<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 JULY 31, 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 JULY 31, 1999 - 3,268,519
SHARES OF CLASS B COMMON STOCK OUTSTANDING JULY 31, 1999 - 1,449,199
-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 FISCAL FOR THE TWO FISCAL
QUARTER ENDED QUARTERS ENDED
------------------------ ------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Revenues . . . . . . . . . . . . . . . . $155,438 $127,299 $279,081 $235,433
-------- -------- -------- --------
Cost of goods sold and expenses: . . . .
Cost of goods sold . . . . . . . . . . 116,522 91,695 205,949 168,449
Operating and administrative expenses. 34,005 31,548 65,177 61,064
Interest expense . . . . . . . . . . . 2,697 2,594 5,546 5,332
-------- -------- -------- --------
153,224 125,837 276,672 234,845
-------- -------- -------- --------
Income before incomes taxes . . . . . . 2,214 1,462 2,409 588
Provision for income taxes . . . . . . 1,058 545 1,155 264
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . $ 1,156 $ 917 $ 1,254 $ 324
- ----------------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.24 $ 0.20 $ 0.27 $ 0.07
Earnings per share - Diluted $ 0.24 $ 0.19 $ 0.26 $ 0.07
</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>
JULY 31, 1999 JANUARY 30, 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 2,394 $ 3,367
Short-term investments . . . . . . . . . . . . . . 3,145 2,724
Accounts and notes receivable . . . . . . . . . . 19,048 15,541
Inventory . . . . . . . . . . . . . . . . . . . . 27,761 24,293
Prepaid expenses and other current assets . . . . 2,189 2,324
Deferred income taxes . . . . . . . . . . . . . . 1,449 1,520
--------- ---------
Total current assets . . . . . . . . . . . . . 55,986 49,769
Assets Held For Sale . . . . . . . . . . . . . . . 2,486 6,327
Property and Equipment, net . . . . . . . . . . . 103,365 98,829
Intangible Assets, net . . . . . . . . . . . . . . 15,051 15,452
Other Assets, net . . . . . . . . . . . . . . . . 10,157 10,954
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . $ 187,045 $ 181,331
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations . . . $ 1,311 $ 4,056
Accounts payable . . . . . . . . . . . . . . . . . 42,871 35,685
Accrued expenses . . . . . . . . . . . . . . . . . 16,112 15,378
Accrued interest . . . . . . . . . . . . . . . . . 3,731 3,713
--------- ---------
Total current liabilities . . . . . . . . . . . 64,025 58,832
Long-Term Obligations, less current portion above . . 103,996 104,451
Other Liabilities . . . . . . . . . . . . . . . . . . 8,485 8,791
Stockholders' Equity:
Class A Common Stock . . . . . . . . . . . . . . . 38 37
Class B Common Stock . . . . . . . . . . . . . . . 29 29
Paid-in capital . . . . . . . . . . . . . . . . . 31,072 31,045
Retained deficit . . . . . . . . . . . . . . . . . (5,595) (6,849)
Treasury stock, at cost . . . . . . . . . . . . . (15,005) (15,005)
--------- ---------
Total stockholders' equity . . . . . . . . . . 10,539 9,257
--------- ---------
Total liabilities and stockholders' equity . . . . . $ 187,045 $ 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 TWO FISCAL QUARTERS ENDED
---------------------------------
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . .. . . . . . . . . . . . . . . . . . . $ 1,254 $ 324
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 5,716 5,245
Change in deferred income taxes . . . . . . . . . . . 1,155 347
(Gain) loss on disposition of properties, net . . . . (1,516) 312
Net change in assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . (3,507) 1
Inventory . . . . . . . . . . . . . . . . . . . . . (3,468) (2,267)
Accounts payable . . . . . . . . . . . . . . . . . 7,186 7,470
Accrued interest . . . . . . . . . . . . . . . . . 18 136
Other assets and liabilities . . . . . . . . . . . (416) (4,314)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities . . . . . . . . 6,422 7,254
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in short-term investments . . . . . . . . . . (421) (84)
Purchase of property and equipment, net . . . . . . . . . (10,065) (16,797)
Net proceeds from sale of property, equipment and
assets held for sale . . . . . . . . . . . . . . . . 5,887 573
Increase in long-term notes receivable . . . . . . . . (164) (345)
Proceeds from collection of long-term notes receivable 461 368
Decrease (increase) in intangibles and other assets 159 (153)
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities . . . (4,143) (16,438)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net . . . . . . . . . . . . 100 9,200
Repayment of long-term obligations . . . . . . . . . . (3,380) (486)
Issuance of common stock . . . . . . . . . . . . . . . 28 135
- ------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities . . . . (3,252) 8,849
- ------------------------------------------------------------------------------------------------
Decrease in cash . . . . . . . . . . . . . . .. . . . . . . (973) (335)
Cash at beginning of fiscal year . . . . . . . . . . . . 3,367 3,806
- ------------------------------------------------------------------------------------------------
Cash at end of second fiscal quarter . . . . . . . . . . . $ 2,394 $ 3,471
- ------------------------------------------------------------------------------------------------
</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
JULY 31, 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 two fiscal quarters
ended July 31, 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 9,921 - 99 26,841
Stock options exercised - - - -
Exchange of Class B Shares
for Class A Shares 36,000 (36,000) - -
----------- ----------- ----------- -----------
Balance July 31, 1999 3,790,144 2,845,156 $ 66,344 $31,071,935
----------- ----------- ----------- -----------
</TABLE>
-5-
<PAGE> 6
As of July 31, 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 3,268,519 Class A shares and 1,449,199 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 4,717,718 and 4,670,402 for the
second fiscal quarters ended July 31, 1999 and August 1, 1998, respectively, and
4,714,445 and 4,666,291 for the first two fiscal quarters ended July 31, 1999
and August 1, 1998, respectively. The weighted average number of shares used in
the calculation of diluted earnings per share was 4,802,277 and 4,751,330 for
the second fiscal quarter ended July 31, 1999 and August 1, 1998, respectively,
and 4,785,757 and 4,751,009 for the first two fiscal quarters ended July 31,
1999 and August 1, 1998, respectively.
4. SEASONALITY
The results of operations for the first two fiscal quarters ended July 31, 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
Guarantor Subsidiaries. The following supplemental financial information sets
-6-
<PAGE> 7
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 Two Fiscal Quarters Ended July 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $ 116 $ 278,802 $ 163 $ -- $ 279,081
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . -- 205,949 -- -- 205,949
Operating and administrative expenses 152 65,014 11 -- 65,177
Interest expense . . . . . . . . . . 4,981 453 112 -- 5,546
---------------------------------------------------------------------
5,133 271,416 123 -- 276,672
---------------------------------------------------------------------
Income (loss) before income taxes
and equity in income (loss) of
consolidated subsidiaries . . . . . (5,017) 7,386 40 -- 2,409
Benefit from (provision for)
income taxes . . . . . . . . . . . 2,508 (3,643) (20) -- (1,155)
---------------------------------------------------------------------
Income (loss) before equity in
income of consolidated subsidiaries (2,509) 3,743 20 -- 1,254
Equity in income of consolidated
subsidiaries . . . . . . . . . . . . 3,763 20 -- (3,783) --
---------------------------------------------------------------------
---------
Net income . . . . . . . . . . . . $ 1,254 $ 3,763 $ 20 $ (3,783) $ 1,254
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 9
Supplemental Consolidating Balance Sheets
as of July 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . $ -- $ 2,324 $ 70 $ -- $ 2,394
Short-term investments . . . . . . . 138 374 2,633 -- 3,145
Accounts and notes receivable . . . 2,269 15,748 1,031 -- 19,048
Inventory . . . . . . . . . . . . . -- 27,761 -- -- 27,761
Prepaid expenses and other
current assets . . . . . . . . . . 125 2,064 -- -- 2,189
Deferred income taxes . . . . . . . -- 1,449 -- -- 1,449
------------------------------------------------------------------
Total current assets . . . . . . . 2,532 49,720 3,734 -- 55,986
Assets Held For Sale . . . . . . . . . -- 2,486 -- -- 2,486
Property and Equipment, net . . . . . . -- 103,365 -- -- 103,365
Intangible Assets, net . . . . . . . . -- 15,051 -- -- 15,051
Other Assets, net . . . . . . . . . . . 3,047 8,767 917 (2,574) 10,157
Investment in and Advances to
subsidiaries . . . . . . . . . . . . 137,750 1,390 522 (139,662) --
------------------------------------------------------------------
Total assets . . . . . . . . . . . . . $ 143,329 $ 180,779 $ 5,173 $(142,236) $ 187,045
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term
obligations . . . . . . . . . . . $ 1,068 $ 243 $ -- $ -- $ 1,311
Accounts payable . . . . . . . . . . 25,145 17,726 -- -- 42,871
Accrued expenses . . . . . . . . . . -- 16,104 8 -- 16,112
Accrued income taxes 2,574 -- -- (2,574) --
Accrued interest . . . . . . . . . . 3,608 -- 123 -- 3,731
------------------------------------------------------------------
Total current liabilities . . . . 32,395 34,073 131 (2,574) 64,025
------------------------------------------------------------------
Long-Term Obligations, less
current portion above . . . . . . . 100,395 471 3,130 -- 103,996
Other Liabilities . . . . . . . . . . . -- 8,485 -- -- 8,485
Stockholders' Equity . . . . . . . . . 10,539 137,750 1,912 (139,662) 10,539
------------------------------------------------------------------
Total liabilities and
stockholders' equity . . . . . . . . $ 143,329 $ 180,779 $ 5,173 $(142,236) $ 187,045
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 10
Supplemental Consolidating Statement of Cash Flows
for the Two Fiscal Quarters Ended July
31, 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 . . . . . . . . $ (569) $ 6,856 $ 135 $ - $ 6,422
-------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in short-term
investments . . . . . . . . . . . - (371) (50) - (421)
Purchase of property and equipment . - (10,065) - - (10,065)
Net proceeds from sale of property,
equipment and assets held for sale - 5,887 - - 5,887
Investment in and (advances to)
subsidiaries . . . . . . . . . . . 3,259 (3,027) (232) - -
(Decrease) increase in long-term
notes receivables . . . . . . . . . - (357) 193 - (164)
Proceeds from collection of
long-term receivables . . . . . . - 461 - - 461
(Increase) decrease in intangibles
and other assets . . . . . . .. . . (64) 199 24 - 159
-------------------------------------------------------------------------
Net cash provided by (used in)
investing activities . . . . . . . . 3,195 (7,273) (65) - (4,143)
-------------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net . . 100 - - - 100
Repayment of long-term obligations . (3,273) (107) - - (3,380)
Issuance of common stock . . . . . . 28 - - - 28
-------------------------------------------------------------------------
Net cash (used in) provided by
financing activities . . . . . . . . (3,145) (107) - - (3,252)
-------------------------------------------------------------------------
(Decrease) increase in cash . . . . . (519) (524) 70 - (973)
Cash at beginning of fiscal year . . . 519 2,848 - - 3,367
-------------------------------------------------------------------------
Cash at end of second fiscal quarter . $ - $ 2,324 $ 70 $ - $ 2,394
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE> 11
Supplemental Consolidating Statement of Operations
for the Two Fiscal Quarters Ended August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $ 45 $ 235,156 $ 232 $ - $ 235,433
Cost of goods sold and expenses:
Cost of goods sold . . . . . . . . . - 168,449 - - 168,449
Operating and administrative expenses 131 60,923 10 - 61,064
Interest expense . . . . . . . . . . 4,903 254 175 - 5,332
---------------------------------------------------------------------
5,034 229,626 185 - 234,845
Income (loss) before income taxes
and equity in income of
consolidated subsidiaries . . . . (4,989) 5,530 47 - 588
Benefit from (provision for)
income taxes . . . . . . . . . . . 2,295 (2,537) (22) - (264)
---------------------------------------------------------------------
Income (loss) before equity in
income of consolidated
subsidiaries . . . . . . . . . . (2,694) 2,993 25 - 324
Equity in income of
consolidated subsidiaries . . . 3,018 25 - (3,043) -
---------------------------------------------------------------------
Net income . . . . . . . . . . $ 324 $ 3,018 $ 25 $ (3,043) $ 324
- -----------------------------------------------------------------------------------------------------------------
</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 . . . . . . . . . . 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 Two Fiscal Quarters Ended August 1, 1998
(in thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities . . . . . . . . . $ 1,902 $ 5,274 $ 78 $ - $ 7,254
---------------------------------------------------------------------
Cash flows from investing activities:
Increase in short-term investments - - (84) - (84)
Purchase of property and equipment . - (16,797) - - (16,797)
Net proceeds from sale of property,
equipment and assets held for sale - 573 - - 573
Investment in and (advances to)
subsidiaries . . . . . . . . . . . (10,789) 10,874 (85) - -
Increase in long-term notes
receivables . . . . . . . . . . . - (7) (338) - (345)
Proceeds from collection of
long-term receivables . . . . . . - 30 338 - 368
Decrease in intangibles and
other assets . . . . . . . . . . . (130) (23) - - (153)
---------------------------------------------------------------------
Net cash (used in)
investing activities . . . . . . . . (10,919) (5,350) (169) - (16,438)
---------------------------------------------------------------------
Cash flows from financing activities:
Increase in revolving loan, net . . 9,200 - - - 9,200
Repayment of long-term obligations . (318) (168) - - (486)
Issuance of common stock . . . . . . 135 - - - 135
---------------------------------------------------------------------
Net cash provided by (used in)
financing activities . . . . . . . . 9,017 (168) - - 8,849
---------------------------------------------------------------------
Increase (decrease) in cash . . . . . 0 (244) (91) - (335)
Cash at beginning of fiscal year . . . 0 3,572 234 - 3,806
---------------------------------------------------------------------
Cash at end of second fiscal quarter . $ 0 $ 3,328 $ 143 $ - $ 3,471
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-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:
SECOND QUARTER FISCAL YEAR 2000 RESULTS COMPARED TO SECOND QUARTER FISCAL YEAR
1999 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Second Quarters Ended July 31, 1999, and August 1, 1998
<TABLE>
<CAPTION>
For the Second
Fiscal For the Two Fiscal
Quarter Ended Quarters Ended
---------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $155,438 $127,299 $279,081 $235,433
Cost of goods sold and expenses:
Cost of goods sold 116,522 91,695 205,949 168,449
Operating & administrative
expenses 34,005 31,548 65,177 61,064
Interest expense 2,697 2,594 5,546 5,332
-------- ----------------------------------
153,224 125,837 276,672 234,845
Income before income taxes 2,214 1,462 2,409 588
Provision from income taxes 1,058 545 1,155 264
-------- ----------------------------------
Net income $ 1,156 $ 917 $ 1,254 $ 324
Income per share- Basic $ 0.24 $ 0.20 $ 0.27 $ 0.07
Income per share- Diluted $ 0.24 $ 0.19 $ 0.26 $ 0.07
</TABLE>
-14-
<PAGE> 15
REVENUES
Revenues for the first two quarters of the current year increased $43.6 million
compared to the same period for the prior year. Revenues for the second quarter
increased $28.1 million compared to the same period for the prior year. A
summary of revenues by functional area is shown below:
<TABLE>
<CAPTION>
For the Second Fiscal For the Two Fiscal
Quarters Ended Quarters Ended
------------------------- ------------------------
July 31, August 1, July 3 August 1,
1999 1998 1999 1998
-------- ---------- -------- ---------
(in millions)
<S> <C> <C> <C> <C>
Convenience Stores $ 96.4 $ 81.6 $ 173.1 $ 150.4
Gasoline 58.8 45.5 105.5 84.7
Other .2 .2 .5 .3
-------- -------- -------- --------
Total $ 155.4 $ 127.3 $ 279.1 $ 235.4
</TABLE>
Convenience store revenues increased $22.7 million or 15.1% in the current year
first two quarters compared to the prior year first two quarters and $14.8
million, or 18.1% in the current year second quarter, as a result of comparable
corporate store sales increases of 11.7% and 14.6% for the first two quarters
and the second quarter, respectively, and the opening of twenty-four new stores
during the prior four quarters, partially offset by the closure and/or sale of
twenty-six 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 $20.8 million in the current year first two quarters
compared to the prior year and $13.3 million in the current year second quarter
compared to the prior year because total gallons sold increased 19.1 million in
the current year first two quarters compared to the prior year and 10.1 million
in the current year second quarter compared to the prior year. Gallons sold
increased as a result of the new store openings described above and a 9.7%
increase in comparable-store gallons sold for the first two quarters and a 9.9%
increase in comparable-store gallons sold for the second quarter.
-15-
<PAGE> 16
GROSS PROFITS
Gross profits increased $6.1 million for the first two quarters and $3.3 million
for the second quarter. A summary of gross profits by functional area is shown
below:
<TABLE>
<CAPTION>
For the Second Fiscal For the Two Fiscal
Quarters Ended Quarter Ended
----------------------- -----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ----------
(in millions)
<S> <C> <C> <C> <C>
Convenience Stores $ 33.3 $ 30.4 $ 61.8 $ 57.2
Gasoline 5.4 5.0 10.8 9.5
Other .2 .2 .5 .3
------- ------- ------- -------
Total $ 38.9 $ 35.6 $ 73.1 $ 67.0
</TABLE>
Convenience store gross profit increased by $4.6 million or 8.0% for the current
year first two quarters compared to the prior year, and by $2.9 million or 9.5%
in the current year second quarter. 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 $1.3 million for the current year first two
quarters compared to the prior year first two quarters, and increased $0.4
million in the current year second quarter. These increases are primarily
attributable to the increase in gallons sold, described above, offset partially
by slightly lower gasoline gross profit margins.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $4.1 million for the current
year first two quarters compared to the prior year first two quarters, and
increased $2.5 million in the current year second quarter. Operating expenses
increased as a result of higher store wages and occupancy costs associated with
the new store openings described above.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense increased $0.2 million for the current year first two quarters
compared to the prior year first two quarters, and increased $0.1 million in the
current year second quarter, 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 two quarters of
fiscal 2000 and 1999.
-16-
<PAGE> 17
The effective tax rate for the Company was 47.9% and 44.9% for the first two
quarters of fiscal year 2000 and 1999, respectively, and 47.8% and 37.3% for the
second quarters of fiscal year 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 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
July 31, 1999, Dairy Mart had $10.3 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 July 31, 1999, Dairy Mart had $19 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 two fiscal quarters, net cash provided by
operating activities decreased $0.8 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 a net change in other assets and liabilities. The
net change in other assets and liabilities is primarily a result of lower
environmental remediation expenditures during the current year.
-17-
<PAGE> 18
CASH USED BY INVESTING ACTIVITIES
Net cash used in investing activities was $4.1 million in the current year first
two fiscal quarters compared to $16.4 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 used by financing activities was $3.2 in the current year first two
quarters compared to net cash provided of $8.8 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 and the repayment in the
current fiscal year of a mortgage related to Dairy Mart's former headquarters
facility.
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 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 a 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
-18-
<PAGE> 19
completion, with all remaining phases expected to be completed by 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 is in various stages of testing, renovating and implementing system
changes. Dairy Mart expects to complete these internal Y2K initiatives by
October, 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 currently evaluating
their responses. Contingency planning efforts are being undertaken to evaluate
alternative sources and ascertain the continuation of normal business. Such
contingency planning efforts are expected to be complete by October, 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.
-19-
<PAGE> 20
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.
-20-
<PAGE> 21
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
Pursuant to an amendment to Securities Exchange Act Rule 14a-4 ( c )(1)
which became effective June 29, 1998, the persons acting under proxies solicited
by Dairy Mart's Board of Directors in connection with Dairy Mart's 1999 annual
meeting of stockholders will have discretionary authority to vote the shares
represented thereby on any matter properly presented by a stockholder at such
meeting that is not specifically set forth in the notice of such meeting if
Dairy Mart does not have notice of such matter on or before April 15, 1999
(unless the date of the 1999 annual meeting is changed by more than 30 days from
June 10, 1999 in which event such persons will have such discretionary authority
if Dairy Mart does not have notice of such matter a reasonable time before Dairy
Mart mails its proxy materials for such meeting).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
1. Exhibit (11)- Statement re Computation of Per-Share
Earnings.
2. Exhibit (27) - Financial Data Schedule.
Submitted in electronic format only.
b) Reports on Form 8-K
During the second quarter of fiscal year 2000, the
Company filed no reports on Form 8-K.
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
DAIRY MART CONVENIENCE STORES, INC.
DATE: September 14, 1999 /s/ Gregory G. Landry
----------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
-22-
<PAGE> 1
EXHIBIT 11
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATIONS OF PER-SHARE EARNINGS
(in thousands, except per share amounts)
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Second Fiscal For the Two Fiscal
Quarter Ended Quarters Ended
---------------------------------------------------
July 31, August 1, July 31 August 1,
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . $1,156 $ 917 $1,254 $ 324
Weighted average shares . . . . . . . . . 4,718 4,670 4,714 4,666
Dilutive options . . . . . . . . . . . 84 81 72 85
---------------------------------------------------
Total shares for EPS purposes . . . . . . 4,802 4,751 4,786 4,751
- ------------------------------------------------------------------------------------------------------
Earnings per share - Basic . . . . . . . . $ 0.24 $ 0.20 $ 0.27 $ 0.07
Earnings per share - Diluted . . . . . . $ 0.24 $ 0.19 $ 0.26 $ 0.07
- ------------------------------------------------------------------------------------------------------
</TABLE>
-23-
<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> MAY-02-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,394
<SECURITIES> 3,145
<RECEIVABLES> 21,122
<ALLOWANCES> (2,074)
<INVENTORY> 27,761
<CURRENT-ASSETS> 55,986
<PP&E> 161,997
<DEPRECIATION> (56,146)
<TOTAL-ASSETS> 187,045
<CURRENT-LIABILITIES> 64,025
<BONDS> 103,996
0
0
<COMMON> 67
<OTHER-SE> 10,472
<TOTAL-LIABILITY-AND-EQUITY> 187,045
<SALES> 0
<TOTAL-REVENUES> 155,438
<CGS> 116,522
<TOTAL-COSTS> 150,527
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,697
<INCOME-PRETAX> 2,214
<INCOME-TAX> 1,058
<INCOME-CONTINUING> 1,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,156
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
