<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MAY 2, 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)
<TABLE>
<S> <C>
Delaware 04-2497894
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 May 2, 1998 - 3,134,132
Shares of Class B Common Stock outstanding May 2, 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 FIRST FISCAL
QUARTERS ENDED
-------------------------
MAY 2, MAY 3,
1998 1997
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues ................................................. $ 109,849 $ 139,937
--------- ---------
Cost of goods sold and expenses:
Cost of goods sold ..................................... 78,718 102,416
Operating and administrative expenses .................. 29,357 34,730
Interest expense ....................................... 2,738 2,767
--------- ---------
110,813 139,913
Income (loss) before income taxes ...................... (964) 24
Benefit from (provision for)income taxes ............... 318 (7)
--------- ---------
Net income (loss) ................................. $ (646) $ 17
- - ----------------------------------------------------------------------------------------------
Weighted average shares outstanding 4,662 4,756
Income (loss) per share ................................. $ (0.14) $ 0.00
- - ----------------------------------------------------------------------------------------------
</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>
MAY 2, 1998 JANUARY 31, 1998
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash .............................................................. $ 5,898 $ 3,806
Short-term investments ............................................ 3,662 3,629
Accounts and notes receivable ..................................... 14,465 14,970
Inventory ......................................................... 17,286 16,808
Prepaid expenses and other current assets ......................... 2,657 2,231
Deferred income taxes ............................................. 927 1,048
--------- ---------
Total current assets .......................................... 44,895 42,492
Assets Held for Sale ................................................. 12,763 10,715
Property and Equipment, net .......................................... 87,111 82,589
Intangible Assets, net ............................................... 15,752 16,017
Other Assets, net .................................................... 12,942 13,291
--------- ---------
Total assets ......................................................... $ 173,463 $ 165,104
- - --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations .......................... $ 2,055 $ 2,056
Accounts payable ..................................................... 38,504 31,297
Accrued expenses ..................................................... 15,638 18,177
Accrued interest ..................................................... 1,417 3,567
--------- ---------
Total current liabilities ..................................... 57,614 55,097
Long-Term Obligations, less current
portion above ..................................................... 101,189 94,392
Other Liabilities .................................................... 8,761 9,170
Stockholders' Equity
Preferred Stock (serial) .......................................... - -
Class A Common Stock .............................................. 37 36
Class B Common Stock .............................................. 29 29
Paid-in capital ................................................... 30,901 30,802
Retained deficit .................................................. (10,063) (9,417)
Treasury stock, at cost ........................................... (15,005) (15,005)
--------- ---------
Total stockholders' equity .................................... 5,899 6,445
--------- ---------
Total liabilities and stockholders' equity ........................... $ 173,463 $ 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 FIRST FISCAL
QUARTERS ENDED
-------------------
MAY 2, 1998 MAY 3, 1997
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................................... $ (646) $ 17
Adjustment to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ...................................... 2,607 3,163
Change in deferred income taxes .................................... 385 431
(Gain) loss on disposition of properties, net ...................... (41) 45
Net change in assets and liabilities:
Accounts and notes receivable .................................... 505 2,003
Inventory ........................................................ (478) 562
Accounts payable ................................................. 7,207 868
Accrued interest ................................................. (2,150) (2,188)
Other assets and liabilities ..................................... (3,337) (379)
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................. 4,052 4,522
- - -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of and change in short-term investments ................... (33) 18
Purchase of property and equipment ................................. (9,254) (5,124)
Proceeds from sale of property, equipment
and assets held for sale ........................................... 408 3,641
Increase in long-term notes receivable ............................. (75) (168)
Proceeds from collection of long-term notes
receivable ......................................................... 87 163
Decrease (increase) in intangibles and
other assets ....................................................... 48 (25)
- - -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................. (8,819) (1,495)
- - -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net .................................... 7,000 1,620
Repayment of long-term obligations ................................. (241) (622)
Issuance of common stock ........................................... 100 107
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................. 6,859 1,105
- - -------------------------------------------------------------------------------------------------------------
Increase in cash ...................................................... 2,092 4,132
Cash at beginning of fiscal year ...................................... 3,806 9,290
- - -------------------------------------------------------------------------------------------------------------
Cash at end of first fiscal quarter ................................... $ 5,898 $ 13,422
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 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 fiscal quarter ended May
2, 1998 follows:
<TABLE>
<CAPTION>
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 5,419 0 54 22,977
Stock options exercised 27,675 0 277 77,347
---------- ---------- --------- --------------
Balance May 2, 1998 3,655,757 2,924,006 $ 65,789 $ 30,901,004
---------- ---------- --------- --------------
</TABLE>
As of May 2, 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 3,134,132 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.
-5-
<PAGE> 6
4. SEASONALITY
The results of operations for the first fiscal quarter ended May 2, 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 stores and retail
gasoline locations based in the northeastern United States for $39.1 million.
The principal assets sold by the Company include 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. These transactions
resulted in a pre-tax gain of $3.6 million which 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 fiscal quarter
ended May 2, 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:
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
QUARTER ENDED YEAR ENDED
------------- ----------------
MAY 2, 1998 JANUARY 31, 1998
-----------------------------------------
<S> <C> <C>
Revenues ................................................... $ 109,849 $ 459,348
----------- -------------
Loss before income taxes ................................... (964) (6,358)
----------- -------------
Net loss ................................................... $ (646) $ (4,519)
- - ---------------------------------------------------------------------------------------------------------
Loss per share ............................................. $ (0.14) $ (0.98)
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE> 7
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 an unconsolidated 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 accordingly omitted.
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 investment in subsidiaries and intercompany balances and
transactions.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
May 2, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 12 $ 109,730 $ 107 $ - $ 109,849
Cost of goods sold and expenses:
Cost of goods sold ............................ - 78,718 - - 78,718
Operating and administrative
expenses ..................................... 65 29,289 3 - 29,357
Interest expense .............................. 2,463 188 87 2,738
--------- --------- --------- --------- ---------
$ 2,528 $ 108,195 $ 90 $ - $ 110,813
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries ................... (2,516) 1,535 17 - (964)
Benefit from (provision for)
income taxes ................................. 830 (506) (6) - 318
--------- --------- --------- --------- ---------
Income (loss) before equity in
income of consolidated
subsidiaries ................................... (1,686) 1,029 11 - (646)
Equity in income of
consolidated subsidiaries ...................... 1,040 11 - (1,051) 0
--------- --------- --------- --------- ---------
Net income (loss) ........................... $ (646) $ 1,040 $ 11 $ (1,051) $ (646)
--------- --------- --------- --------- ---------
</TABLE>
-7-
<PAGE> 8
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
May 2, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash .................................. $ - $ 5,565 $ 333 $ - $ 5,898
Short-term investments ................ - 3 3,659 - 3,662
Accounts and notes receivable ......... 551 13,322 592 - 14,465
Inventory ............................. - 17,286 - - 17,286
Prepaid expenses and other
current assets ...................... 88 2,569 - - 2,657
Deferred income taxes ................. 677 250 - - 927
--------- --------- --------- --------- ---------
Total current assets .............. 1,316 38,995 4,584 - 44,895
--------- --------- --------- --------- ---------
Assets Held For Sale ..................... - 12,763 - - 12,763
Property and Equipment, net .............. - 87,111 - - 87,111
Intangible Assets, net ................... - 15,752 - - 15,752
Other Assets, net ........................ 1,391 9,771 1,780 - 12,942
Investment in and advances to
subsidiaries ........................ 126,031 2,025 71 (128,127) -
--------- --------- --------- --------- ---------
Total assets ............................. $ 128,738 $ 166,417 $ 6,435 $(128,127) $ 173,463
- - ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ............... $ 637 $ 318 $ 1,100 $ - $ 2,055
Accounts payable ...................... 22,585 15,919 - - 38,504
Accrued expenses ...................... 948 14,671 19 - 15,638
Accrued interest ...................... 1,327 - 90 - 1,417
--------- --------- --------- --------- ---------
Total current liabilities .......... 25,497 30,908 1,209 - 57,614
--------- --------- --------- --------- ---------
Long-Term Obligations, less
current portion above .................. 97,342 717 3,130 - 101,189
Other Liabilities ........................ - 8,761 0 - 8,761
Stockholders' Equity ..................... 5,899 126,031 2,096 (128,127) 5,899
--------- --------- --------- --------- ---------
Total liabilities and stockholders
equity ................................... $ 128,738 $ 166,417 $ 6,435 $(128,127) $ 173,463
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 9
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
May 2, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities ................ $ 414 $ 3,572 $ 66 $ - $ 4,052
--------- --------- --------- --------- ---------
Cash flow from investing activities:
Purchase of and change in short-
term investments ................ - - (33) - (33)
Purchase of property and equipment - (9,254) - - (9,254)
Proceeds from sale of property,
equipment and assets held for
sale ............................ - 408 - - 408
Investment in and advances to
subsidiaries .................... (7,359) 7,293 66 - -
Increase in long-term notes
receivable ...................... - - (75) - (75)
Proceeds from collection of
long-term notes receivable ...... - 12 75 - 87
Decrease in intangibles and
other assets .................... - 48 - - 48
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities ............ (7,359) (1,493) 33 - (8,819)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase in revolving loan, net ... 7,000 - - - 7,000
Repayment of long-term obligations (155) (86) - - (241)
Issuance of common stock .......... 100 - - - 100
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ................ 6,945 (86) 0 - 6,859
--------- --------- --------- --------- ---------
Increase in cash .................... 0 1,993 99 - 2,092
Cash at beginning of year ........... 0 3,572 234 - 3,806
--------- --------- --------- --------- ---------
Cash at end of first fiscal quarter . $ 0 $ 5,565 $ 333 $ - $ 5,898
--------- --------- --------- --------- ---------
</TABLE>
-9-
<PAGE> 10
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
May 3,1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues ..................................... $ 68 $ 139,782 $ 87 $ - $ 139,937
Cost of goods sold and expenses:
Cost of goods sold ........................ - 102,416 - - 102,416
Operating and administrative
expenses ................................. 69 34,657 4 - 34,730
Interest expense .......................... 2,487 192 88 2,767
--------- --------- --------- --------- ---------
$ 2,556 $ 137,265 $ 92 $ - $ 139,913
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and equity in income
(loss) of consolidated
subsidiaries ............................. (2,488) 2,517 (5) - 24
Benefit from (provision for)
income taxes ............................. 697 (705) 1 - (7)
--------- --------- --------- --------- ---------
Income (loss) before equity in
income (loss) of consolidated
subsidiaries .............................. (1,791) 1,812 (4) - 17
Equity in income (loss) of
consolidated subsidiaries ................. 1,808 (4) - (1,804) -
--------- --------- --------- --------- ---------
Net income (loss) ....................... $ 17 $ 1,808 $ (4) $ (1,804) $ 17
--------- --------- --------- --------- ---------
</TABLE>
-10-
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
January 31, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <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>
-11-
<PAGE> 12
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
May 3, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net Cash provided (used) by operating
activities ................................. $ (1,340) $ 5,590 $ 272 $ - $ 4,522
-------- -------- -------- -------- --------
Cash flow from investing activities:
Purchase of and increase in short-
term investments ......................... - - 18 - 18
Purchase of property and equipment ......... - (5,124) - - (5,124)
Proceeds from sale of property,
equipment and assets held for
sale ..................................... - 3,641 - - 3,641
Investment in and advances to
subsidiaries ............................. 3,297 (3,784) 487 - -
Increase in long-term notes
receivable ............................... - (168) - - (168)
Proceeds from collection of
long-term notes receivable ............... - 163 - - 163
Increase in intangibles and other
assets ................................... 1 (28) 2 - (25)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities ..................... 3,298 (5,300) 507 - (1,495)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in revolving loan, net ............ 1,620 - - - 1,620
Repayment of long-term obligations ......... (456) (166) - - (622)
Issuance of common stock ................... 107 - - - 107
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities ............................... 1,271 (166) - - 1,105
-------- -------- -------- -------- --------
Increase in cash ............................. 3,229 124 779 - 4,132
Cash at beginning of year .................... 100 8,018 1,172 - 9,290
-------- -------- -------- -------- --------
Cash at end of first fiscal quarter .......... $ 3,329 $ 8,142 $ 1,951 $ - $ 13,422
-------- -------- -------- -------- --------
</TABLE>
7. SUBSEQUENT EVENTS
In May 1998, the Company announced that it has leased its former headquarters
facility in Enfield, Connecticut, and will relocate certain administrative
functions from that building to its headquarters in Hudson, Ohio. The Company
has estimated that the cost of consolidating these functions will be
approximately $1.3 million which costs will be primarily spent in fiscal year
1999. Additionally, the Company has estimated that the operating expenses
associated with the leased facility will be reduced annually by approximately
$0.7 million beginning in fiscal year 2000.
In May 1998, the Company also announced that it has entered into a long-term
supply and branding agreement with Chevron Products Company to sell
Chevron-branded gasoline and related products at its convenience stores in
Kentucky and southern Indiana. Approximately 60 existing Dairy Mart locations in
Kentucky and southern Indiana will carry the Chevron brand, as well as many of
the Company's new locations planned to be constructed in that region.
In May, 1998, the Company received a $47.2 million forward commitment providing
real estate sale/leaseback or mortgage financing on a long term basis. The
Company intends to use the proceeds under this agreement to reduce outstanding
borrowings on its revolving line of credit and to finance the real estate
associated with its new store development program. Borrowing under this facility
will initially bear an interest rate equal to the sum of the ten year U.S.
Treasury Note plus 3.5%.
-12-
<PAGE> 13
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 fiscal year quarter as compared to the corresponding period of
the prior fiscal year. The unaudited Pro Forma Consolidated Statements of
Operations as presented below reflect exclusion, for the two fiscal quarters
shown, of the historical revenues, cost of goods sold, operating expenses, and
direct and indirect administrative expenses associated with the assets sold.
Additionally, the unaudited Pro Forma Consolidated Statements of Operations
reflect the elimination of historical interest expense related to debt retired
based on the assumption that proceeds from the 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 first fiscal quarters are as follows:
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
MAY 2, MAY 3,
1998 1997
- - ---------------------------------------------------------------------------------------
<S> <C> <C>
Revenues ......................................... $ 109,849 $ 113,220
--------- ---------
Cost of goods sold and expenses:
Cost of goods sold ............................... 78,718 82,648
Operating and administrative expenses ............ 29,357 28,742
Interest expense ................................. 2,738 2,601
--------- ---------
110,813 113,991
--------- ---------
Loss before income taxes ......................... (964) (771)
Benefit from income taxes ........................ 318 225
--------- ---------
Net loss .................................... $ (646) $ (546)
- - ---------------------------------------------------------------------------------------
Weighted average shares outstanding .............. 4,662 4,756
--------- ---------
Loss per share ................................... $ (0.14) $ (0.11)
- - ---------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE> 14
REVENUES
Revenues for the current year first fiscal quarter decreased by $3.4 million
from the prior year first fiscal quarter. A summary of revenues by functional
area for the comparative first fiscal quarter is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTERS ENDED
--------------------
(IN MILLIONS)
MAY 2, MAY 3,
1998 1997
--------------------
<S> <C> <C>
CONVENIENCE STORES .......................... $ 72.6 $ 68.0
GASOLINE .................................... 36.7 44.7
OTHER ....................................... 0.5 0.5
--------- ---------
TOTAL $ 109.8 $ 113.2
--------- ---------
</TABLE>
Convenience store revenues increased by $4.6 million, or 6.8%, in the current
first fiscal quarter as compared to the prior year first fiscal quarter
primarily due to a 7.4% increase in comparable company operated store sales
coupled with the opening of 10 new stores, partially offset by the closure
and/or sale of 25 underperforming stores. Although the reduction in stores has a
negative impact on revenues, it did 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 $8.0 million in the current year first fiscal
quarter as compared to the prior year first fiscal quarter as a result of a
decrease in the average selling price of gasoline of 16.1 cents per gallon and a
decrease in total gallons sold of 1.6 million. The decreases in average selling
price and in gasoline gallons sold was a result of a highly competitive
retailing environment experienced by the Company, particularly in its Southeast
market where the Company's gasoline volumes have historically been strong.
GROSS PROFITS
Gross profits for the current year first fiscal quarter increased $0.5 million
from the prior year first fiscal quarter. A summary of the gross profits by
functional area for the comparative first fiscal quarter is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTERS ENDED
--------------------
(IN MILLIONS)
MAY 2, MAY 3,
1998 1997
--------------------
<S> <C> <C>
CONVENIENCE STORES ........................... $ 26.1 $ 25.1
GASOLINE ..................................... 4.5 5.0
OTHER ........................................ 0.5 0.5
--------- ---------
TOTAL $ 31.1 $ 30.6
--------- ---------
</TABLE>
Convenience store gross profits increased by $1.0 million in the current year
first fiscal quarter as compared to the prior year first fiscal quarter. The
increase was primarily due to the increase in comparable store sales, as
described above, offset in part by slightly lower product gross margins.
-14-
<PAGE> 15
Gasoline gross profits decreased by $0.5 million in the current year first
fiscal quarter as compared to the prior year first fiscal quarter, due to a
decrease in gasoline gross profit of 0.8 cents per gallon in the current fiscal
quarter as compared to the prior year quarter and a decline in gasoline gallons
sold as described above.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for the current year first fiscal quarter
increased $0.7 million from the prior year first fiscal quarter. Certain
expenses in the prior year first fiscal quarter related to gasoline operations
have been reclassed to convenience store operations to conform with current
year presentation. A summary of expenses by functional area for the comparative
first fiscal quarter is as follows:
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTERS ENDED
-----------------------
(IN MILLIONS)
MAY 2, MAY 3,
1998 1997
- - --------------------------------------------------------------------------
<S> <C> <C>
CONVENIENCE STORES ........................... $ 22.0 $ 20.9
GASOLINE ..................................... 1.7 1.8
OTHER ........................................ 5.7 6.0
--------- ---------
TOTAL $ 29.4 $ 28.7
--------- ---------
</TABLE>
Convenience store operating expenses increased $1.1 million in the current year
first fiscal quarter as compared to the prior year first fiscal quarter as a
result of higher store labor, store supplies, depreciation and store rent
expenses, partially offset by the reduction in the number of underperforming
stores, as described above.
Gasoline operating expenses decreased by $0.1 million in the current year first
fiscal quarter as compared to the prior year first fiscal quarter. This decrease
is primarily due to lower gasoline commissions paid to franchisees, mostly
offset by higher depreciation expenses.
Administrative and other expenses decreased by $0.3 million in the current year
first fiscal quarter as compared to the prior year first fiscal quarter as a
result of lower commercial insurance expense. The lower commercial insurance
expense is a result of lower claims experienced by the Company for its general
liability and workers' compensation insurances.
INTEREST EXPENSE AND TAXES
Pro forma interest expense increased by $0.1 million in the current year first
fiscal quarter as compared to the prior year first fiscal quarter due to
interest expense associated with the Company's use of its revolving line of
credit.
The effective tax rate for the Company was a benefit of 33% for the current year
first fiscal quarter versus a benefit of 29% for the corresponding periods of
the prior year.
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. Additionally, the Company has a revolving line of credit available
to address the seasonality of operations and the timing of capital
-15-
<PAGE> 16
expenditures and certain working capital disbursements. The capital expenditures
of the Company were primarily funded by the Company's borrowings under its
revolving line of credit coupled with the excess cash flow available after debt
service. Management believes that the cash flow from operations, the proceeds
from the sale of certain assets, supplemented by the availability of a revolving
credit facility or other forms of asset financing and/or leasing, if necessary,
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 by $0.5 million in the
current year first fiscal quarter as compared to the corresponding period of the
prior year primarily due to a reduced Results of Operations (see Consolidated
Statements of Operations) and a net unfavorable change in other assets and
liabilities, offset in part by a favorable change in working capital accounts.
The unfavorable change in other assets and liabilities was due to a decrease in
various accrued expense related primarily to environmental accruals, accrued
wages and workers' compensation and liability insurance reserves. The net
favorable change in working capital was primarily due to the timing of payments
to the issuers of money orders, partially offset by a reduced favorable change
in accounts receivable and notes receivable in the current year first fiscal
quarter as compared to the prior year first fiscal quarter and the collection of
a gasoline excise tax rebate due to the Company in the prior year first fiscal
quarter.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities increased by $7.3 million in the current
year first fiscal quarter as compared to the corresponding period of the prior
year primarily due an increased level of capital expenditures with respect to
new store construction, store automation and remodeling of existing store
locations and a reduced level of net proceeds generated from the sale of
property and equipment.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities increased $5.8 million in the current year
first fiscal quarter as compared to the corresponding period of the prior year
primarily due to an increase in the outstanding balance of the Company's
revolving credit facility. The Company has a $30.0 million senior revolving
credit facility with $15.0 million available for issuance of letters of credit.
The Company may utilize the revolving credit facility for working capital and
general corporate purposes. As of May 2, 1998, the Company had $7.0 million in
outstanding revolving credit loans and had $9.8 million in outstanding letters
of credit.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $35 million 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 May 2, 1998,
supplemented by the availability of a senior revolving line of credit or other
forms of equipment financing and/or leasing, if necessary. The Company intends
to lease the real estate for the majority of new store locations.
-16-
<PAGE> 17
ENVIRONMENTAL RESPONSIBILITY
The Company accrues its estimate of all costs to be incurred for assessment and
remediation with respect to releases of regulated substances from existing and
previously operated retail gasoline facilities. As of May 2,1998, the Company
had recorded an accrual of $6,050,000 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 May 2, 1998, the Company has recorded a
net state trust fund reimbursement receivable of $4,500,000. Although there are
no assurances as to the timing, the Company believes that it is probable that
reimbursements from the state environmental trust funds will be received within
one to five years from the payment of the reimbursable assessment and
remediation expenses.
In addition, the Company estimates that future capital expenditure requirements
to comply with federal and state underground gasoline storage tank regulations
will be approximately $3.0 to $4.0 million in the aggregate through December
1998. These costs could be reduced for low volume locations closed in lieu of
the capital cost of compliance.
The Company's estimate of costs to be incurred for environmental assessment and
remediation and for required underground storage tank upgrading and other
regulatory compliance are based on factors and assumptions that could change due
to modifications of regulatory requirements or detection of unanticipated
environmental conditions.
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.
-17-
<PAGE> 18
Part II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a.) EXHIBITS:
1. Exhibit (11)- Statement re Computation of Per-Share Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
(b.) 8-K REPORTS:
During the first quarter of fiscal year 1999, the Company filed no reports on
Form 8-K.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
Date: June 16, 1998 /s/ Dale W. Fuller
--------------------------
Dale W. Fuller
Executive Vice President and
Chief Administrative Officer
(Principal Accounting Officer)
-19-
<PAGE> 1
Exhibit 11
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per share amounts)
Calculation of Earnings (Loss) per share
<TABLE>
<CAPTION>
FOR THE FISCAL
QUARTERS ENDED
-----------------------
MAY 2, MAY 3,
1998 1997
================================================================================
<S> <C> <C>
Net income (loss) ................................ $ (646) $ 17
--------- ---------
Weighted average shares .......................... 4,662 5,792
Dilutive options .............................. - 184
Effect of DM Associates stock ................. - (1,220)
--------- ---------
Total shares for EPS purposes .................... 4,662 4,756
- - --------------------------------------------------------------------------------
Net income (loss) per share ...................... $ (0.14) $ 0.00
================================================================================
</TABLE>
-20-
<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> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 5,898
<SECURITIES> 3,662
<RECEIVABLES> 16,900
<ALLOWANCES> (2,435)
<INVENTORY> 17,286
<CURRENT-ASSETS> 44,895
<PP&E> 137,383
<DEPRECIATION> (50,272)
<TOTAL-ASSETS> 173,463
<CURRENT-LIABILITIES> 64,614
<BONDS> 94,189
<COMMON> 66
0
0
<OTHER-SE> 5,833
<TOTAL-LIABILITY-AND-EQUITY> 173,463
<SALES> 0
<TOTAL-REVENUES> 109,849
<CGS> 78,718
<TOTAL-COSTS> 110,813
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,738
<INCOME-PRETAX> (964)
<INCOME-TAX> 318
<INCOME-CONTINUING> (646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (646)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
