<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended OCTOBER 30, 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 DECEMBER 10, 1999 - 3,306,911
SHARES OF CLASS B COMMON STOCK OUTSTANDING DECEMBER 10, 1999 - 1,440,499
<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 FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
-------------------------- ---------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Revenues ............................... $156,409 $127,644 $438,211 $365,464
Cost of goods sold and expenses: .......
Cost of goods sold ................... 117,516 89,940 326,606 260,461
Operating and administrative expenses. 35,318 33,866 100,174 95,292
Interest expense ..................... 2,627 2,668 8,058 7,953
-------- -------- -------- --------
155,461 126,474 434,838 363,706
-------- -------- -------- --------
Income before incomes taxes ........... 948 1,170 3,373 1,758
Provision for income taxes ............ 437 532 1,593 796
-------- -------- -------- --------
Net income .......................... $ 511 $ 638 $ 1,780 $ 962
--------------------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.11 $ 0.14 $ 0.38 $ 0.21
Earnings per share - Diluted $ 0.11 $ 0.13 $ 0.37 $ 0.20
</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>
OCTOBER 30, 1999 JANUARY 30, 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash .................................................... $ 2,733 $ 3,367
Short-term investments .................................. 2,837 2,724
Accounts and notes receivable ........................... 19,903 15,541
Inventory ............................................... 31,267 24,293
Prepaid expenses and other current assets ............... 1,126 2,324
Deferred income taxes ................................... -- 1,520
--------- ---------
Total current assets ................................. 57,866 49,769
Assets Held For Sale .................................... 3,351 6,327
Property and Equipment, net ............................. 105,004 98,829
Intangible Assets, net .................................. 14,787 15,452
Other Assets, net ....................................... 13,431 10,954
--------- ---------
Total assets ............................................ $ 194,439 $ 181,331
- --------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ............. $ 1,622 $ 4,056
Accounts payable ........................................ 44,638 35,685
Accrued expenses ........................................ 13,443 15,378
Accrued interest ........................................ 1,501 3,713
Deferred income taxes ................................... 1,348 --
--------- ---------
Total current liabilities ............................. 62,552 58,832
Long-Term Obligations, less current portion above .......... 112,384 104,451
Other Liabilities .......................................... 8,395 8,791
Stockholders' Equity:
Class A Common Stock .................................... 38 37
Class B Common Stock .................................... 29 29
Paid-in capital ......................................... 31,118 31,045
Retained deficit ........................................ (5,072) (6,849)
Treasury stock, at cost ................................. (15,005) (15,005)
--------- ---------
Total stockholders' equity ........................... 11,108 9,257
--------- ---------
Total liabilities and stockholders' equity ................. $ 194,439 $ 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 THREE FISCAL QUARTERS ENDED
------------------------------------
OCTOBER 30, 1999 OCTOBER 31 ,1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 1,780 $ 962
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 8,863 8,122
Change in deferred income taxes ........................................ 388 454
(Gain) loss on disposition of properties, net .......................... (1,101) 615
Net change in assets and liabilities:
Accounts and notes receivable ........................................ (5,537) (4,920)
Inventory ............................................................ (6,974) (2,742)
Accounts payable ..................................................... 8,953 8,619
Accrued interest ..................................................... (2,212) (2,140)
Other assets and liabilities ......................................... (427) (3,898)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .................................. 3,733 5,072
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Decrease) increase in short-term investments ........................... (113) 1,086
Purchase of property and equipment, net ................................. (15,659) (15,851)
Net proceeds from sale of property, equipment and
Assets held for sale .................................................. 5,953 733
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ...................................... (9,819) (14,032)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net ......................................... 7,300 12,800
Repayment of long-term obligations, net of borrowings ................... (1,922) (1,823)
Issuance of common stock ................................................ 74 214
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................. 5,452 11,191
- ---------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash................................................. (634) 2,231
Cash at beginning of fiscal year ........................................... 3,367 3,806
- ---------------------------------------------------------------------------------------------------------------
Cash at end of third fiscal quarter ........................................ $ 2,733 $ 6,037
- ---------------------------------------------------------------------------------------------------------------
</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
OCTOBER 30, 1999
(Unaudited)
The unaudited consolidated financial statements for Dairy Mart Convenience
Stores, 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 three fiscal quarters
ended October 30, 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 18,988 - 271 73,360
Stock options exercised - - - -
Exchange of Class B Shares
for Class A Shares 37,000 (37,000) - -
----------- ----------- ----------- -----------
Balance October 30, 1999 3,800,211 2,844,156 $ 66,516 $31,118,454
----------- ----------- ----------- -----------
</TABLE>
-5-
<PAGE> 6
As of October 30, 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 3,278,586 Class A shares and 1,448,199 Class B
shares outstanding.
3. Earnings Per Share
------------------
Earnings 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 4,722,486 and 4,681,970 for the
third fiscal quarter ended October 30, 1999 and October 31, 1998, respectively,
and 4,717,125 and 4,671,518 for the first three fiscal quarters ended October
30, 1999 and October 31, 1998, respectively. The weighted average number of
shares used in the calculation of diluted earnings per share was 4,856,014 and
4,729,095 for the third fiscal quarter ended October 30, 1999 and October 31,
1998, respectively, and 4,801,834 and 4,743,704 for the first three fiscal
quarters ended October 30, 1999 and October 31, 1998, respectively.
4. Seasonality
-----------
The results of operations for the first three fiscal quarters ended October 30,
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. 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
-6-
<PAGE> 7
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 Three Fiscal Quarters Ended October 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ 258 $ 437,694 $ 259 $ - $ 438,211
Cost of goods sold and expenses:
Cost of goods sold ........................ - 326,606 - - 326,606
Operating and administrative expenses ..... 224 99,933 17 - 100,174
Interest expense .......................... 7,405 486 167 - 8,058
------------------------------------------------------------------
7,629 427,025 184 - 434,838
------------------------------------------------------------------
Income (loss) before income taxes
and equity in income (loss) of
consolidated subsidiaries ................ (7,371) 10,669 75 - 3,373
Benefit from (provision for)
income taxes ............................ 2,686 (4,250) (29) - (1,593)
------------------------------------------------------------------
Income (loss) before equity in
income of consolidated subsidiaries ..... (4,685) 6,419 46 - 1,780
Equity in income of consolidated
subsidiaries .............................. 6,465 46 - (6,511) -
------------------------------------------------------------------
Net income .............................. $ 1,780 $ 6,465 $ 46 $ (6,511) $ 1,780
================================================================================================================
</TABLE>
-8-
<PAGE> 9
Supplemental Consolidating Balance Sheets
as of October 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash ........................................... $ - $ 2,729 $ 4 $ - $ 2,733
Short-term investments ......................... 138 223 2,476 - 2,837
Accounts and notes receivable .................. 3,424 16,085 394 - 19,903
Inventory ...................................... - 31,267 - - 31,267
Prepaid expenses and other
current assets ............................... - 1,126 - - 1,126
-----------------------------------------------------------------------
Total current assets ......................... 3,562 51,430 2,874 - 57,866
Assets Held For Sale .............................. - 3,351 - - 3,351
Property and Equipment, net ....................... - 105,004 - - 105,004
Intangible Assets, net ............................ - 14,787 - - 14,787
Other Assets, net ................................. 3,022 8,828 1,581 - 13,431
Investment in and Advances to
subsidiaries ................................... 145,129 1,259 686 (147,074) -
-----------------------------------------------------------------------
Total assets ...................................... $ 151,713 $ 184,659 $ 5,141 $(147,074) $ 194,439
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
obligations .................................. $ 1,384 $ 238 $ - $ - $ 1,622
Accounts payable ............................... 28,882 15,756 - - 44,638
Accrued expenses ............................... 59 13,372 12 - 13,443
Accrued interest ............................... 1,446 1 54 - 1,501
Deferred income taxes .......................... - 1,348 - - 1,348
-----------------------------------------------------------------------
Total current liabilities .................... 31,771 30,715 66 - 62,552
-----------------------------------------------------------------------
Long-Term Obligations, less
current portion above .......................... 108,834 420 3,130 - 112,384
Other Liabilities ................................. - 8,395 - - 8,395
Stockholders' Equity .............................. 11,108 145,129 1,945 (147,074) 11,108
-----------------------------------------------------------------------
Total liabilities and
stockholders' equity ........................... $ 151,713 $ 184,659 $ 5,141 $(147,074) $ 194,439
================================================================================================================================
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Statement of Cash Flows
for the Three Fiscal Quarters Ended October 30, 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 ................................... $ (2,467) $ 5,907 $ 293 $ - $ 3,733
---------------------------------------------------------------------
Cash flows from investing activities:
(Decrease) increase in short-term
investments .............................. - (220) 107 - (113)
Purchase of property and equipment ......... - (15,659) - - (15,659)
Net proceeds from sale of property,
equipment and assets held for sale ....... - 5,953 - - 5,953
Investment in and (advances to)
subsidiaries ............................. (3,667) 4,063 (396) - -
---------------------------------------------------------------------
Net cash used in
investing activities ....................... (3,667) (5,863) (289) - (9,819)
---------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net ............ 7,300 - - - 7,300
Repayment of long-term obligations ......... (1,759) (163) - - (1,922)
Issuance of common stock ................... 74 - - - 74
---------------------------------------------------------------------
Net cash provided by (used in)
financing activities ......................... 5,615 (163) - - 5,452
---------------------------------------------------------------------
(Decrease) increase in cash .................. (519) (119) 4 - (634)
Cash at beginning of fiscal year ............. 519 2,848 - - 3,367
---------------------------------------------------------------------
Cash at end of third fiscal quarter .......... $ - $ 2,729 $ 4 $ - $ 2,733
=======================================================================================================================
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Operations
for the Three Fiscal Quarters Ended October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .............................. $ 76 $ 365,053 $ 335 $ - $ 365,464
Cost of goods sold and expenses:
Cost of goods sold .................. - 260,461 - - 260,461
Operating and administrative expenses 201 95,075 16 - 95,292
Interest expense .................... 7,326 382 245 - 7,953
-------------------------------------------------------------------------
7,527 355,918 261 - 363,706
-------------------------------------------------------------------------
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries ......... (7,451) 9,135 74 - 1,758
Benefit from (provision for)
income taxes ...................... 3,428 (4,190) (34) - (796)
-------------------------------------------------------------------------
Income (loss) before equity in
income of consolidated
subsidiaries .................... (4,023) 4,945 40 - 962
Equity in income of
consolidated subsidiaries ....... 4,985 40 - (5,025) -
-------------------------------------------------------------------------
Net income .................... $ 962 $ 4,985 $ 40 $ (5,025) $ 962
======================================================================================================================
</TABLE>
-11-
<PAGE> 12
Supplemental Consolidating Balance Sheets
as of January 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
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 ............................... 2,776 15,186 9 (2,593) 15,378
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 Three Fiscal Quarters Ended October 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities ..................................... $ (1,944) $ 6,924 $ 92 $ - $ 5,072
------------------------------------------------------------
Cash flows from investing activities:
Increase in short-term investments .............. - - 1,086 - 1,086
Purchase of property and equipment .............. - (15,851) - - (15,851)
Net proceeds from sale of property,
equipment and assets held for sale ............ - 733 - - 733
Investment in and (advances to)
subsidiaries .................................. (10,486) 10,646 (160) - -
------------------------------------------------------------
Net cash (used in) provided by
investing activities ............................ (10,486) (4,472) 926 - (14,032)
------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net ................. 12,800 - - - 12,800
Repayment of long-term obligations .............. (484) (239) (1,100) - (1,823)
Issuance of common stock ........................ 214 - - - 214
------------------------------------------------------------
Net cash provided by (used in)
Financing activities ............................ 12,530 (239) (1,100) - 11,191
------------------------------------------------------------
Increase (decrease) in cash ....................... 100 2,213 (82) - 2,231
Cash at beginning of fiscal year .................. - 3,572 234 - 3,806
------------------------------------------------------------
Cash at end of third fiscal quarter ............... $ 100 $ 5,785 $ 152 $ - $ 6,037
===================================================================================================================
</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:
THIRD QUARTER FISCAL YEAR 2000 RESULTS COMPARED TO THIRD QUARTER FISCAL YEAR
1999 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
-------------------------- ------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $156,409 $127,644 $438,211 $365,464
Cost of goods sold and expenses:
Cost of goods sold 117,516 89,940 326,606 260,461
Operating & administrative
expenses 35,318 33,866 100,174 95,292
Interest expense 2,627 2,668 8,058 7,953
---------------------------------------------------
155,461 126,474 434,838 363,706
Income before income taxes 948 1,170 3,373 1,758
Provision for income taxes 437 532 1,593 796
---------------------------------------------------
Net income $ 511 $ 638 $ 1,780 $ 962
Income per share- Basic $ 0.11 $ 0.14 $ 0.38 $ 0.21
Income per share- Diluted $ 0.11 $ 0.13 $ 0.37 $ 0.20
</TABLE>
-14-
<PAGE> 15
REVENUES
Revenues for the third quarter increased $28.8 million compared to the same
period for the prior year. Revenues for the first three quarters of the current
year increased $72.7 million compared to the same period for the prior year. A
summary of revenues by functional area is shown below:
<TABLE>
<CAPTION>
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
-------------------------- --------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Convenience Stores $ 93.2 $ 79.7 $269.0 $232.5
Gasoline 63.1 44.8 168.6 129.5
Other .1 3.1 .6 3.5
------ ------ ------ ------
Total $156.4 $127.6 $438.2 $365.5
</TABLE>
Convenience store revenues increased $13.5 million, or 17.0%, in the third
quarter and $36.5 million, or 15.7%, in the current year first three quarters
compared to the prior year first three quarters, as a result of comparable
corporate store sales increases of 12.1% and 12.0% for the third quarter and the
first three quarters, respectively, and the opening of 21 new stores during the
prior four quarters, partially offset by the closure and/or sale of 30
under-performing 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 $18.3 million in the current year third quarter
compared to the prior year and $39.1 million in the first three quarters of the
current year compared to the prior year because total gallons sold increased 7.0
million in the current year third quarter compared to the prior year and 26.1
million in the first three quarters of the current year compared to the prior
year. Gallons sold increased as a result of the new store openings described
above and a 2.3% increase in comparable-store gallons sold for the third quarter
and a 6.3% increase in comparable-store gallons sold for the first three
quarters.
-15-
<PAGE> 16
GROSS PROFITS
Gross profits increased $1.2 million for the third quarter and $6.6 million for
the first three quarters. A summary of gross profits by functional area is shown
below:
<TABLE>
<CAPTION>
For the Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
-------------------------------------- ---------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Convenience Stores $31.9 $29.2 $92.5 $86.2
Gasoline 6.9 5.4 18.6 15.3
Other .1 3.1 .5 3.5
----- ----- ------ ------
Total $38.9 $37.7 $111.6 $105.0
</TABLE>
Convenience store gross profit increased by $2.7 million or 9.2% for the current
year third quarter compared to the prior year, and by $6.3 million or 7.3% in
the first three quarters. These increases were attributable to the increases in
convenience store sales, as described above offset partially by a decrease in
convenience store gross profit margins as a result of a decrease in tobacco
product gross profit margins.
Gasoline gross profits increased $1.5 million for the third quarter compared to
the prior year, and increased $3.3 million in the first three quarters of the
current year. These increases are primarily attributable to the increase in
gallons sold, described above, offset partially by slightly lower gasoline gross
profit margins.
Other gross profits decreased $3.0 million in both the third quarter and first
three quarters compared to the prior year. The decrease was caused by a one-time
fee received by the Company on the termination of a long-term ATM agreement in
the prior year third quarter. The Company's former partner in the agreement
agreed to the termination fee in lieu of its ongoing payment obligations under
the agreement.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $1.5 million for third quarter
compared to the prior year third quarter, and increased $4.9 million for the
first three quarters of the fiscal year. Operating expenses increased as a
result of higher store wages and occupancy costs associated with the new store
openings described above.
-16-
<PAGE> 17
INFLATION AND TAXES
Inflation did not have a material effect on Dairy Mart's revenues, gross
profits, operating and administrative expenses in the first three quarters of
fiscal 2000 and 1999.
The effective tax rate for the Company was 46.1% and 45.5% for the third quarter
of fiscal years 2000 and 1999, respectively, and 47.2% and 45.3% for the first
three quarters of fiscal year 2000 and 1999, respectively.
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 other forms of
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 capital 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
October 30, 1999, Dairy Mart had $17.5 million in outstanding revolving credit
loans and had $5.9 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 October 30, 1999, Dairy Mart had $13.0 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. Dairy Mart accounted for this transaction as a
capital lease. In the third quarter of this year, Dairy Mart obtained
commitments for an additional $8.5 million for equipment financing, of which
$5.5 million was available as of October 30, 1999.
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
-17-
<PAGE> 18
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 three fiscal quarters, net cash provided by
operating activities decreased $1.3 million compared to the same period of the
prior year. This decrease was a result of increases in vendor-related discount
and allowance receivables and inventory increases associated with the increase
in convenience store revenues described above partially offset by Dairy Mart's
improved profitability and the net change in other assets and liabilities. The
net change in other assets and liabilities is primarily a result of lower
prepaid expenses and environmental remediation costs during the current year.
CASH USED BY INVESTING ACTIVITIES
Net cash used in investing activities was $9.8 million in the current year first
three fiscal quarters compared to $14.0 million in the same period of the prior
year. The decrease in cash used by investing activities was primarily a result
of proceeds received during the current year from the sale of Dairy Mart's
former headquarters facility and decreased purchases of property and equipment,
net of sale/leaseback proceeds.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $5.5 in the current year first
three quarters compared to net cash provided of $11.2 million in 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 due to the Company's
increased profitability and decreased purchases of property and equipment, net
of sale/leaseback proceeds as discussed above.
CAPITAL EXPENDITURES
Dairy Mart anticipates spending approximately $20 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
-18-
<PAGE> 19
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.
Therefore, some older computer programs that have date-sensitive coding may
recognize a date using "00" as the year 1900 rather than the 2000.
Dairy Mart's process toward resolution of its Y2K issue has been ongoing for the
past three years and the project included a phased approach: (1) awareness; (2)
assessment and replacement; (3) contingency planning; (4) renovation; (5)
testing and certification; and, (6) production release. All phases of the
project are now essentially complete as of October, 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 also reviewed 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 currently evaluating
their responses. Contingency planning efforts are being undertaken to evaluate
alternative sources and ascertain the continuation of normal business.
Management is not presently aware of any product supplier-related issue
presented by the year 2000 that is likely to have a material impact on the
Company.
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 its readiness for Y2K 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 its readiness project is
not sufficient. These risks include the need to process transactions manually at
significant costs to Dairy Mart, loss of communication links with store
locations, significant delays in obtaining key operational data for analysis,
the inability to pay vendors, settle receivables or procure
-19-
<PAGE> 20
merchandise for resale on a timely basis, inability to communicate and settle
transactions with banks and other financial institutions 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 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.
-20-
<PAGE> 21
QUANTITATIVE AND QUALITATIVE MARKET RISK
The Company does not have any instruments that it believes would be materially
affected by any future interest rate changes.
-21-
<PAGE> 22
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and certain of its current and former directors have agreed to
settle a previously disclosed derivative action filed in the Delaware Court of
Chancery. In 1995, the Company was named as a nominal defendant, along with
certain of those persons who were directors of the Company, in two shareholder
derivative actions. The two cases have been consolidated as DAIRY MART
CONVENIENCE STORES, INC. DERIVATIVE LITIGATION. The plaintiffs alleged among
other things, that in connection with the settlement of a dispute between
Charles Nirenberg and the Company's management with respect to control of the
Company, the directors violated their fiduciary duty to the Company and its
shareholders. Mr. Nirenberg is a former shareholder, director and officer of the
Company.
On November 8, 1999, the parties to the litigation executed a Stipulation of
Settlement that provided for the following:
- - The lawsuit will be dismissed.
- - The Company's insurance carrier will make a payment of $2,000,000 on behalf
of all the defendants to the Company, some or all of which is expected to
be used by the Company to cover the fees and expenses, including attorneys'
fees awarded to plaintiffs by the court.
- - The Company must hold its 2000 annual meeting of its shareholders on or
before May 31, 2000.
- - Mr. Robert B. Stein, Jr., the Chairman of the Board and Chief Executive
Officer, and Mr. Gregory L. Landry, a director and Chief Financial Officer,
have agreed that, upon any event that would result in the disposition of
their interests in the general partner of DM Associates Limited Partnership
("DM Associates"), including a liquidation of DM Associates, they will pay
to the Company any proceeds generated upon such disposition, except each of
them may retain 17.9% of the proceeds for himself.
The Settlement Agreement was conditioned upon approval by the court, which was
obtained on December 13, 1999 and is also conditioned upon the Company
reclassifying is Class A Common Stock and its Class B Common Stock into a new,
single class of Common Stock. On December 7, 1999, the Company filed its
preliminary proxy statement with respect to the proposed reclassification of the
Company's Common Stock with the Securities and Exchange Commission (the
"Commission"). The Company intends to hold its shareholder meeting with respect
to the reclassification as soon as practicable after the Commission permits the
Company to mail the proxy statement to its shareholders.
Item 5. OTHER INFORMATION
The Company intends to ask its shareholders to approve a reclassification of its
existing Class A common stock and Class B common stock into a new, single class
of common stock. Currently, each share of Class A common stock is entitled to
1/10th of a vote and Class B common stock is entitled to one vote on all matters
voted on as a single class. In addition, Class A shareholders, voting as a
separate class, elect 25% of the Board of Directors and Class B shareholders,
voting as a separate class, elect the remaining Directors. Under the terms of
the proposed reclassification, each share of Dairy Mart's existing Class A
common stock would be converted into one share of the new common stock and each
share of the existing Class B common stock would be converted into 1.1 shares of
the new common stock. Each share of the new common stock would be entitled to
one vote on all matters and the holders of the new common stock would elect all
directors. The proposed reclassification, if approved would also allow Dairy
Mart and certain of its current and former directors to settle the derivative
action discussed in Item 1 of Part II above, although such settlement is not
necessary for the reclassification to be effectuated. Dairy Mart expects that a
majority of the costs related to the derivative litigation will be reimbursed by
its insurance carriers. To the extent that insurance proceeds are less than the
amount of such costs, the difference will be recorded as a charge to Dairy
Mart's results of operations in its current fiscal year.
-22-
<PAGE> 23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
1. Exhibit (11)- Statement re Computation of Per-Share Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
b) Reports on Form 8-K
During the third quarter of fiscal year 2000, the Company filed no
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
DATE: December 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 Third Fiscal For the Three Fiscal
Quarter Ended Quarters Ended
---------------------- ----------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net income ................................... $ 511 $ 638 $1,780 $ 962
Weighted average shares ...................... 4,722 4,682 4,717 4,672
Dilutive options ........................... 134 47 85 72
----------------------------------------------
Total shares for EPS purposes ................ 4,856 4,729 4,802 4,744
- ------------------------------------------------------------------------------------------------
Earnings per share - Basic ................... $ 0.11 $ 0.14 $ 0.38 $ 0.21
Earnings per share - Diluted ................. $ 0.11 $ 0.13 $ 0.37 $ 0.20
- ------------------------------------------------------------------------------------------------
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> JUL-17-1999
<PERIOD-END> OCT-30-1999
<CASH> 2,733
<SECURITIES> 2,837
<RECEIVABLES> 22,114
<ALLOWANCES> (2,211)
<INVENTORY> 31,267
<CURRENT-ASSETS> 57,866
<PP&E> 162,859
<DEPRECIATION> (57,855)
<TOTAL-ASSETS> 194,439
<CURRENT-LIABILITIES> 62,552
<BONDS> 112,384
0
0
<COMMON> 67
<OTHER-SE> 11,041
<TOTAL-LIABILITY-AND-EQUITY> 194,439
<TOTAL-REVENUES> 156,409
<CGS> 117,516
<TOTAL-COSTS> 155,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,627
<INCOME-PRETAX> 948
<INCOME-TAX> 437
<INCOME-CONTINUING> 511
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<NET-INCOME> 511
<EPS-BASIC> .11
<EPS-DILUTED> .11
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