<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 1, 1999
[ ] 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 MAY 1, 1999 - 3,245,660
SHARES OF CLASS B COMMON STOCK OUTSTANDING MAY 1, 1999 - 1,467,199
-1-
<PAGE> 2
PART I. FINANCIAL INFORMATION
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
May 1, May 2,
1999 1998
--------- ---------
<S> <C> <C>
- --------------------------------------------------------------------------------
Revenues ............................... $ 123,643 $ 108,134
--------- ---------
Cost of goods sold and expenses:
Cost of goods sold ................... 89,427 76,814
Operating and administrative expenses 31,172 29,516
Interest expense ..................... 2,849 2,738
--------- ---------
123,448 109,068
--------- ---------
Income (loss) before incomes taxes ..... 195 (934)
(Provision for) benefit from
income taxes ........................ (98) 305
--------- ---------
Net income (loss) .................... $ 97 $ (629)
- --------------------------------------------------------------------------------
Income (loss) per share -
Basic and Diluted ................... $ 0.02 $ (0.13)
</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 1, 1999 JANUARY 30, 1999
- -------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash ............................................. $ 5,209 $ 3,367
Short-term investments ........................... 2,752 2,724
Accounts and notes receivable .................... 18,148 15,541
Inventory ........................................ 24,767 24,293
Prepaid expenses and other current assets ........ 3,178 2,324
Deferred income taxes ............................ 1,449 1,520
--------- ---------
Total current assets .......................... 55,503 49,769
Assets Held For Sale ............................. 2,486 6,327
Property and Equipment, net ...................... 102,962 98,829
Intangible Assets, net ........................... 15,255 15,452
Other Assets, net ................................ 10,270 10,954
--------- ---------
Total assets ..................................... $ 186,476 $ 181,331
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ...... $ 4,052 $ 4,056
Accounts payable ................................. 37,977 35,685
Accrued expenses ................................. 15,000 15,378
Accrued interest ................................. 1,626 3,713
--------- ---------
Total current liabilities ...................... 58,655 58,832
Long-Term Obligations, less current portion above ... 110,052 104,451
Other Liabilities ................................... 8,400 8,791
Stockholders' Equity:
Class A Common Stock ............................. 37 37
Class B Common Stock ............................. 29 29
Paid-in capital .................................. 31,060 31,045
Retained deficit ................................. (6,752) (6,849)
Treasury stock, at cost .......................... (15,005) (15,005)
--------- ---------
Total stockholders' equity .................... 9,369 9,257
--------- ---------
Total liabilities and stockholders' equity .......... $ 186,476 $ 181,331
- -------------------------------------------------------------------------------------------
</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
QUARTER ENDED
--------------------------
MAY 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ 97 $ (629)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization ............................ 2,810 2,607
Change in deferred income taxes .......................... 98 398
Gain on disposition of properties, net ................... (855) (41)
Net change in assets and liabilities:
Accounts and notes receivable .......................... (401) 505
Inventory .............................................. (474) (508)
Accounts payable ....................................... 2,292 7,207
Accrued interest ....................................... (2,135) (2,150)
Other assets and liabilities ........................... (1,041) (3,337)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities .................... 391 4,052
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments ........................ (28) (33)
Purchase of property and equipment ........................ (8,326) (9,254)
Net proceeds from sale of property, equipment and
assets held for sale .................................... 4,231 408
Increase in long-term notes receivable .................... (164) (75)
Proceeds from collection of long-term notes receivable .... 218 87
(Increase) decrease in intangibles and other assets ....... (51) 48
- -------------------------------------------------------------------------------------------
Net cash used in investing activities ........................ (4,120) (8,819)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on revolving loan, net ......................... 5,900 7,000
Repayment of long-term obligations ........................ (344) (241)
Issuance of common stock .................................. 15 100
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities .................... 5,571 6,859
- -------------------------------------------------------------------------------------------
Increase in cash ............................................. 1,842 2,092
Cash at beginning of fiscal year ............................. 3,367 3,806
- -------------------------------------------------------------------------------------------
Cash at end of first fiscal quarter .......................... $ 5,209 $ 5,898
- -------------------------------------------------------------------------------------------
</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 1, 1999
(Unaudited)
The unaudited consolidated financial statements for Dairy Mart Convenience
Store, Inc. and Subsidiaries ("Dairy Mart") 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
Dairy Mart 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. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
Dairy Mart's Form 10-K, filed with the Securities and Exchange Commission on
April 30, 1999.
1. Accounting Policies
-------------------
The financial statements included herein have been prepared in accordance with
the accounting policies described in Note 1 to the January 30, 1999 audited
consolidated financial statements included in Dairy Mart'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 1, 1999 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 30, 1999 3,744,223 2,881,156 $ 66,245 $ 31,045,094
Employee stock purchase plan 5,062 - 50 15,034
Stock options exercised - - - -
Exchange of Class B Shares
for Class A Shares 18,000 (18,000) - -
---------- ---------- --------- -------------
Balance May 1, 1999 3,767,285 2,863,156 $ 66,295 $ 31,060,128
---------- ---------- --------- -------------
</TABLE>
-5-
<PAGE> 6
As of May 1, 1999, 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 3,245,660 Class A shares and 1,467,199 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 4,747,211 and 4,750,688 for the
first fiscal quarters ended May 1, 1999 and May 2, 1998, respectively. The
weighted average number of shares used in the calculation of diluted earnings
per share was 4,769,237 and 4,750,688 for the first fiscal quarter ended May 1,
1999 and May 2, 1998, respectively.
4. Seasonality
-----------
The results of operations for the first fiscal quarter ended May 1, 1999 are not
necessarily indicative of results to be expected for the full fiscal year. The
convenience store industry in Dairy Mart's marketing areas experiences a higher
percentage of revenues and profit margins during the summer months than during
the winter months. Historically, Dairy Mart has achieved more favorable
financial results in its second and third fiscal quarters, as compared to its
first and fourth fiscal quarters.
5. Sale of Former Headquarters Facility
------------------------------------
During the first quarter of fiscal year 2000, Dairy Mart sold its former
headquarters facility in Enfield, Connecticut for $5.3 million. As a result,
Dairy Mart recognized an $858,000 pre-tax gain on the sale. A portion of the
sale proceeds will be used to repay in full a related mortgage of $2.5 million.
-6-
<PAGE> 7
6. Supplemental Consolidating Financial Information (unaudited)
------------------------------------------------------------
Dairy Mart's payment obligations under the Series A and Series B Senior
Subordinated Notes are guaranteed by certain of Dairy Mart'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 Dairy Mart Convenience Stores, Inc. ("Parent
Company"), for the Guarantor Subsidiaries and for Financial Opportunities, Inc.
("FINOP"), Dairy Mart'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 inter-company balances and
transactions.
-7-
<PAGE> 8
Supplemental Consolidating Statement of Operations
for the First Fiscal Quarter Ended May 1, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 61 $ 123,494 $ 88 $ - $ 123,643
Cost of goods sold and expenses:
Cost of goods sold ............................. - 89,427 - - 89,427
Operating and administrative expenses .......... 80 31,087 5 - 31,172
Interest expense ............................... 2,673 53 123 - 2,849
-----------------------------------------------------------------------
2,753 120,567 128 - 123,448
-----------------------------------------------------------------------
Income (loss) before income taxes
and equity in income (loss) of
consolidated subsidiaries ..................... (2,692) 2,927 (40) - 195
Benefit from (provision for)
income taxes ................................. 1,346 (1,464) 20 - (98)
-----------------------------------------------------------------------
Income (loss) before equity in
income of consolidated subsidiaries .......... (1,346) 1,463 (20) - 97
Equity in income (loss) of consolidated
subsidiaries ................................... 1,443 (20) - (1,373) -
-----------------------------------------------------------------------
Net income (loss) ........................... $ 97 $ 1,443 $ (20) $ (1,373) $ 97
============================================================================================================================
</TABLE>
-8-
<PAGE> 9
Supplemental Consolidating Balance Sheets
as of May 1, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash ............................ $ 84 $ 5,079 $ 46 $ - $ 5,209
Short-term investments .......... 138 3 2,611 - 2,752
Accounts and notes receivable ... 3,756 13,311 1,081 - 18,148
Inventory ....................... - 24,767 - - 24,767
Prepaid expenses and other
current assets ................ 13 3,165 - - 3,178
Deferred income taxes ........... 1,449 - - - 1,449
--------------------------------------------------------------------------
Total current assets .......... 5,440 46,325 3,738 - 55,503
- ---------------------------------------------------------------------------------------------------------------------
Assets Held For Sale ............... - 2,486 - - 2,486
Property and Equipment, net ........ - 102,962 - - 102,962
Intangible Assets, net ............. - 15,255 - - 15,255
Other Assets, net .................. 1,608 10,397 966 (2,701) 10,270
Investment in and Advances to
subsidiaries .................... 137,801 1,428 444 (139,673) -
--------------------------------------------------------------------------
Total assets ....................... $ 144,849 $ 178,853 $ 5,148 $(142,374) $ 186,476
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
obligations ................... $ 3,807 $ 245 $ - $ - $ 4,052
Accounts payable ................ 23,785 14,192 - - 37,977
Accrued expenses ................ - 14,988 12 - 15,000
Accrued income taxes ............ - 2,701 - (2,701) -
Accrued interest ................ 1,492 - 134 - 1,626
--------------------------------------------------------------------------
Total current liabilities ..... 29,084 32,126 145 - 58,655
--------------------------------------------------------------------------
Long-Term Obligations, less
current portion above ........... 106,396 526 3,130 - 110,052
Other Liabilities .................. - 8,400 - - 8,400
Stockholders' Equity ............... 9,369 137,801 1,872 (139,673) 9,369
--------------------------------------------------------------------------
Total liabilities and
stockholders' equity ............ $ 144,849 $ 178,853 $ 5,148 $(142,374) $ 186,476
=====================================================================================================================
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Statement of Cash Flows
for the Fiscal Quarter Ended May 1, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating activities $(8,991) $ 9,316 $ 66 $ - $ 391
----------------------------------------------------------------
Cash flows from investing activities:
Increase in short-term
investments ................................... - - (28) - (28)
Purchase of property and equipment .............. - (8,326) - - (8,326)
Net proceeds from sale of property,
equipment and assets held for sale ............ - 4,231 - - 4,231
Investment in and (advances to)
subsidiaries .................................. 3,129 (2,975) (154) - -
Increase (decrease) in long-term
notes receivables ............................. - (331) 167 - (164)
Proceeds from collection of
long-term receivables ......................... - 218 - - 218
(Increase) decrease in intangibles
and other assets .............................. (195) 149 (5) - (51)
----------------------------------------------------------------
Net cash provided by (used in)
investing activities ............................ 2,934 (7,034) (20) - (4,120)
----------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net ................. 5,900 - - - 5,900
Repayment of long-term obligations .............. (293) (51) - - (344)
Issuance of common stock ........................ 15 - - - 15
----------------------------------------------------------------
Net cash provided by (used in)
financing activities ............................ 5,622 (51) - - 5,571
----------------------------------------------------------------
(Decrease) increase in cash ....................... (435) 2,231 46 - 1,842
Cash at beginning of fiscal year .................. 519 2,848 - - 3,367
----------------------------------------------------------------
Cash at end of first fiscal quarter ............... $ 84 $ 5,079 $ 46 $ - $ 5,209
======================================================================================================================
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Operations
for the Fiscal Quarter Ended May 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 12 $ 108,015 $ 107 $ - $ 108,134
Cost of goods sold and expenses:
Cost of goods sold ............................. - 76,814 - - 76,814
Operating and administrative expenses .......... 65 29,448 3 - 29,516
Interest expense ............................... 2,463 188 87 - 2,738
------------------------------------------------------------------------------
2,528 106,450 90 - 109,068
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries .................... (2,516) 1,565 17 - (934)
Benefit from (provision for)
income taxes ................................. 830 (519) (6) - 305
------------------------------------------------------------------------------
Income (loss) before equity in
income of consolidated
subsidiaries ............................... (1,686) 1,046 11 - (629)
Equity in income of
consolidated subsidiaries .................. 1,057 11 - (1,068) -
------------------------------------------------------------------------------
Net (loss) income ........................ $ (629) $ 1,057 $ 11 $ (1,068) $ (629)
-
===============================================================================================================================
</TABLE>
-11-
<PAGE> 12
Supplemental Consolidating Balance Sheets
as of January 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash .......................................... $ 519 $ 2,848 $ - $ - $ 3,367
Short-term investments ........................ 138 3 2,583 - 2,724
Accounts and notes receivable ................. 1,327 13,093 1,121 - 15,541
Inventory ..................................... - 24,293 - - 24,293
Prepaid expenses and other
current assets .............................. - 2,324 - - 2,324
Deferred income taxes ......................... - 1,520 - - 1,520
-----------------------------------------------------------------------
Total current assets ........................ 1,984 44,081 3,704 - 49,769
-----------------------------------------------------------------------
Assets Held For Sale ............................. - 6,327 - - 6,327
Property and Equipment, net ...................... - 98,829 - - 98,829
Intangible Assets, net ........................... - 15,452 - - 15,452
Other Assets, net ................................ 1,689 11,271 1,134 (3,140) 10,954
Investment in and Advances to
Subsidiaries .................................. 140,880 1,602 290 (142,772) -
-----------------------------------------------------------------------
Total assets ..................................... $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of
long-term obligations ....................... $ 3,807 $ 249 $ - $ - $ 4,056
Accounts payable .............................. 23,776 11,885 24 - 35,685
Accrued expenses .............................. 183 15,186 9 - 15,378
Accrued income taxes .......................... 2,593 - - (2,593) -
Accrued interest .............................. 3,641 (1) 73 - 3,713
-----------------------------------------------------------------------
Total current liabilities ................... 34,000 27,319 106 (2,593) 58,832
-----------------------------------------------------------------------
Long-Term Obligations, less
current portion above ......................... 100,749 572 3,130 - 104,451
Other Liabilities ................................ 547 8,791 - (547) 8,791
Stockholders' Equity ............................. 9,257 140,880 1,892 (142,772) 9,257
-----------------------------------------------------------------------
Total liabilities and
stockholders' equity .......................... $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
============================================================================================================================
</TABLE>
-12-
<PAGE> 13
Supplemental Consolidating Statement of Cash Flows
for the Quarter Ended May 2, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities ........................ $ 414 $ 3,572 $ 66 $ - $ 4,052
---------------------------------------------------------------
Cash flows from investing activities:
Increase in short-term investments . - - (33) - (33)
Purchase of property and equipment . - (9,254) - - (9,254)
Net 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
receivables ...................... - - (75) - (75)
Proceeds from collection of
long-term receivables ............ - 12 75 - 87
Increase 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) - - 6,859
---------------------------------------------------------------
Increase in cash ..................... - 1,993 99 - 2,092
Cash at beginning of fiscal year ..... - 3,572 234 - 3,806
---------------------------------------------------------------
Cash at end of first fiscal quarter .. $ - $ 5,565 $ 333 $ - $ 5,898
=========================================================================================================
</TABLE>
-13-
<PAGE> 14
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS:
FIRST QUARTER FISCAL YEAR 2000 RESULTS COMPARED TO FIRST QUARTER FISCAL YEAR
1999 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the First Quarters Ended:
<TABLE>
<CAPTION>
May 1, May 2,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues ..................................... $ 123,643 $ 108,134
------------ ---------
Cost of goods sold and expenses:
Cost of goods sold ......................... 89,427 76,814
Operating and administrative expenses ...... 31,172 29,516
Interest expense ........................... 2,849 2,738
------------ ---------
123,448 109,068
------------ ---------
Income (loss) before incomes taxes ........... 195 (934)
(Provision for) benefit from
income taxes .............................. (98) 305
----------- ---------
Net income (loss) .......................... $ 97 $ (629)
- --------------------------------------------------------------------------------
Income (loss) per share -
Basic and Diluted ......................... $ 0.02 $ (0.13)
</TABLE>
REVENUES
Revenues for the quarter increased $15.5 million compared to the same period for
the prior year. A summary of revenues by functional area is shown below:
-14-
<PAGE> 15
For the Fiscal
Quarter Ended
May 1, May 2,
1999 1998
-------- --------
(in millions)
Convenience Stores $ 76.0 $ 68.6
Gasoline 46.8 39.1
Other .8 .4
-------- --------
Total $ 123.6 $ 108.1
======== ========
Convenience store revenues increased $7.4 million, or 10.8%, as a result of an
8.4% increase in comparable corporate store sales and the opening of nineteen
new stores during the prior four quarters, partially offset by the closure
and/or sale of 27 underperforming stores during the same period. Although the
reduction in stores had a negative impact on revenues, it did not have a
material adverse effect on results of operations, because the majority of stores
closed and/or sold had been operating at a loss.
Gasoline revenues increased $7.7 million as a result of an increase of 9.0
million gallons of gasoline sold, partially offset by a $0.035 per gallon
decrease in the average selling price of gasoline. Gallons sold increased as a
result of the new store openings described above and a 9.4% increase in
comparable store gallons sold.
GROSS PROFITS
Gross profits increased $2.9 million. A summary of gross profits by functional
area is shown below:
<TABLE>
<CAPTION>
For the Fiscal
Quarter Ended
May 1, May 2,
1999 1998
------- -------
(in millions)
<S> <C> <C>
Convenience Stores $ 28.0 $ 26.4
Gasoline 5.4 4.5
Other .8 .4
------- -------
Total $ 34.2 $ 31.3
======= =======
</TABLE>
Convenience store gross profits increased by $1.6 million or 6%. The increase
was attributable to the increase in convenience store sales, as described above.
Convenience store gross profit margins decreased slightly as a result of a
decrease in tobacco product gross profit margins.
Gasoline gross profits increased $0.9 million. This increase is primarily
attributable to the increase in gallons sold, described above, offset partially
by a decrease in gross profit per gallon of $0.003.
-15-
<PAGE> 16
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $1.7 million. A summary of
operating and administrative expenses is shown below:
<TABLE>
<CAPTION>
For the Fiscal
Quarter Ended
May 1, May 2,
1999 1998
------- -------
(in millions)
<S> <C> <C>
Operating Expenses $ 26.2 $ 24.0
General & Administrative Expenses 5.9 5.6
Gain on Disposition of Assets (.9) (.1)
------- -------
Total $ 31.2 $ 29.5
======= =======
</TABLE>
Operating expenses increased as a result of higher store wages and occupancy
costs. These increases were partially offset by lower environmental remediation
expenses in the first quarter of fiscal year 2000. General and administrative
expenses increased as a result of higher commercial insurance and depreciation
expenses. Gain on disposition of assets increased as a result of a pre-tax gain
of $858,000 recognized on the sale of a former headquarters facility. [See
"Notes to Consolidated Financial Statements", Note 5]
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense increased $0.1 million as a result of additional equipment
financing undertaken during the fourth quarter of fiscal year 1999.
Inflation did not have a material effect on Dairy Mart's revenues, gross
profits, operating and administrative expenses in the first quarters of fiscal
2000 and 1999.
The effective tax rate for Dairy Mart was a provision of 50.0% and a benefit of
33.0% for the first quarters of fiscal years 2000 and 1999, respectively. The
higher effective tax rate in the current year is a result of nondeductible
expenses related to the amortization of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
Dairy Mart generates substantial operating cash flow because a majority of its
revenues are received in cash. The amount of cash generated from operations
exceeded the current debt service requirements of Dairy Mart's long-term
obligations.
Dairy Mart is pursuing expansion initiatives in its retail operations (see
"Capital Expenditures"). Dairy Mart's capital expenditures are generally funded
by the excess operating cash flow available after debt service, the proceeds
from the sale of property, equipment and assets held for sale and various forms
of
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<PAGE> 17
long-term asset financing and/or leasing. Additionally, Dairy Mart has a $30.0
million senior revolving credit facility available to address the seasonality of
operations and the timing of capita expenditures and certain working capital
disbursements. Dairy Mart can issue up to $15.0 million of letters of credit
under the facility. The facility is due and payable on April 30, 2003. As of May
1, 1999, Dairy Mart had $16.1 million in outstanding revolving credit loans and
had $6.7 million in outstanding letters of credit under the facility.
In May 1998, Dairy Mart received a $53.7 million forward commitment that
provides real estate sale/leaseback or mortgage financing on a long-term basis
to fund the real estate acquisitions associated with its new store development
program. At May 1, 1999, Dairy Mart had approximately $21.0 million available
under this agreement. Dairy Mart accounts for these real estate sale/leaseback
transactions as operating leases. In January 1999, Dairy Mart entered into a
$3.8 million sale/leaseback arrangement for equipment financing which was fully
utilized at the end of fiscal year 1999. The term of this lease is for 48 months
with principal and interest due on a monthly basis. Dairy Mart accounted for
this transaction as a capital lease.
Management believes that the cash flow from operations, the proceeds from the
sale of certain assets held for sale and other forms of asset financing and/or
leasing, supplemented by the availability under the revolving credit facility,
will provide Dairy Mart with adequate liquidity and the capital necessary to
achieve its expansion initiatives.
CASH PROVIDED BY OPERATING ACTIVITIES
During the current year first quarter, net cash provided by operating activities
decreased $3.7 million compared to the same period of the prior year. This
decrease was primarily a result of the timing of money order payments and was
partially offset by a net change in other assets and liabilities and by Dairy
Mart's improved profitability during the first quarter of fiscal year 2000. The
net change in other assets and liabilities is a result of lower environmental
remediation expenditures during the current year first quarter.
CASH USED BY INVESTING ACTIVITIES
Net cash used in investing activities was $4.1 million in the current year first
quarter compared to $8.8 million in the prior year. The decrease was a result of
additional proceeds from sale/leaseback transactions relating to new stores
received in the current fiscal year first quarter.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $5.6 million for the current
quarter compared to $6.9 million for the same period of the prior year. The
decrease was a result of lower borrowings under Dairy Mart's revolving credit
facility in the current fiscal year first quarter.
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<PAGE> 18
CAPITAL EXPENDITURES
Dairy Mart anticipates spending approximately $25.0 million, net of
sale/leaseback transactions, for capital expenditures in fiscal year 2000 by
purchasing store and gasoline equipment for new stores, remodeling a certain
number of existing store and gasoline locations and implementing and/or
upgrading office and store technology.
ENVIRONMENTAL RESPONSIBILITY
During fiscal year 1998, Dairy Mart adopted the American Institute of Certified
Public Accountants' Statement of Position ("SOP") No. 96-1, "Environmental
Remediation Liabilities", which provides guidance on specific accounting issues
that are present in the recognition, measurement and disclosure of environmental
remediation liabilities. Dairy Mart accrues its estimate of all costs to be
incurred for assessment and remediation with respect to release of regulated
substances from existing and previously operated retail gasoline facilities.
YEAR 2000
The Year 2000 issue ("Y2K") is the result of computer software programs being
coded to use two digits rather than four to define the applicable year. Some of
Dairy Mart's older computer programs that have date-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions in
operations.
Dairy Mart's process toward resolution of its Y2K issue has been ongoing for the
past three years and the project includes the following phased approach: (1)
awareness; (2) assessment and replacement; (3) contingency planning; (4)
renovation; (5) testing and certification; and (6) production release. Phases
one and two are complete. Phases three through six are in various stages of
completion, with all remaining phases expected to be complete by September,
1999.
As a part of Dairy Mart's broader initiatives with respect to retail store
automation, Dairy Mart purchased and implemented a Y2K compliant,
commercial-off-the-shelf retail accounting system to replace the existing legacy
accounting system and related sub-systems. In conjunction with the
implementation of this system, Dairy Mart migrated its remaining financial,
human resources and other systems from an existing mainframe environment to a
new Unix-based client/server architecture certified to be Y2K compliant. Dairy
Mart is in various stages of testing, renovating and implementing system
changes. Dairy Mart expects to complete these internal Y2K initiatives by
September, 1999.
Dairy Mart is also reviewing the efforts being undertaken by its third party
suppliers and vendors to become Y2K compliant. Dairy Mart sent questionnaires
during the fourth quarter of fiscal 1999 to all of its significant vendors and
suppliers to ascertain their state of Y2K readiness and is evaluating their
responses. Dairy Mart expects to complete assessment and testing of its supplier
and vendor Y2K compliance by the end of June, 1999. Contingency planning efforts
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<PAGE> 19
will escalate following completion of third party assessments and testing and
such contingency planning efforts are expected to be complete by September,
1999.
Because Dairy Mart's scheduled replacements of mainframe systems and retail
store automation and accounting systems are considered by management to be a
planned capital expenditure and incidental to the Y2K issue, Dairy Mart does not
consider these expenditures to be specifically related to Y2K compliance and
upgrades. Dairy Mart has used internal resources to assess and address internal
and third party Y2K readiness. These internal costs are included as general and
administrative expenses in Dairy Mart's financial statements and are not tracked
separately for purposes of determining costs of Y2K readiness.
Dairy Mart's estimates regarding the expected completion dates involved in Dairy
Mart's Y2K project are based on various assumptions regarding future events,
including the availability of resources, the success of third parties in
addressing their own Y2K issues, and other factors. There are significant risks
to Dairy Mart if actual completion dates or costs differ materially from
expected completion dates and costs. These risks include the need to process
transactions manually at significant costs to Dairy Mart, significant delays in
obtaining key operational data for analysis, the inability to pay vendors,
settle receivables or procure merchandise for resale on a timely basis and to
perform other critical business functions which could have a material adverse
effect on Dairy Mart's financial position and the results of its operations.
Further, Dairy Mart cannot reasonably estimate the impact on Dairy Mart of key
third parties not successfully addressing their own Year 2000 issues, although
Dairy Mart believes that it will generally have alternative sources for
comparable products and does not expect to experience any material business
disruptions. Due to the uncertainty of these factors, Dairy Mart is unable to
quantify a worst-case scenario at this time.
BUSINESS OUTLOOK
Statements contained in this 10-Q that are not historical facts, including those
relating to future financial performance, capital expenditures, estimated costs
for environmental remediation, and year 2000 compliance, may constitute
forward-looking statements with respect to Dairy Mart's future performance.
Forward-looking statements are generally identified by the words "anticipate",
"believe", "expect", "plan", "intend", "should", "estimate", and similar
expressions. Factors that could cause actual results to differ materially from
those in the forward-looking statements include competition, general economic
conditions, the availability of capital, the ability to obtain suitable
locations for new stores, construction delays, the ability to attract and retain
key personnel and other factors disclosed in this 10-Q and Dairy Mart's other
filings with the Securities and Exchange Commission.
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<PAGE> 20
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In the Dairy Mart Convenience Stores, Inc. Derivative Litigation, which is
pending in the Chancery of New Castle County as Consolidated C.A. No. 14713 and
is described more fully in Dairy Mart's Form 10-K for the fiscal year ended
1999, the Court has recently denied both sides' motion for summary judgment and
set a trial date for July 27, 1999. Dairy Mart is not able to determine what the
results of the litigation will be.
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 first quarter of fiscal year 2000, the Company filed no
reports on Form 8-K.
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<PAGE> 21
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 14, 1999 /s/ Gregory G. Landry
---------------------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
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<PAGE> 1
Exhibit 11
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per share amounts)
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE FIRST FISCAL
QUARTER ENDED
--------------------
MAY 1, MAY 2,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . $ 97 $ (629)
Weighted average shares . . . . . . . . . 4,747 4,751
Dilutive options . . . . . . . . . . . 22 -
Total shares for EPS purposes . . . . . . 4,769 4,751
- --------------------------------------------------------------------------------
Earnings (loss) per share -
Basic and Diluted . . . . . . . . . . $ 0.02 $ (0.13)
- --------------------------------------------------------------------------------
</TABLE>
-22-
<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-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 5,209
<SECURITIES> 2,752
<RECEIVABLES> 20,222
<ALLOWANCES> (2,074)
<INVENTORY> 24,767
<CURRENT-ASSETS> 55,503
<PP&E> 157,765
<DEPRECIATION> (52,317)
<TOTAL-ASSETS> 186,476
<CURRENT-LIABILITIES> 58,655
<BONDS> 110,052
0
0
<COMMON> 66
<OTHER-SE> 9,303
<TOTAL-LIABILITY-AND-EQUITY> 186,476
<SALES> 0
<TOTAL-REVENUES> 123,643
<CGS> 89,427
<TOTAL-COSTS> 120,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,849
<INCOME-PRETAX> 195
<INCOME-TAX> (98)
<INCOME-CONTINUING> 97
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
