<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended AUGUST 1, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-12497
------------------------------
DAIRY MART CONVENIENCE STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2497894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE DAIRY MART WAY, 300 EXECUTIVE PARKWAY WEST, HUDSON, OHIO 44236
(Address of principal executive offices)
Registrant's telephone number, including area code (330) 342-6600
-----------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
SHARES OF CLASS A COMMON STOCK OUTSTANDING AUGUST 1, 1998 - 3,145,213
SHARES OF CLASS B COMMON STOCK OUTSTANDING AUGUST 1, 1998 - 1,528,049
-1-
<PAGE> 2
PART I. FINANCIAL INFORMATION
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
------------- --------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . $ 126,129 $ 136,160 $ 235,978 $ 276,097
------------ ----------- ------------ ---------
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . . 90,315 99,684 169,033 202,100
Operating and administrative expenses. 31,788 31,774 61,145 66,504
Interest expense . . . . . . . . . . . 2,594 2,692 5,332 5,459
----------- ----------- ------------ ---------
124,697 134,150 235,510 274,063
------------ ----------- ------------ ---------
Income before incomes taxes. . . . . . . 1,432 2,010 468 2,034
Provision for income taxes . . . . . . . (533) (888) (215) (895)
----------- ---------- ----------- ----------
Net income . . . . . . . . . . . . . . $ 899 $ 1,122 $ 253 $ 1,139
- - ------------------------------------------------------------ ---------------- ----------------- ----------------- ----------------
Earnings per share - Basic . . . . . . . $ 0.19 $ 0.24 $ 0.05 $ 0.25
Earnings per share - Diluted . . . . . . $ 0.19 $ 0.23 $ 0.05 $ 0.24
- - ------------------------------------------------------------ ---------------- ----------------- ----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 3
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
AUGUST 1, 1998 JANUARY 31, 1998
- - -------------------------------------------------------------------------- ----------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 3,471 $ 3,806
Short-term investments . . . . . . . . . . . . . . 3,713 3,629
Accounts and notes receivable. . . . . . . . . . . 14,969 14,970
Inventory. . . . . . . . . . . . . . . . . . . . . 19,184 16,808
Prepaid expenses and other current assets. . . . . 2,790 2,231
Deferred income taxes. . . . . . . . . . . . . . . 1,072 1,048
-------------- -----------
Total current assets. . . . . . . . . . . . . . 45,199 42,492
Assets Held For Sale . . . . . . . . . . . . . . . 18,847 10,715
Property and Equipment, net. . . . . . . . . . . . 85,703 82,589
Intangible Assets, net . . . . . . . . . . . . . . 15,559 16,017
Other Assets, net. . . . . . . . . . . . . . . . . 12,929 13,291
-------------- -----------
Total assets . . . . . . . . . . . . . . . . . . . $ 178,237 $ 165,104
- - -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations. . . . $ 2,053 $ 2,056
Accounts payable . . . . . . . . . . . . . . . . . 38,767 31,297
Accrued expenses . . . . . . . . . . . . . . . . . 15,846 18,177
Accrued interest . . . . . . . . . . . . . . . . . 3,703 3,567
-------------- -----------
Total current liabilities. . . . . . . . . . . . 60,369 55,097
Long-Term Obligations, less current portion above . . 103,183 94,392
Other Liabilities . . . . . . . . . . . . . . . . . . 7,852 9,170
Stockholders' Equity:
Preferred Stock (serial) . . . . . . . . . . . . . - -
Class A Common Stock . . . . . . . . . . . . . . . 37 36
Class B Common Stock . . . . . . . . . . . . . . . 29 29
Paid-in capital. . . . . . . . . . . . . . . . . . 30,936 30,802
Retained deficit . . . . . . . . . . . . . . . . . (9,164) (9,417)
Treasury stock, at cost. . . . . . . . . . . . . . (15,005) (15,005)
------------- ------------
Total stockholders' equity. . . . . . . . . . . 6,833 6,445
-------------- -----------
Total liabilities and stockholders' equity. . . . . . $ 178,237 $ 165,104
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-3-
<PAGE> 4
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE TWO FISCAL QUARTERS ENDED
---------------------------------
AUGUST 1, 1998 AUGUST 2, 1997
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 253 $ 1,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 5,245 6,020
Change in deferred income taxes . . . . . . . . . . . 347 (1,223)
(Gain) loss on disposition of properties, net . . . . 312 (1,633)
Net change in assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . 1 (5,200)
Inventory . . . . . . . . . . . . . . . . . . . . . (2,376) (445)
Accounts payable. . . . . . . . . . . . . . . . . . 7,470 1,833
Accrued interest. . . . . . . . . . . . . . . . . . 136 (83)
Other assets and liabilities. . . . . . . . . . . . (4,134) 10,453
- - -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities . . . . . . . . 7,254 10,861
- - -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and increase in short-term investments . . (84) (20,679)
Purchase of property and equipment . . . . . . . . . . (16,797) (13,438)
Proceeds from sale of property, equipment and
assets held for sale . . . . . . . . . . . . . . . . 573 31,830
Increase in long-term notes receivable . . . . . . . . (345) (418)
Proceeds from collection of long-term notes receivable 368 631
(Increase) decrease in intangibles and other assets. . (153) 1,709
- - -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities . . . . . . . . . . (16,438) (365)
- - -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in revolving loan, net . . . . . . 9,200 (10,280)
Repayment of long-term obligations . . . . . . . . . . (486) (3,281)
Issuance of common stock . . . . . . . . . . . . . . . 135 164
- - -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities . . . 8,849 (13,397)
- - -----------------------------------------------------------------------------------------------------------------------------
Decrease in cash . . . . . . . . . . . . . . . . . . . . (335) (2,901)
Cash at beginning of fiscal year. . . . . . . . . . . . . 3,806 9,290
- - -----------------------------------------------------------------------------------------------------------------------------
Cash at end of second fiscal quarter. . . . . . . . . . . $ 3,471 $ 6,389
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998
(Unaudited)
The unaudited consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's Form 10-K, filed with the Securities and Exchange Commission on
May 1, 1998.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in accordance with
the accounting policies described in Note 1 to the January 31, 1998 audited
consolidated financial statements included in the Company's Form 10-K. Certain
prior year amounts have been reclassified to conform to the presentation used
for the current year.
2. Changes in Capital Accounts
---------------------------
An analysis of the capital stock accounts for the first two fiscal quarters
ended August 1, 1998 follows:
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES PAID-IN CAPITAL
ISSUED AT ISSUED AT IN EXCESS OF
$.01 PAR VALUE $.01 PAR VALUE AMOUNT PAR VALUE
-------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance January 31, 1998 3,622,663 2,924,006 $ 65,458 $ 30,800,680
Employee stock purchase plan 10,250 - 102 40,900
Stock options exercised 33,925 - 339 94,797
---------- ---------- --------- -------------
Balance August 1, 1998 3,666,838 2,924,006 $ 65,899 $ 30,936,377
---------- ---------- --------- -------------
</TABLE>
-5-
<PAGE> 6
As of August 1, 1998, there were 521,625 shares of Class A Common Stock and
1,395,957 shares of Class B Common Stock held as treasury stock at an aggregate
cost of $15,004,847, leaving 3,145,213 Class A shares and 1,528,049 Class B
shares outstanding.
3. Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate,
during each period. The weighted average number of shares used in the
calculation of basic earnings per share was 4,670,402 and 4,601,700 for the
second fiscal quarter ended August 1, 1998 and August 2, 1997, respectively, and
4,666,291 and 4,586,500 for the two fiscal quarters ended August 1, 1998 and
August 2, 1997, respectively. The weighted average number of shares used in the
calculation of diluted earnings per share was 4,751,330 and 4,828,431 for the
second fiscal quarter ended August 1, 1998 and August 2, 1997, respectively, and
4,751,009 and 4,791,996 for the two fiscal quarters ended August 1, 1998 and
August 2, 1997, respectively.
4. Seasonality
-----------
The results of operations for the first two fiscal quarters ended August 1, 1998
are not necessarily indicative of results to be expected for the full fiscal
year. The convenience store industry in the Company's marketing areas
experiences a higher percentage of revenues and profit margins during the summer
months than during the winter months. Historically, the Company has achieved
more favorable financial results in its second and third fiscal quarters, as
compared to its first and fourth fiscal quarters.
5. Unaudited Pro Forma Information
-------------------------------
In fiscal year 1998, the Company sold 156 convenience store and gasoline
locations in the northeastern United States for $39.1 million. The principal
assets sold by the Company included inventories, convenience store and gasoline
fixtures and equipment, land, buildings, and building and leasehold
improvements. In fiscal year 1998, the Company also sold a former office and
manufacturing facility in Ohio for $4.1 million. The resulting net pre-tax
-6-
<PAGE> 7
gain of $3.6 million recognized in the fiscal year ended January 31, 1998 has
been excluded from the pro forma results shown below. The following unaudited
pro forma information of the Company for the fiscal year ended January 31, 1998
and the first two fiscal quarters ended August 1, 1998, has been prepared
assuming that the asset sales had occurred as of the beginning of the fiscal
year ended January 31, 1998. The unaudited pro forma information is not
necessarily indicative of the results which would have been reported if the
transaction had occurred at the beginning of the fiscal year ended January 31,
1998, or which may be reported in the future. The unaudited pro forma
information reflects the exclusion, for both fiscal periods shown, of historical
revenues, cost of goods sold, operating expenses, and direct and indirect
administrative expenses associated with the assets sold. Additionally, the
unaudited pro forma information reflects the elimination of historical interest
expense related to debt retired based on the assumption that proceeds from the
sale of assets had been received at the beginning of the fiscal year ended
January 31, 1998, and also reflects the elimination of the estimated income tax
effect of the associated excluded results of operations for the assets sold. The
unaudited pro forma information is as follows:
<TABLE>
<CAPTION>
(Unaudited)
(in thousands, except per share amounts)
FOR THE TWO FISCAL FOR THE FISCAL
QUARTERS ENDED YEAR ENDED
------------------ --------------
AUGUST 1, JANUARY 31,
1998 1998
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . $ 235,978 $ 459,348
--------------- -------------
Income (loss) before income taxes . . 468 (6,358)
--------------- --------------
Net income (loss) . . . . . . . . . . $ 253 $ (4,519)
- - -------------------------------------------------------------- -----------------------------------------------------------------
Earnings (loss) per share - Basic . . $ 0.05 $ (0.98)
Earnings (loss) per share - Diluted . $ 0.05 $ (0.98)
- - -------------------------------------------------------------- -----------------------------------------------------------------
</TABLE>
-7-
<PAGE> 8
6. Supplemental Consolidating Financial Information (unaudited)
------------------------------------------------------------
The Company's payment obligations under the Series A and Series B Senior
Subordinated Notes are guaranteed by certain of the Company's subsidiaries
("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed
on an unsecured, senior subordinated, joint and several basis by each of the
Guarantor Subsidiaries. The following supplemental financial information sets
forth, on a consolidating basis, statements of operations, balance sheets and
cash flow information for the Company ("Parent Company"), 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 omitted accordingly.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principle elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
-8-
<PAGE> 9
Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . $ 45 $ 235,701 $ 232 $ - $ 235,978
Cost of goods sold and expenses:
Cost of goods sold. . . . . . . . . . - 169,033 - - 169,033
Operating and administrative expenses 131 61,004 10 - 61,145
Interest expense. . . . . . . . . . . 4,903 254 175 - 5,332
--------------------------------------------------------------------------------
5,034 230,291 185 - 235,510
--------------------------------------------------------------------------------
Income (loss) before income taxes
and equity in income of consolidated
subsidiaries . . . . . . . . . . . . (4,989) 5,410 47 - 468
(Provision for) benefit from
income taxes. . . . . . . . . . . . 2,295 (2,488) (22) - (215)
--------------------------------------------------------------------------------
Income (loss) before equity in
income of consolidated subsidiaries (2,694) 2,922 25 - 253
Equity in income of consolidated
subsidiaries. . . . . . . . . . . . . 2,947 25 - (2,972) -
--------------------------------------------------------------------------------
Net income. . . . . . . . . . . . . $ 253 $ 2,947 $ 25 $ (2,972) $ 253
===================================================================================================================================
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Balance Sheets
as of August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . $ - $ 3,328 $ 143 $ - $ 3,471
Short-term investments . . . . . . . - 3 3,710 - 3,713
Accounts and notes receivable. . . . 583 13,765 621 - 14,969
Inventory. . . . . . . . . . . . . . - 19,184 - - 19,184
Prepaid expenses and other
current assets . . . . . . . . . . 31 2,759 - - 2,790
Deferred income taxes. . . . . . . . 963 109 - - 1,072
--------------------------------------------------------------------------------
Total current assets . . . . . . . 1,577 39,148 4,474 - 45,199
Assets Held For Sale. . . . . . . . . . - 18,847 - - 18,847
Property and Equipment, net . . . . . . - 85,703 - - 85,703
Intangible Assets, net. . . . . . . . . - 15,559 - - 15,559
Other Assets, net . . . . . . . . . . . 1,409 9,742 1,778 - 12,929
Investment in and Advances to
subsidiaries . . . . . . . . . . . . 129,461 1,888 222 (131,571) -
--------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . $ 132,447 $ 170,887 $ 6,474 $(131,571) $ 178,237
- - ----------------------------------------------------------------------------------------------------------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
obligations. . . . . . . . . . . . $ 637 $ 316 $ 1,100 $ - $ 2,053
Accounts payable . . . . . . . . . . 21,260 17,507 - - 38,767
Accrued expenses . . . . . . . . . . 715 15,115 16 - 15,846
Accrued interest . . . . . . . . . . 3,585 - 118 - 3,703
--------------------------------------------------------------------------------
Total current liabilities. . . . . 26,197 32,938 1,234 - 60,369
--------------------------------------------------------------------------------
Long-Term Obligations, less
current portion above. . . . . . . . 99,417 636 3,130 - 103,183
Other Liabilities . . . . . . . . . . . - 7,852 - - 7,852
Stockholders' Equity. . . . . . . . . . 6,833 129,461 2,110 (131,571) 6,833
--------------------------------------------------------------------------------
Total liabilities and
stockholders' equity . . . . . . . . $ 132,447 $ 170,887 $ 6,474 $(131,571) $ 178,237
==================================================================================================================================
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Cash Flows
for the Two Fiscal Quarters Ended August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities . . . . . . . . . . . . . $ 1,902 $ 5,274 $ 78 $ - $ 7,254
--------------------------------------------------------------------------------
Cash flows from investing activities: -
Purchase of and change in -
short-term investments . . . . . . - - (84) - (84)
Purchase of property and equipment . - (16,797) - - (16,797)
Net proceeds from sale of property,
equipment and assets held for sale - 573 - - 573
Investment in and advances to
subsidiaries . . . . . . . . . . . (10,789) 10,874 (85) - -
Increase in long-term notes
receivables. . . . . . . . . . . . - (7) (338) - (345)
Proceeds from collection of
long-term receivables. . . . . . . - 30 338 - 368
Increase in intangibles and
other assets . . . . . . . . . . . (130) (23) - - (153)
================================================================================
Net cash used by investing
activities . . . . . . . . . . . . . (10,919) (5,350) (169) - (16,438)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net. . . 9,200 - - - 9,200
Repayment of long-term obligations . (318) (168) - - (486)
Issuance of common stock . . . . . . 135 - - - 135
--------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities . . . . . . . . 9,017 (168) - - 8,849
--------------------------------------------------------------------------------
Decrease in cash . . . . . . . . . . . 0 (244) (91) - (335)
Cash at beginning of fiscal year . . . 0 3,572 234 - 3,806
--------------------------------------------------------------------------------
Cash at end of second fiscal quarter . $ 0 $ 3,328 $ 143 $ - $ 3,471
==================================================================================================================================
</TABLE>
-11-
<PAGE> 12
Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 2, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $ 267 $ 275,611 $ 219 $ - $ 276,097
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . - 202,100 - - 202,100
Operating and administrative expenses 139 66,350 15 - 66,504
Interest expense . . . . . . . . . . 4,883 400 176 - 5,459
--------------------------------------------------------------------------------
5,022 268,850 191 - 274,063
--------------------------------------------------------------------------------
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries. . . . . (4,755) 6,761 28 - 2,034
(Provision for) benefit from
income taxes . . . . . . . . . . . 2,092 (2,975) (12) - (895)
--------------------------------------------------------------------------------
Income (loss) before equity in
income of consolidated
subsidiaries . . . . . . . . . . (2,663) 3,786 16 - 1,139
Equity in income of
consolidated subsidiaries. . . . 3,802 16 - (3,818) -
--------------------------------------------------------------------------------
Net income . . . . . . . . . . $ 1,139 $ 3,802 $ 16 $ (3,818) $ 1,139
==================================================================================================================================
</TABLE>
-12-
<PAGE> 13
Supplemental Consolidating Balance Sheets
as of January 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . $ - $ 3,572 $ 234 - $ 3,806
Short-term investments . . . . . . . - 3 3,626 - 3,629
Accounts and notes receivable. . . . 1,254 13,040 676 - 14,970
Inventory. . . . . . . . . . . . . . - 16,808 - - 16,808
Prepaid expenses and other
current assets . . . . . . . . . . 69 2,162 - - 2,231
Deferred income taxes. . . . . . . . 852 196 - - 1,048
--------------------------------------------------------------------------------
Total current assets . . . . . . . 2,175 35,781 4,536 - 42,492
--------------------------------------------------------------------------------
Assets Held For Sale. . . . . . . . . . - 10,715 - - 10,715
Property and Equipment, net . . . . . . - 82,589 - - 82,589
Intangible Assets, net. . . . . . . . . - 16,017 - - 16,017
Other Assets, net . . . . . . . . . . . 1,580 9,929 1,782 - 13,291
Investment in and Advances to
Subsidiaries . . . . . . . . . . . . 118,672 1,948 137 (120,757) -
================================================================================
Total assets. . . . . . . . . . . . . . $122,427 $ 156,979 $ 6,455 $(120,757) $ 165,104
- - ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations. . . . . . . $ 637 $ 319 $ 1,100 $ - $ 2,056
Accounts payable . . . . . . . . . . 20,138 11,159 - - 31,297
Accrued expenses . . . . . . . . . . 1,297 16,857 23 - 18,177
Accrued interest . . . . . . . . . . 3,450 - 117 - 3,567
--------------------------------------------------------------------------------
Total current liabilities. . . . . 25,522 28,335 1,240 - 55,097
--------------------------------------------------------------------------------
Long-Term Obligations, less
current portion above. . . . . . . . 90,460 802 3,130 - 94,392
Other Liabilities . . . . . . . . . . . - 9,170 - - 9,170
Stockholders' Equity. . . . . . . . . . 6,445 118,672 2,085 (120,757) 6,445
--------------------------------------------------------------------------------
Total liabilities and
stockholders' equity . . . . . . . . $122,427 $ 156,979 $ 6,455 $ (120,757) $ 165,104
==================================================================================================================================
</TABLE>
-13-
<PAGE> 14
Supplemental Consolidating Statement of Cash Flows
for the Two Quarters Ended August 2, 1997
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities . . . . . . . . . . . . . $ 5,518 $ 5,205 $ 138 $ - $ 10,861
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and increase in
short-term investments . . . . . . - (19,878) (801) - (20,679)
Purchase of property and equipment . - (13,438) - - (13,438)
Net proceeds from sale of property,
equipment and assets held for sale - 31,830 - - 31,830
Investment in and advances to
subsidiaries . . . . . . . . . . . 7,764 (7,971) 207 - -
Increase in long-term notes
receivables. . . . . . . . . . . . - (23) (395) - (418)
Proceeds from collection of
long-term receivables. . . . . . . - 26 605 - 631
Decrease in intangibles and
other assets . . . . . . . . . . . 29 1,676 4 - 1,709
--------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities . . . . . . . . 7,793 (7,778) (380) - (365)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in revolving loan, net. . . (10,280) - - - (10,280)
Repayment of long-term obligations . (1,672) (1,609) - - (3,281)
Issuance of common stock . . . . . . 164 - - - 164
--------------------------------------------------------------------------------
Net cash used in financing
activities . . . . . . . . . . . . . (11,788) (1,609) - - (13,397)
--------------------------------------------------------------------------------
Increase (decrease) in cash. . . . . . 1,523 (4,182) (242) - (2,901)
Cash at beginning of fiscal year . . . 100 8,018 1,172 - 9,290
--------------------------------------------------------------------------------
Cash at end of second fiscal quarter . $ 1,623 $ 3,836 $ 930 $ - $ 6,389
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE> 15
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
- - ---------------------
During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations based in the northeastern United States for $39.1 million.
The Company also sold a former office and manufacturing facility for $4.1
million. The following discussion and analysis of Results of Operations is based
on unaudited Pro Forma Consolidated Statements of Operations, as shown below,
for the current year first two fiscal quarters and current year second fiscal
quarter as compared to the corresponding periods of the prior fiscal year. The
unaudited Pro Forma Consolidated Statements of Operations as presented below
reflect exclusion, for all comparative fiscal periods shown, of the historical
revenues, cost of goods sold, operating expenses, direct and indirect
administrative expenses and the pre-tax gain associated with the assets sold.
Additionally, the unaudited Pro Forma Consolidated Statements of Operations
reflect the elimination of historical interest expense related to the debt
retired based on the assumption that proceeds from the asset sales had been
received as of the beginning of the prior fiscal year, and also reflect the
elimination of the estimated income tax effect of the associated excluded
results of operations for the assets sold. The unaudited Pro Forma Consolidated
Statements of Operations for the comparative second fiscal quarter and the first
two fiscal quarters are as follows:
-15-
<PAGE> 16
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------- -------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 126,129 $ 120,829 $ 235,978 $ 234,049
------------ ----------- ------------ ---------
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . . 90,315 88,012 169,033 170,660
Operating and administrative expenses. 31,788 30,661 61,145` 59,403
Interest expense . . . . . . . . . . . 2,594 2,577 5,332 5,178
----------- ----------- ------------ ---------
$ 124,697 $ 121,250 $ 235,510 $ 235,241
------------ ----------- ------------ ---------
Income (loss) before incomes taxes . . . 1,432 (421) 468 (1,192)
Provision for income taxes . . . . . . . (533) 185 (215) 525
----------- ----------- ----------- ---------
Net income . . . . . . . . . . . . . . $ 899 $ (236) $ 253 $ (667)
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share - Basic . . . . . . . $ 0.19 $ (0.05) $ 0.05 $ (0.15)
Earnings per share - Diluted . . . . . . $ 0.19 $ (0.05) $ 0.05 $ (0.15)
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
REVENUES
- - --------
Revenues for the current year first two fiscal quarters increased by $2.0
million from the prior year first two fiscal quarters, and revenues for the
current year second fiscal quarter increased by $5.3 million from the prior year
second fiscal quarter. A summary of revenues by functional area for the
comparative second fiscal quarter and the first two fiscal quarters is as
follows:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------------- -----------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
(IN MILLIONS) 1998 1997 1998 1997
- - -------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
CONVENIENCE STORES $ 83.0 $ 75.0 $ 155.7 $ 143.0
GASOLINE 42.7 45.1 79.4 89.8
OTHER 0.4 0.7 0.9 1.2
--------------------------- -----------------------
TOTAL $ 126.1 $ 120.8 $ 236.0 $ 234.0
=========================== =======================
</TABLE>
Convenience store revenues increased by $12.7 million, or 8.9%, in the current
year first two fiscal quarters as compared to the prior year first two fiscal
quarters, and convenience store revenues for the current year second fiscal
quarter increased by $8.0 million, or 10.7%, as compared to the prior year
second fiscal quarter. These increases were primarily due to increases in
comparable company-operated store sales. The increase in comparable company-
operated store sales in the current year two fiscal quarters was 9.7%, and the
increase in comparable company-operated store sales for the current year second
fiscal quarter was 11.1%. In addition to the increase in comparable
company-operated store sales, the Company has opened ten new stores in the last
twelve months. These increases are partially offset by the closure and/or sale
of 33 underperforming stores in the last twelve months. Although the reduction
in stores has a negative impact on revenues, it does not have a material adverse
effect on results of operations, because the majority of these stores closed
and/or sold had been operating at a loss.
Gasoline revenues decreased $10.4 million in the current year first two fiscal
quarters as compared to the prior year first two fiscal quarters, and gasoline
revenues for the current year second fiscal quarter decreased $2.4 million as
compared to the prior year second fiscal quarter. The decrease in gasoline
revenues for the first two fiscal quarters was due to a decrease in the average
selling price of gasoline of 14.5 cents per gallon, partially offset by an
increase in total gallons sold of 1.1 million. The decrease in gasoline revenue
for the second fiscal quarter was due to a decrease in the average selling price
of gasoline of 13.2 cents per gallon, partially offset by an increase in total
gallons sold of 2.7 million.
-17-
<PAGE> 18
GROSS PROFITS
Gross profits for the current year first two fiscal quarters increased $3.5
million from the prior year first two fiscal quarters, and gross profits for the
current year second fiscal quarter increased $3.0 million from the prior year
second fiscal quarter. A summary of the gross profits by functional area for the
comparative second fiscal quarter and the first two fiscal quarters is as
follows:
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------------- ---------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
(IN MILLIONS) 1998 1997 1998 1997
--------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
CONVENIENCE STORES $ 30.4 $ 27.1 $ 56.5 $ 52.2
GASOLINE 5.0 5.0 9.5 10.0
OTHER 0.4 0.7 0.9 1.2
--------------------------- ---------------------------
TOTAL $ 35.8 $ 32.8 $ 66.9 $ 63.4
=========================== ===========================
</TABLE>
Convenience store gross profits increased by $4.3 million in the current year
first two fiscal quarters as compared to the prior year first two fiscal
quarters, and convenience store gross profits increased $3.3 million in the
current year second fiscal quarter as compared to the prior year second fiscal
quarter. The increase in the current year first two fiscal quarters was due to
the increase in comparable store sales, as described above, offset in part by
slightly lower store-related gross margins. The increase in the current year
second fiscal quarter was primarily due to the increase in comparable stores, as
described above, and higher gross margins.
Gasoline gross profits decreased by $0.5 million in the current year first two
fiscal quarters as compared to the prior year first two fiscal quarters, and
gasoline gross profits were unchanged in the current year second fiscal quarter
as compared to the prior year second fiscal quarter. The decrease in the current
year first two fiscal quarters was a result of a decrease in gasoline gross
profit of 0.8 cents per gallon in the current year first two fiscal quarters as
compared to the prior year first two fiscal quarters, offset in part by an
increase in gasoline gallons sold, as described above. In the current year
-18-
<PAGE> 19
second fiscal quarter, gasoline gallons increased 2.7 million as compared to the
prior year second fiscal quarter, offset by a decrease in gasoline gross profit
of 0.8 cents per gallon.
Other gross profits decreased by $0.3 million in the current year first two
fiscal quarters as compared to the prior year first two fiscal quarters, and
other gross profits decreased $0.3 million in the current year second fiscal
quarter as compared to the prior year second fiscal quarter. These decreases
were primarily a result of interest income generated in the prior year on the
proceeds from the sale of certain assets in fiscal year 1998.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the current year first two fiscal
quarters increased $1.7 million from the prior year first two fiscal quarters,
and operating and administrative expenses for the current year second fiscal
quarter increased by $1.0 million from the prior year second fiscal quarter.
These increases were primarily due to higher store labor and depreciation
expenses, and certain expenses related to the relocation of the Company's
information processing center from Connecticut to Ohio. These increases were
partially offset by lower commercial insurance and environmental
remediation-related expense.
INTEREST EXPENSE AND TAXES
Pro forma interest expense increased $0.2 million in the current year first two
fiscal quarters as compared to the prior year first two fiscal quarters, and
interest expense remained constant in the current year second fiscal quarter as
compared to the prior year second fiscal quarter. The increase in interest
expense is a result of the Company's increased borrowings under its revolving
line of credit.
The effective tax rate for the Company was a provision of 46% and 37% for the
current year first two fiscal quarters and the current year second fiscal
quarter, respectively, and a benefit of 44% and 44% for the corresponding
periods of the prior year.
-19-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since most of its revenues
are received in cash. The amount of cash generated from operations significantly
exceeded the current debt service requirements of the Company's long-term
obligations. In May 1998 the Company received a $47.2 million forward commitment
that provides real estate sale/leaseback or mortgage financing on a long-term
basis. Additionally, the Company has a $30.0 million senior revolving credit
facility with $15.0 million available for issuance of letters of credit. The
Company uses the revolving line of credit to address the seasonality of
operations and the timing of capital expenditures and certain working capital
disbursements. As of August 1, 1998, the Company had $9.2 million in outstanding
revolving credit loans and had $7.8 million in outstanding letters of credit.
The Capital expenditures of the Company during the first two quarters of fiscal
year 1999 were funded by the borrowings under the Company's revolving line of
credit, proceeds from real estate sale/leasebacks, and excess operating cash
flow available after debt service. Management believes that the cash flow from
operations, the proceeds from the sale of assets held for sale or other forms of
long-term asset financing and/or leasing, supplemented by the availability of
the revolving credit facility, will provide the Company with adequate liquidity
and the capital necessary to achieve its expansion initiatives in its retail
operations (see "Capital Expenditures").
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities decreased $3.6 million in the current
year first two fiscal quarters as compared to the corresponding period of the
prior year primarily due to a net unfavorable change in other assets and
liabilities, partially offset by a favorable change in working capital accounts.
The unfavorable change in other assets and liabilities is a result of an
increase in certain liabilities in the prior year related to the sale of the 156
Northeastern stores and the Company's former manufacturing facility,
-20-
<PAGE> 21
as described above. The net favorable change in working capital was primarily
due to the timing of payments to the issuers of money orders and an increase in
trade accounts payable, coupled with a favorable change in accounts and notes
receivable partially offset by an increase in the average store inventory
required to support the increases in comparable store sales, as described above.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $30 to $35 million, net of
sale/leaseback transactions, for capital expenditures in fiscal year 1999 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
certain assets held for sale as of August 1, 1998, and other forms of long-term
equipment financing and/or leasing, supplemented by the availability of the
senior revolving credit facility, if necessary.
ENVIRONMENTAL RESPONSIBILITY
The Company accrues its estimate of all costs to be incurred for assessment and
remediation with respect to releases of regulated substances from existing and
previously operated retail gasoline facilities. As of August 1, 1998, the
Company had recorded an accrual of $5,147,000 for such costs, the majority of
which are anticipated to be spent over the next one to five years.
The Company is entitled to reimbursement of a portion of the above costs from
various state environmental trust funds based upon compliance with the terms and
conditions of such trust funds. As of August 1, 1998, the Company had recorded a
net state trust fund reimbursement receivable of $4,662,000. Although there are
no assurances as to the timing, the Company believes that it is probable that
reimbursements from the state environmental trust funds
-21-
<PAGE> 22
will be received within one to five years from the payment of the reimbursable
assessment and remediation expenses.
In addition, the Company estimates that future capital expenditure requirements
to comply with federal and state underground gasoline storage tank regulations
will be approximately $2.0 to $3.0 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 are based on factors and assumptions that could change due
to modifications of regulatory requirements or detection of unanticipated
environmental conditions.
YEAR 2000 COMPUTER COSTS
During fiscal year 1998 the Company undertook the implementation of its store
automation program. The first phase of this program was completed in fiscal year
1998 with the remaining two phases expected to be completed by the end of fiscal
year 2000. The store automation program, when fully implemented, is expected to
enhance accounting and management controls, improve retail margins through
centralized retail pricing, improve inventory management and achieve
efficiencies. In conjunction with the development of this and other systems, the
Company has been addressing the functionality of all the Company's computer
systems for the year 2000. The systems implemented by the Company are designed
to be year 2000 compliant. The Company does not expect to incur significant
costs in the future that would have material impact on Company's operating
results. The Company is also in the process of reviewing the efforts being
undertaken by its vendors and customers to become year 2000 compliant to ensure
that no business interruption is experienced at the turn of the century. The
Company is not currently aware of vendor or customer circumstances that may have
a material adverse impact on the Company.
-22-
<PAGE> 23
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 25, 1998, 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 Albert T. Adams as Class A
Directors and Frank W. Barrett, Jr., Kermit Birchfield, Jr.,
John W. Everets, Jr., Gregory G. Landry, and Robert B. Stein, Jr.
as Class B Directors; and
2. Amendment to the Company's 1995 Stock Option Plan to increase the
number of shares of Common Stock for which awards may be granted
from 650,000 shares to 1,150,000 shares.
The following chart shows the number of votes cast for or against, as well as
the number of abstentions and nonvotes, as to each matter voted on at the
Annual Meeting:
For Against Abstain Nonvotes
------- ------- ------- --------
1. Election of Mr. Janes . . . . . 218,792 5,738 - -
2. Election of Mr. Adams . . . . . 218,943 5,587 - -
3. Election of Mr. Barrett . . . . 1,297,629 12,538 - -
4. Election of Mr. Birchfield . . 1,298,929 11,238 - -
5. Election of Mr. Everets . . . . 1,298,929 11,238 - -
6. Election of Mr. Landry . . . . 1,298,929 11,238 - -
7. Election of Mr. Stein . . . . . 1,298,929 11,238 - -
8. Amendment to the Company's
1995 Stock Option Plan . . . 897,927 102,821 1,361 532,588
Item 5. OTHER INFORMATION.
Pursuant to an amendment to Securities Exchange Act Rule 14a-4 (c)
(1) which became effective June 29, 1998, the persons acting under proxies
solicited by this Company's Board of Directors in connection with the Company's
1999 annual meeting of stockholders will have discretionary authority to vote
the shares represented thereby on any matter properly presented by a stockholder
at such meeting that is not specifically set forth in the notice of such meeting
if the Company does not have notice of such matter on or before April 15, 1999
(unless the date of the 1999 annual meeting is changed by more than 30 days from
June 17, 1999 in which event such persons will have such discretionary authority
if the Company does not have notice of such matter a reasonable time before the
Company mails its proxy materials for such meeting).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
1. Exhibit (11) - Statement re Computation of Per-Share Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
b) Reports on Form 8-K
During the second quarter of fiscal year 1999, the Company filed
no reports on Form 8-K.
-23-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
DATE: September 15, 1998 /s/ Dale W. Fuller
-------------------------------------
Dale W. Fuller
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-24-
<PAGE> 1
EXHIBIT 11
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per share amounts)
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE SECOND FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
--------------------------- ---------------------------------
AUGUST 1, AUGUST 2, AUGUST 1 AUGUST 2,
1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . $ 899 $ 1,122 $ 253 $ 1,139
Weighted average shares . . . . . . . . . 4,670 5,821 4,666 5,807
Dilutive options. . . . . . . . . . . . 81 227 85 205
Effect of DM Associates stock . . . . . - (1,220) - (1,220)
---------------------------------------------------------------------
Total shares for EPS purposes . . . . . . 4,751 4,828 4,751 4,792
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share - Basic. . . . . . . . $ 0.19 $ 0.24 $ 0.05 $ 0.25
Earnings per share - Diluted. . . . . . . $ 0.19 $ 0.23 $ 0.05 $ 0.24
==================================================================================================================================
</TABLE>
-25-
<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> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 3,471
<SECURITIES> 3,713
<RECEIVABLES> 17,421
<ALLOWANCES> (2,452)
<INVENTORY> 19,184
<CURRENT-ASSETS> 45,199
<PP&E> 156,525
<DEPRECIATION> (51,975)
<TOTAL-ASSETS> 178,237
<CURRENT-LIABILITIES> 60,369
<BONDS> 103,183
0
0
<COMMON> 66
<OTHER-SE> 6,833
<TOTAL-LIABILITY-AND-EQUITY> 178,237
<SALES> 0
<TOTAL-REVENUES> 235,978
<CGS> 169,033
<TOTAL-COSTS> 230,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,332
<INCOME-PRETAX> 468
<INCOME-TAX> (215)
<INCOME-CONTINUING> 253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
