------------
Effective income tax rate ....................................... 28 % 35 % 38 %
==============================================================================================
</TABLE>
In November 1994, the Company reached an agreement with the Internal Revenue
Service to settle certain disputed items, primarily related to the deductibility
of certain intangible assets associated with prior acquisitions. The impact of
the settlement required the Company to pay approximately $1,587,000, of which
$681,000 represented pretax interest charges (see Note 14), and to reduce the
deductibility of the remaining basis of certain intangible assets by $3,300,000.
Due to the immateriality of the amounts involved, the Company reflected the
impact of this settlement through the fiscal 1995 tax benefit and adjusted
deferred tax assets and liabilities accordingly rather than adjusting the
amounts allocated to goodwill arising from the acquisition.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Significant deferred tax assets (liabilities) as of February 1, 1997
and February 3, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Capitalized leases ........................................................ $ 141 $ 182
Depreciation and amortization ............................................. (15,414) (13,307)
Vacation accrual .......................................................... 310 324
Inventory (LIFO)........................................................... (1,236) (1,337)
Reserve for asset valuations .............................................. 606 803
Insurance reserves not deductible for tax purposes ........................ 1,654 1,989
Income deferred for financial statement purposes .......................... 2,872 365
Reserve for closed stores and renovations ................................. 476 937
Accrued restructuring and severance reserves .............................. 585 875
Financial statement expenses deferred for tax purposes .................... 46 379
Write-down of non-operating properties .................................... 1,591 1,591
Divestiture of dairy manufacturing and distribution operations ............ 74 124
Tax credits and net operating loss carryforwards .......................... 12,067 9,927
Other ..................................................................... 405 460
------------------------
Net deferred tax asset .................................................... $ 4,177 $ 3,312
======================================================================================================
</TABLE>
As of February 1, 1997, the Company had alternative minimum tax credits
aggregating $330,000 which carryforward indefinitely for federal income tax
purposes. These credits can be used in the future to the extent that the
Company's regular tax liability exceeds its liability calculated under the
alternative minimum tax method. In addition, the Company had $1,979,000 of
targeted jobs credit carryforwards that expire, if unused, from fiscal 2007 to
2011 and $570,000 of foreign tax credit carry-forwards that expire, if unused,
in fiscal 1998 to 2002. The Company and its subsidiaries file a consolidated
federal income tax return but generally file separate state income tax returns.
As of February 1, 1997, the Company had regular federal income tax net operating
loss carryforwards of $21,954,000 which expire, if unused, from fiscal 2009 to
2012 and net operating loss carry-forwards for state income tax purposes of
$35,616,000 which expire, if unused from fiscal 1998 to 2012. Realization of the
net operating loss carryforwards is dependent on generating sufficient taxable
income prior to the expiration of the operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, would be reduced in the near term if
management's estimate of future taxable income during the carryforward period
is reduced. No valuation allowance for deferred tax assets was provided as of
February 1, 1997 and February 3, 1996.
F-11
<PAGE> 43
Dairy Mart Convenience Stores, Inc. and Subsidiaries
9. CAPITAL STOCK:
In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under
the SRP, each holder of Class A and Class B Common Stock was declared a dividend
of one Preferred Stock Purchase Right (the "Rights"). The Rights are to purchase
one one-hundredth (1/100) of a share of Series A Junior Preferred Stock at a
price of $30 subject to certain adjustments. The Rights are exercisable under
certain circumstances, and expire on January 19, 2006.
Dividends may be declared and paid on Class A Common Stock without being paid on
Class B Common Stock. No dividend may be paid on Class B Common Stock without
equal amounts paid concurrently on Class A Common Stock (see Note 6). Holders of
Class A Common Stock have one-tenth vote per share and are entitled to elect 25%
of the Board of Directors so long as the number of outstanding shares of Class A
Common Stock is at least 10% of the total of all shares of Common Stock
outstanding. Holders of Class B Common Stock have one vote per share. Holders of
Class B Common Stock have the right to convert their shares at any time for an
equivalent number of shares of Class A Common Stock.
In June 1986, the stockholders approved an Employee Stock Purchase Plan. The
plan, as amended in September, 1996, provides that employees may purchase
quarterly, through payroll deductions, up to 1,000 shares of Class A Common
Stock at 85% of the market value. Of the original 1,250,000 shares provided for
under this plan, 1,039,643 shares remained available for issuance as of February
1, 1997.
As of February 1, 1997, February 3, 1996, and January 28, 1995, the Company held
521,625 shares of Class A Common Stock and 175,957 shares of Class B Common
Stock as treasury shares.
- --------------------------------------------------------------------------------
10. STOCK OPTION PLANS, GRANTS AND WARRANTS:
In general, the Company's stock option plans provide for the granting of options
to purchase Company shares at the market price of such shares as of the option
grant date. The options generally have a ten year term and vest and become
exercisable on a pro rata basis over four years.
The Company adopted Stock Option Plans in 1985 and 1990 providing for the
granting of options to employees up to an aggregate of 226,875 shares of Class B
Common Stock and 750,000 shares of Class A Common Stock. The Company granted
incentive stock options pursuant to these Plans totaling 177,887, and 158,363 in
fiscal 1996 and 1995, respectively. No options were granted from these plans in
fiscal 1997. As of February 1, 1997, the Company had available for grant under
the 1990 Plan options to purchase 56,206 shares of Class A Common Stock,
after considering the lapse of options previously granted. In addition to the
incentive stock options granted under the above Plans the Company has granted
25,125, 97,500 and 160,500 non-qualified stock options in fiscal 1997, 1996 and
1995, respectively, which are not part of a specific plan.
In January 1996, the Company adopted a Stock Option and Incentive Award Plan
(the "Award Plan") and a non-qualified Stock Option Plan for Outside Directors
("Outside Directors Plan"). The Award Plan provides for the granting of options
to employees up to a total of 650,000 shares of either Class A or Class B
Common Stock. In fiscal 1997 and 1996, the Company granted incentive stock
options of 22,500 and 82,500, respectively. As of February 1, 1997, the Company
had available for grant under the Award Plan options to purchase 552,500 shares
of Class A Common Stock, after considering the lapse of options previously
granted. The Outside Directors Plan provides for an option to purchase 3,500
shares of the Company's Class A Common Stock to all non-employee directors and
an option of 3,500 shares annually thereafter for a period of ten years. The
maximum number of shares reserved for issuance under this plan is 50,000. The
Company granted 17,500 nonqualified stock options to Outside Directors in
fiscal years 1997 and 1996, respectively.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, "Accounting for Stock-Based Compensation", and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1997 and 1996, respectively:
risk-free interest rates of 6.24% and 5.66%; dividend yield of zero percent;
volatility factor of the expected market price of the Company's common stock of
39%; and a weighted-average expected life of the options of 6.72 years and 7.51
years. For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net loss.......................... ($2,028) ($6,057)
Pro forma loss per share.................... ($0.46) ($1.13)
================================================================================
</TABLE>
The pro forma effect on net loss for fiscal years 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal year 1996.
F-12
<PAGE> 44
A summary of the Company's stock option activity and related information for the
fiscal years ended February 1, 1997 and February 3, 1996 is as follows:
<TABLE>
<CAPTION>
(options in thousands)
Weighted-Average
Options Exercise Price
------- ---------------
<S> <C> <C>
Outstanding January 28, 1995 706 $3.71
Granted .................... 375 3.98
Exercised .................. (17) 2.80
Forfeited .................. (121) 2.98
----------------------
Outstanding February 3, 1996 943 $3.92
Granted .................... 65 4.58
Exercised .................. (170) 3.17
Forfeited .................. (197) 5.70
----------------------
Outstanding February 1, 1997 641 $3.64
================================================================================
</TABLE>
The weighted-average fair values of stock options granted during fiscal years
1997 and 1996 were $3.12 and $3.07, respectively.
The following table summarizes information about the Company's stock options
outstanding as of February 1, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining
Grant Options Options Exercise Contractual
Price Range Outstanding Exercisable Price Life (Years)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.75 to $2.88 ............... 331,913 261,407 $2.80 5.8
$3.63 to $4.60 ............... 176,637 51,284 3.65 8.1
$5.00 to $6.00 ............... 132,500 23,125 5.74 9.2
- ----------------------------------------------------------------------------------------
Total 641,050 335,816
========================================================================================
</TABLE>
During fiscal years 1997 and 1996, the Company awarded, pursuant to the Award
Plan, restricted stock grants consisting of an aggregate of 45,000 and 100,000
shares, respectively, of the Company's Class A Common Stock. The restricted
shares will vest equally over a three year period if the closing price of the
Company's Class A Common Stock, as reported on the American Stock Exchange
(AMEX) for a consecutive ten day period, is equal to at least $9.00 in the first
year, $11.00 in the second year and $13.00 in the third year from the date of
the grant. No compensation expense was recorded with respect to the shares
awarded under the Award Plan.
In December 1995, the Company issued warrants to purchase 1,715,000 shares of
Class A Common Stock which may be exercised at any time during the next five
years (see Notes 6 and 14) at an initial exercise price of $6.95 per share,
which exercise price was subsequently adjusted to $5.45 per share as of February
1, 1997. The issuance of the warrants was recorded as an increase in
paid-in-capital.
F-13
<PAGE> 45
Dairy Mart Convenience Stores, Inc. and Subsidiaries
11. GASOLINE OPERATIONS:
A summary of gasoline operations for the years ended February 1, 1997, February
3, 1996 and January 28, 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gasoline gallons sold .............. 209,478 212,832 206,441
Gasoline revenues .................. $245,718 $226,505 $210,541
Cost of gasoline sold .............. 220,636 201,980 186,462
Depreciation ....................... 2,651 2,461 2,080
Capital expenditures ............... 5,869 7,585 3,702
Net book value of gasoline equipment 21,801 19,054 13,068
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLANS:
The Company provides benefits to qualified employees through a defined
contribution profit sharing plan. Contributions under this plan are made
annually in amounts determined by the Company's Board of Directors. No
discretionary contributions to this plan were made in fiscal 1997, 1996 or 1995.
Effective January 1, 1993, the profit sharing plan was amended pursuant to
section 401(k) of the Internal Revenue Code enabling eligible employees to
contribute up to 15% of their annual compensation to the plan, with the Company
matching 25% of such contributions up to 6% of the employees' annual
compensation. Matching contributions from the Company for fiscal years 1997,
1996 and 1995 were $117,000, $128,000 and $163,000, respectively. The Company
does not offer any additional postretirement and postemployment benefits to its
employees.
- --------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES:
As of February 1, 1997, the Company was contingently liable for outstanding
letters of credit amounting to $5,631,000.
The Company has certain environmental contingencies related to the ongoing costs
to comply with federal, state and local environmental laws and regulations,
including costs for assessment, compliance, remediation and certain capital
expenditures related to its gasoline operations. In the ordinary course of
business, the Company is involved in environmental assessment and remediation
activities with respect to releases of regulated substances from existing and
previously operated retail gasoline facilities. The Company accrues its estimate
of all costs to be incurred for assessment and remediation for known releases.
These accruals are adjusted if and when new information becomes known. Due to
the nature of such releases, the actual costs of assessment and remediation may
vary significantly from year to year. As of February 1, 1997 and February 3,
1996, the Company had recorded an accrual of $1,782,000 and $1,890,000,
respectively, for such costs. 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 funds. As of February 1,
1997 and February 3, 1996, the Company had recorded a reimbursement receivable
of $1,450,000 and $1,137,000, respectively. For the fiscal years ended February
1, 1997, February 3, 1996 and January 28, 1995, the Company recorded a provision
for environmental expenses of $2,109,000, $1,048,000 and $1,160,000,
respectively. Additionally, under current federal and state regulatory programs,
the Company will be obligated by December 1998 to upgrade or replace most of its
existing underground storage tanks ("USTs"). The Company presently estimates
that it will be required to make capital expenditures related to the upgrading
or replacing of USTs ranging from approximately $7.0 to $8.0 million in the
aggregate through December 1998, which capital expenditures could be reduced for
locations which may be closed in lieu of the capital costs of compliance. The
Company's estimate of costs to be incurred for environmental assessment and
remediation and for UST upgrading and other regulatory compliance are based on
factors and assumptions that could change due to modifications of regulatory
requirements, detection of unanticipated environmental conditions or other
unexpected circumstances. Due to the nature of such information, the actual
costs incurred may vary from their estimates, and the ongoing costs of
assessment and remediation activities may vary significantly from year to year.
In fiscal 1997, the Company entered into a new agreement for the wholesale
supply of various grocery items to its Northeast, Midwest and Southeast region
stores. Under the supply agreement, the Company is obligated to annually
purchase a minimum amount of merchandise for a period of nine years. Management
believes that the level of purchases is readily achievable over the term of the
new agreement. Prices to be charged by the supplier must be competitive.
The Company has been named as a nominal defendant, along with those persons who
were directors of the Company in fiscal 1996, in two shareholder derivative
actions. The plaintiffs allege, among other things, that in connection with the
settlement of the dispute between a former majority stockholder of the Company
and certain of his affiliates and the Company's board of directors and
management with respect to control of the Company, the directors violated their
fiduciary duty to the Company and its stockholders, violated provisions of
Delaware corporate law and wasted corporate assets. The plaintiffs seek, among
other things, a declaration that the current structure of the general partner of
DM Associates is invalid and that certain voting rights, with respect to the
Class B Common Stock held by DM Associates should be vested in the Company. DM
Associates owns approximately 60% of the total voting power of both classes of
the Company's Common Stock. The Company is contesting these claims and at this
time is not able to determine what the outcome of this litigation will be.
The Company is party to a number of other lawsuits which have arisen in the
ordinary course of business. Management does not believe the outcome of this
litigation will have a material impact on the Company's future results of
operations or financial position.
F-14
<PAGE> 46
Dairy Mart Convenience Stores, Inc. and Subsidiaries
14. CORPORATE GOVERNANCE ISSUES, RESTRUCTURING INITIATIVES AND INTEREST CHARGES:
In fiscal years 1996 and 1995, the Company incurred special and/or unusual costs
and expenses associated with corporate governance issues and corporate
restructuring initiatives and other operating costs which have been included in
operating and administrative expenses on the Consolidated Statement of
Operations. Additionally, special and/or unusual interest charges have been
included in interest expense on the Consolidated Statement of Operations. A
summary of these costs and expenses for fiscal years ended February 3, 1996 and
January 28, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Costs and expenses associated with corporate governance issues............. $ 8,985 $ 2,050
Corporate restructuring initiatives and other operating costs.............. 3,215 10,734
Interest charges........................................................... - 1,216
==========================================================================================================
</TABLE>
During fiscal 1996, the Company entered into an agreement with a former majority
stockholder of the Company and certain of his affiliates (Former Holder) for
purposes of settling a dispute between the Former Holder and the Company's board
of directors and management with respect to control of the Company. The dispute
arose due to philosophical differences with regards to the strategic direction
and management of the Company. The agreement provided for a cash payment of
$13,150,000 to the Former Holder comprised of $10,000,000 for the purchase of
certain interests of the Former Holder in DM Associates, which owns 1,858,743
shares of the Company's Class B Common Stock, and $3,150,000 for additional
costs and expenses. The acquired interests comprise a limited partnership
interest in DM Associates and a promissory note receivable from DM Associates.
The promissory note has a principal amount of $7,100,000, and has accrued
interest at an annual rate of 9% since its inception in 1992, for a total
accreted value as of February 3, 1996 of approximately $10,000,000. The note is
collateralized by the Pledged Shares and matures on September 12, 1997. The
additional costs and expenses of $3,150,000 included $850,000, $800,000 and
$1,500,000 for the reimbursement of legal and other costs, for the execution of
a non-compete agreement, and for a release of claims against the Company, by or
with the Former Holder, respectively.
The Company did not attribute value to its acquired limited partnership interest
in DM Associates because at the current market price of the Company's Class B
Common Stock, the Company would not receive any distribution upon a dissolution
of DM Associates in respect of the interest since the other limited partner of
DM Associates is entitled to a preferential return according to the terms and
conditions of the partnership agreements. The Company attributed a fair value of
$10,000,000 to the acquired promissory note and recorded the note as a reduction
of stockholders' equity on the Consolidated Balance Sheets. Although DM
Associates retained its right to pay the full accreted value of the note at or
before maturity, the Company anticipates based upon the current market price of
the Company's Class B Common Stock and since DM Associates primary asset is the
Pledged Shares, that DM Associates will choose to relinquish its right to the
Pledged Shares in full satisfaction of the note. Assuming that the Company
receives the Pledged Shares in satisfaction of the note and receives no value
for its limited partnership interest, the Company effectively paid $8.20 per
share for the Pledged Shares at the time of the agreement when the quoted market
price of the Company's Class B Common Stock was $6.38 per share. The Company's
Board of Directors obtained a fairness opinion from a nationally recognized
valuation firm prior to consummating the agreement to the effect that the price
paid by the Company in the transaction was fair from a financial point of view
to the Company and its public stockholders. The aforementioned opinion was based
on, among other items: the market multiple approach in which the Company was
compared with other publicly traded companies on the basis of operational and
economic similarities; the comparable transaction approach in which transactions
involving the acquisition of a control position in other convenience and grocery
store operators were reviewed; and the discounted cash flow approach in which
management's financial projections which reflected improved profitability and
cash flows for fiscal years 1997 through 2001 were reviewed to develop a value
indication for the Company. These analyses resulted in a valuation range for the
Company's Common Stock of $6.85 to $9.45 per share. In addition, the Company
elected to expense the costs associated with the non-compete agreement rather
than deferring such costs over the term of the agreement as the future value was
deemed to have minimal economic impact on future years.
Also during fiscal 1996, the Company incurred $5,835,000 of additional costs and
expenses in connection with the aforementioned transactions. These costs and
expenses included $2,672,000 for legal and other professional fees, $1,211,000
for the termination of an Officer of the Company who was a party to the Former
Holder's claims against the Company, $1,287,000 for financing fees primarily
incurred to amend the Company's senior revolving credit facility with respect to
the purchase of the Former Holder's interest and issuance of Series B Notes (see
Note 6) and $665,000 for the issuance of warrants to purchase 500,000 shares of
the Company's Class A Common Stock to holders of the Company's Series A Notes as
fee for the consent of such holders for the Company to purchase the interests of
the Former Holder and for the waiver of certain alleged defaults under the terms
of the Series A Notes.
During fiscal 1995, the Company recorded costs and expenses of $2,050,000 in
connection with the removal of the Company's former President and Chief
Executive Officer, and the settlement of legal disputes arising therefrom. These
costs and expenses included $650,000 for legal and professional fees incurred by
the Company, and $1,400,000 for the reimbursement of legal fees incurred by the
former President, severance and other related costs.
In the fourth quarter of fiscal 1995, the Company's senior management approved a
plan and implemented a series of initiatives to restructure the operations of
the organization. As a result, the Company recorded costs and expenses of
$10,734,000 related to these initiatives, including $2,500,000 of exit costs for
the disposal of equipment, severance and other personnel related costs
associated with the divestiture of the dairy manufacturing and distribution
operations, $3,584,000 for the writedown of certain dairy and manufacturing and
other properties to their estimated net realizable value based upon marketing
efforts to dispose of these assets in the fourth quarter of fiscal 1995,
$3,900,000 of exit costs associated with the sale or closing of 143 retail
convenience stores and the closing of 81 retail gasoline facilities and $750,000
of severance and termination costs for 112 administrative personnel associated
with the downsizing of the Company's operations.
During fiscal 1996, the Company recorded additional operating and exit costs
totaling $3,215,000 related to the aforementioned restructuring initiatives
including $1,313,000 incurred during the wind-down of dairy and manufacturing
distribution operations since the eventual sales of such operations occurred at
later dates than initially anticipated by management and $1,000,000 for the
further writedown of the properties held for sale to their estimated net
realizable value based upon marketing efforts to dispose of these assets in the
fourth quarter of fiscal 1996. In addition, the Company incurred an additional
$902,000 of costs related to the sale or closing of the 143 retail convenience
stores and 81 retail gasoline facilities again since such sales/closings
occurred at later dates than had been originally planned by management.
During fiscal 1995, the Company incurred $535,000 in duplicative interest
expense, net of interest income, and fees due to the issuance of the Company's
10.25% senior subordinated notes on March 3, 1994, the retirement of the
Company's 14.25% subordinated debentures on April 4, 1994 and a subsequent
amendment of the Company's senior revolving credit facility (see Note 6). In
addition, the Company reached an agreement with the Internal Revenue Service to
settle certain disputed items. The terms of the settlement required the Company
to pay $681,000 of interest charges (see Note 8).
F-15
<PAGE> 47
Dairy Mart Convenience Stores, Inc. and Subsidiaries
15. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION:
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.
Investment in subsidiaries is 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 investment in subsidiaries and intercompany balances and transactions.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
----------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $36,427) ......................... $ 253 $ 584,981 $ 512 $ - $ 585,746
Cost of goods sold and expenses:
Cost of goods sold .............................................. - 431,851 - - 431,851
Operating and administrative expenses ........................... 277 145,326 28 - 145,631
Interest expense ................................................ 10,050 472 355 - 10,877
----------------------------------------------------------
10,327 577,649 383 - 588,359
----------------------------------------------------------
Income (loss) before income taxes and equity in income (loss)
of consolidated subsidiaries .............................. (10,074) 7,332 129 - (2,613)
Benefit from (provision for) income taxes ............................ 2,802 (2,040) (35) - 727
----------------------------------------------------------
Income (loss) before equity in income (loss) of
consolidated subsidiaries ................................. (7,272) 5,292 94 - (1,886)
Equity in income (loss) of consolidated subsidiaries ................. 5,386 94 - (5,480) -
----------------------------------------------------------
Net income (loss) ........................................... $ (1,886) $ 5,386 $ 94 $ (5,480) $ (1,886)
===================================================================================================================================
</TABLE>
F-16
<PAGE> 48
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF 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 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>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 1, 1997
<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 ....... $ (4,406) $ 13,925 $ 91 $ - $ 9,610
------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments ................... - - (1,533) - (1,533)
Purchase of property and equipment ................... - (23,782) - - (23,782)
Proceeds from sale of property, equipment and
assets held for sale ................................ - 2,628 - - 2,628
Investment in and advances to subsidiaries ........... (7,475) 8,043 (568) - -
Increase in long-term notes receivable ............... - (128) (1,307) - (1,435)
Proceeds from collection of long-term notes receivable - 98 1,415 - 1,513
(Increase) decrease in intangibles and other assets .. (1) (409) 38 - (372)
------------------------------------------------------------------
Net cash used in investing activities ..................... (7,476) (13,515) (1,990) - (22,981)
------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations..................... 10,580 350 - - 10,930
Repayment of long-term obligations ................... (928) (578) (8) - (1,514)
Issuance of common stock ............................. 591 - - - 591
------------------------------------------------------------------
Net cash provided by (used in) financing activities ....... 10,243 (228) (8) - 10,007
------------------------------------------------------------------
(Decrease) increase in cash ............................... (1,639) 147 (1,872) - (3,364)
Cash at beginning of year ................................. 1,739 7,871 3,044 - 12,654
------------------------------------------------------------------
Cash at end of year ....................................... $ 100 $ 8,018 $ 1,172 $ - $ 9,290
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year-
Interest ............................................. $ 9,635 $ 472 $ 359 $ - $ 10,466
Income taxes refunded ................................ (97) - - - (97)
====================================================================================================================================
</TABLE>
F-17
<PAGE> 49
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
---------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $36,331) ......................... $ 681 $570,099 $ 531 $ - $ 571,311
Cost of goods sold and expenses:
Cost of goods sold .............................................. - 413,548 - - 413,548
Operating and administrative expenses ........................... 9,288 148,016 18 - 157,322
Interest expense ................................................ 8,723 594 344 - 9,661
------------------------------------------------------
18,011 562,158 362 - 580,531
------------------------------------------------------
Income (loss) before income taxes and equity in income (loss)
of consolidated subsidiaries .............................. (17,330) 7,941 169 - (9,220)
Benefit from (provision for) income taxes ............................ 6,052 (2,768) (64) - 3,220
------------------------------------------------------
Income (loss) before equity in income (loss) of
consolidated subsidiaries ................................. (11,278) 5,173 105 - (6,000)
Equity in income (loss) of consolidated subsidiaries ................. 5,278 105 - (5,383) -
------------------------------------------------------
Net income (loss) ........................................... $ (6,000) $ 5,278 $ 105 $ (5,383) $ (6,000)
==================================================================================================================================
</TABLE>
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
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>
F-18
<PAGE> 50
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 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 ....... $ (9,824) $ 19,624 $ 95 $ - $ 9,895
--------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments ......... - - 2,053 - 2,053
Purchase of property and equipment ................... - (20,232) - - (20,232)
Proceeds from sale of property, equipment
and assets held for sale ........................... - 14,741 - - 14,741
Investment in and advances to subsidiaries ........... 8,096 (7,831) (265) - -
Increase in long-term notes receivable ............... - - (1,579) - (1,579)
Proceeds from collection of long-term notes receivable - 69 1,637 - 1,706
Decrease (increase) in intangibles and other assets .. 183 (113) 9 - 79
--------------------------------------------------------------
Net cash provided by (used in) investing activities ....... 8,279 (13,366) 1,855 - (3,232)
--------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and related warrants 13,500 - - - 13,500
Repayment of long-term obligations ................... (326) (1,805) - - (2,131)
Note receivable from DM Associates ................... (10,000) - - - (10,000)
Issuance of common stock ............................. 110 - - - 110
--------------------------------------------------------------
Net cash provided by (used in) financing activities ....... 3,284 (1,805) - - 1,479
--------------------------------------------------------------
Increase in cash .......................................... 1,739 4,453 1,950 - 8,142
Cash at beginning of year ................................. - 3,418 1,094 - 4,512
--------------------------------------------------------------
Cash at end of year ....................................... $ 1,739 $ 7,871 $ 3,044 $ - $ 12,654
===============================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year-
Interest ............................................. $ 8,512 $ 535 $ 312 $ - $ 9,359
Income taxes refunded ................................ (1,172) - - - (1,172)
Noncash investing and financing activities-
Issuance of warrants ................................. 665 - - - 665
Capital lease obligations ............................ 768 60 - - 828
===============================================================================================================================
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 28, 1995
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-----------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $36,332) ......................... $ 500 $595,821 $ 461 $ - $ 596,782
Cost of goods sold and expenses:
Cost of goods sold .............................................. - 439,757 - - 439,757
Operating and administrative expenses ........................... 3,140 160,744 25 - 163,909
Interest expense ................................................ 9,414 645 376 - 10,435
----------------------------------------------------------
12,554 601,146 401 - 614,101
----------------------------------------------------------
Income (loss) before income taxes, equity in income (loss) of
consolidated subsidiaries and cumulative effect of
accounting change ......................................... (12,054) (5,325) 60 - (17,319)
Benefit from (provision for) income taxes ............................ 4,564 2,018 (24) - 6,558
----------------------------------------------------------
Income (loss) before equity in income (loss) of consolidated
subsidiaries and cumulative effect of accounting change ... (7,490) (3,307) 36 - (10,761)
Equity in income (loss) of consolidated subsidiaries ................. (3,271) 36 - 3,235 -
----------------------------------------------------------
Income (loss) before cumulative effect of accounting change . (10,761) (3,271) 36 3,235 (10,761)
Cumulative effect of accounting change ............................... (389) - - - (389)
----------------------------------------------------------
Net income (loss) ........................................... $ (11,150) $ (3,271) $ 36 $ 3,235 $ (11,150)
===================================================================================================================================
</TABLE>
F-19
<PAGE> 51
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 28, 1995
<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 ....... $ (2,158) $ 8,931 $ (81) $ - $ 6,692
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments ................... - - (3,953) - (3,953)
Proceeds from sale of short-term investments ......... - - 1,900 - 1,900
Purchase of property and equipment ................... - (17,772) - - (17,772)
Proceeds from sale of property, equipment
and assets held for sale ........................... - 1,120 - - 1,120
Investment in and advances to subsidiaries ........... (8,653) 8,955 (302) - -
Increase in long-term notes receivable ............... - - (1,621) - (1,621)
Proceeds from collection of long-term notes receivable - 332 1,062 - 1,394
(Increase) decrease in intangibles and other assets .. (2,793) 2,413 46 - (334)
------------------------------------------------------------
Net cash used by investing activities ..................... (11,446) (4,952) (2,868) - (19,266)
------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and related warrants 74,064 - - - 74,064
Repayment of long-term obligations ................... (60,557) (3,150) - - (63,707)
Issuance of common stock ............................. 97 - - - 97
------------------------------------------------------------
Net cash provided by (used in) financing activities ....... 13,604 (3,150) - - 10,454
------------------------------------------------------------
Increase (decrease) in cash ............................... - 829 (2,949) - (2,120)
Cash at beginning of year ................................. - 2,589 4,043 - 6,632
------------------------------------------------------------
Cash at end of year ....................................... $ - $ 3,418 $ 1,094 $ - $ 4,512
=============================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year-
Interest ............................................. $ 8,600 $ 581 $ 328 $ - $ 9,509
Income taxes paid .................................... 879 - - - 879
=============================================================================================================================
</TABLE>
F-20
<PAGE> 52
Dairy Mart Convenience Stores, Inc. and Subsidiaries
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 4, August 3, November 2, February 1,
Fiscal year ended February 1, 1997 1996 1996 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues ................................ $141,328 $156,132 $147,344 $140,942
Gross profit ............................ 36,246 41,676 40,990 34,983
Net income (loss) ....................... (393) 2,234 193 (3,920)
Earnings (loss) per share ............... (0.09) 0.48 0.04 (0.85)
- ---------------------------------------------------------------------------------------------------------------------------------
April 29, July 29, October 28, February 3,
Fiscal year ended February 3, 1996 1995 1995 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues ................................ $133,442 $150,818 $143,492 $143,559
Gross profit ............................ 35,272 42,217 40,614 39,660
Net income (loss) ........................ (329) 2,237 (405) (7,503)
Earnings (loss) per share ............... (0.06) 0.38 (0.07) (1.57)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17. 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 May 15, 1997.
In February, 1997, the Company finalized the sale of its former administrative
office building and plant facility located in Cuyahoga Falls, Ohio, to CFP,
Ltd., for $4.1 million.
F-21
<PAGE> 1
EXHIBIT 10.2
AGREEMENT OF AMENDMENT
This AGREEMENT OF AMENDMENT (this "Agreement") dated as of January 31,
1997 among DAIRY MART CONVENIENCE STORES, INC. (the "Company"), BANK OF BOSTON
CONNECTICUT, individually and as Agent under the Credit Agreement (as
hereinafter defined), HELLER FINANCIAL, INC. ("Heller"), and STATE STREET BANK
AND TRUST COMPANY ("State Street").
WHEREAS, the Company, the banks and other financial institutions listed
on Schedule I thereto (collectively, with any banks or financial institutions
from time to time parties thereto, the "Banks"), and Bank of Boston Connecticut
("BOBC"), as agent of the Banks thereunder (in such capacity, the "Agent")
entered into a certain Credit Agreement dated as of April 24, 1996 (as amended,
the "Credit Agreement"); and
WHEREAS, the Company, the Banks and the Agent wish to amend the Credit
Agreement as more fully set forth below.
NOW THEREFORE, the parties hereto agree as follows:
I. AGREEMENT OF THE PARTIES
1. Unless the context shall otherwise require, all capitalized terms
used herein without definition shall have the meanings assigned to them in the
Credit Agreement.
2. Section 1.1 of the Credit Agreement is amended by deleting the
definitions of "Applicable Margin" and "Minimum Consolidated Net Worth" in their
entirety and substituting in lieu thereof the following:
"APPLICABLE MARGIN" at any time, for Alternate Base Rate Loans
or Libor Loans, as the case may be, a rate per annum equal to the rate set forth
below opposite the applicable ratio of Consolidated Indebtedness to Consolidated
EBITDA for the period of four consecutive fiscal quarters ending on the FQED
immediately preceding such time:
<PAGE> 2
<TABLE>
<CAPTION>
LEVEL RATIO OF CONSOLIDATED INDEBTEDNESS TO APPLICABLE MARGIN FOR APPLICABLE
CONSOLIDATED EBITDA ALTERNATIVE BASE RATE MARGIN FOR LIBOR
LOANS LOANS
<S> <C> <C> <C>
I Less than 3.0 to 1.00 0.00% 2.00%
- ----------- ------------------------------------------------------------ -------------------------- ------------------
II Less than 3.50 to 1.00, but greater than or equal to 3.00 0.00% 2.25%
to 1.00
- ----------- ------------------------------------------------------------ -------------------------- ------------------
III Less than 4.00 to 1.00, but greater than or equal to 3.50 0.00% 2.50%
to 1.00
- ----------- ------------------------------------------------------------ -------------------------- ------------------
IV Less than 4.50 to 1.00, but greater than or equal to 4.00 0.25% 2.75%
to 1.00
- ----------- ------------------------------------------------------------ -------------------------- ------------------
V Greater than or equal to 4.50 to 1.00 .50% 3.00%
- ----------- ------------------------------------------------------------ -------------------------- ------------------
</TABLE>
PROVIDED, HOWEVER, that notwithstanding the foregoing, until the Company
delivers to the Agent the certificates required by Section 6.2(b) hereof
following the completion of the Company's fiscal year ending approximately
January 31, 1997, the Applicable Margin for Alternate Base Rate Loans and the
Applicable Margin for LIBOR Loans shall be not less than that set forth in Level
IV above.
"MINIMUM CONSOLIDATED NET WORTH" (i) as at the FQED to occur on or
about February 1, 1997: $7,500,000; (ii) as at the FQED to occur on April 30,
1997: $6,750,000; (iii) as at the FQED to occur on July 31, 1997: $7,900,000;
(iv) as at the FQED to occur on October 31, 1997: $8,700,000; (v) as at the FQED
to occur on January 31, 1998: $7,700,000; (vi) as at the FQED to occur on April
30, 1998: $7,100,000; and (vii) as at any FQED to occur on July 31, 1998 and all
FQEDs thereafter: $7,100,000 plus 50% of cumulative Consolidated Net Income
earned after the end of the Company's FQED ending approximately April 30, 1998.
3. Section 1.1 of the Credit Agreement is further amended by adding the
following additional definitions:
"ADJUSTED CONSOLIDATED INDEBTEDNESS" that amount which is equal to
Consolidated Indebtedness reduced by an amount equal to Cash and Cash
Equivalents.
"CASH" when used in connection with any Person, all monetary and
nonmonetary items owned by that Person that are treated as cash in accordance
with GAAP.
4. Section 6 of the Credit Agreement shall be, and hereby is, amended
by adding the following:
Section 6.11 SALE OF NORTHEAST REGIONAL DIVISION. Sell its
Northeast Regional Division and provide evidence satisfactory to the Bank that
it has raised gross cash receipts of at least $37,500,000 from such sale on or
before June 30, 1997. In the event that such sale does not occur by such date,
the Company and the Banks agree that Section 7.1 (along with the definition of
Minimum Consolidated Net Worth) and Section 7.8 shall automatically be amended
effective with the FQED to occur on October 31, 1998 to reflect the terms and
conditions set forth therein immediately prior to the effectiveness of the
Amendment to the Agreement effective as of January 31, 1997.
<PAGE> 3
5. Sections 7.1 (a), (b) and (c) of the Credit Agreement shall be, and
hereby are, amended by deleting such Sections 7.1(a) (b) and (c) in their
entirety and substituting in lieu thereof the following:
Section 7.1(a) ADJUSTED CONSOLIDATED INDEBTEDNESS TO
CONSOLIDATED EBITDA. For any period of four consecutive fiscal
quarters ending on any FQED set forth below, permit the ratio
of (i) Adjusted Consolidated Indebtedness at the end of such
period to (ii) Consolidated EBITDA for such period to be more
than the ratio set forth opposite such FQED:
<TABLE>
<CAPTION>
FQED RATIO
<S> <C>
The FQED ending on or about February 1, 1997 4.50 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about April 30, 1997 5.25 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about July 31, 1997 3.80 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about October 31, 1997 4.30 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about January 31, 1998 4.20 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about April 30, 1998 4.40 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about July 31, 1998 4.10 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about October 31, 1998 4.00 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about January 31, 1999 and thereafter 3.90 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
</TABLE>
Section 7.1 (b) EBITDA TO INTEREST EXPENSE. For any period of four
consecutive fiscal quarters ending on any FQED set forth below, permit the ratio
of (i) Consolidated EBITDA for the applicable period to (ii) Consolidated
Interest Expense for such period to be less than the ratio set forth opposite
such FQED:
<TABLE>
<CAPTION>
FQED RATIO
<S> <C>
The FQED ending on or about February 1, 1997 2.00 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQEDs ending on or about April 30, 1997, July 31, 1997 and October 1.60 to 1.00
31, 1997
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about January 31, 1998 1.80 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about April 30, 1998 2.00 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about July 31, 1998 2.10 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
The FQED ending on or about October 31, 1998 and thereafter 2.25 to 1.00
- ------------------------------------------------------------------------ -------------------------------------------
</TABLE>
Section 7.1 (c) FIXED CHARGE COVERAGE. For any period of four
consecutive fiscal quarters ending on any FQED set forth below, permit the ratio
of (i) Consolidated EBITDAR minus the amount of any federal, state and local
income taxes levied by a Governmental Authority on the revenues of the Company
which are actually paid by the Company or its consolidated Subsidiaries in cash
during such period, to (ii) Consolidated Interest Expense, plus all principal
payments
<PAGE> 4
required to be made during the period on account of any Consolidated
Indebtedness, plus the amount of any Consolidated Rent Expense during the
period, to be less than the ratio set forth opposite such FQED:
<TABLE>
<CAPTION>
FQED RATIO
<S> <C>
The FQED ending on or about February 1, 1997 1.20 to 1.00
- ---------------------------------------------------------------------------------- ---------------------------------
The FQED ending on or about April 30, 1997 and thereafter 1.25 to 1.00
- ---------------------------------------------------------------------------------- ---------------------------------
</TABLE>
6. Section 7.8 of the Credit Agreement shall be, and hereby is, amended
by deleting such Section 7.8 in its entirety and substituting in lieu thereof
the following:
LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by
way of the acquisition of securities of a Person or otherwise) any Capital
Expenditures (excluding any expenses incurred in connection with normal
replacement and maintenance programs properly charged to current operations) in
the aggregate for the Company and its Subsidiaries during any of the fiscal
years of the Company set forth below in an amount in excess of that set forth
opposite such fiscal year:
<TABLE>
<CAPTION>
FISCAL YEAR MAXIMUM CAPITAL EXPENDITURES
<S> <C>
1997 $28,500,000
- ------------------------------------------------- ---------------------------------------
1998 $34,500,000
- ------------------------------------------------- ---------------------------------------
1999 and thereafter $33,000,000
- ------------------------------------------------- ---------------------------------------
</TABLE>
PROVIDED, HOWEVER, that in the event the Company and its Subsidiaries shall make
Capital Expenditures in any fiscal year of less than the maximum amount set
forth above, an amount equal to the difference between such maximum amount and
the actual Capital Expenditures made during such fiscal year shall be available
(in addition to the maximum amount stated above) to the Company for Capital
Expenditures during (but only during) the immediately following fiscal year.
7. Except as specifically amended or modified by this Agreement, all
terms and conditions set forth in the Credit Agreement and the Security
Documents remain in full force and effect.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of Connecticut.
9. The Company shall reimburse the Agent for the fees and expenses of
its counsel in connection with this Agreement.
10. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute but one agreement.
<PAGE> 5
II. REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants as follows:
1. The representations and warranties set forth in the Credit Agreement
are true and correct in all material respects on the date hereof as if made on
the date hereof.
2. After giving effect to this Agreement, no Event of Default has
occurred and is continuing, and no event or condition has occurred or exists
which would constitute an Event of Default but for the giving of notice or
passage of time or both.
III. CONDITIONS TO EFFECTIVENESS
This Agreement shall be effective upon satisfaction of the following
conditions:
1. The Agent shall have received counterparts of this Agreement which,
when taken together, bear the signatures of all parties hereto.
2. The representations and warranties of the Company set forth in
Section II of this Agreement shall be true and correct in all respects.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
DAIRY MART CONVENIENCE STORES, INC.
By:
----------------------------------------
Name: James M. Schulte
Title: Vice President and Treasurer
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By:
----------------------------------------
Name: Scott S. Barnett
Title: Vice President
HELLER FINANCIAL, INC.
By:
----------------------------------------
Name: William P. Watkins
Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------------------
Name: Karen F. Booth
Title: Vice President
<PAGE> 1
Exhibit 11
DAIRY MART CONVENIENCE STORES, INC.
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per-share data)
CALCULATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<Caption)
For the Years Ended February 1, 1997, February 3, 1996 and January 28, 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before cumulative effect of
accounting change........................................................... $ (1,886) $ (6,000) $ (10,761)
---------------------------------------
Cumulative effect of accounting change........................................... - - (389)
---------------------------------------
Net loss......................................................................... $ (1,886) $ (6,000) $ (11,150)
=======================================
Weighted average shares.......................................................... 5,661 5,577 5,541
Dilutive options................................................................. - - -
Effect of DM Associates stock.................................................... (1,220) (203) -
--------------------------------------
Total shares for EPS purposes.................................................... 4,441 5,374 5,541
=======================================
Loss per share:
Before cumulative effect of accounting change............................... $ (0.42) $ (1.12) $ (1.94)
Cumulative effect of accounting change...................................... - - (0.07)
---------------------------------------
Net income (loss) per share...................................................... $ (0.42) $ (1.12) $ (2.01)
=======================================
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-8, File No. 33-8209 and File No. 33-47893.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
April 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 9,290
<SECURITIES> 1,533
<RECEIVABLES> 17,422
<ALLOWANCES> 1,545
<INVENTORY> 20,184
<CURRENT-ASSETS> 49,685
<PP&E> 130,286
<DEPRECIATION> 41,991
<TOTAL-ASSETS> 175,505
<CURRENT-LIABILITIES> 48,825
<BONDS> 109,045
<COMMON> 65
0
0
<OTHER-SE> 7,848
<TOTAL-LIABILITY-AND-EQUITY> 175,505
<SALES> 585,746
<TOTAL-REVENUES> 585,746
<CGS> 431,851
<TOTAL-COSTS> 145,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,211
<INTEREST-EXPENSE> 10,877
<INCOME-PRETAX> (2,613)
<INCOME-TAX> 727
<INCOME-CONTINUING> (1,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,886)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
