<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 28, 2000
|_| 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 COMMON STOCK OUTSTANDING DECEMBER 6, 2000 - 4,999,479
<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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues..................................................... $ 180,723 $ 156,424 $ 549,467 $ 438,211
Cost of goods sold and expenses:
Cost of goods sold........................................ 144,276 118,138 435,631 328,156
Operating and administrative expenses..................... 39,986 34,711 116,138 98,624
Interest expense.......................................... 3,372 2,627 9,794 8,058
---------- ------------- ------------ -----------
187,634 155,476 561,563 434,838
---------- ------------- ------------ -----------
Income (loss) before incomes taxes........................... (6,911) 948 (12,096) 3,373
Benefit from (provision for) income taxes.................... 2,763 (437) 5,157 (1,593)
---------- ------------- ------------ -----------
Net income (loss)............................................ $ (4,148) $ 511 $ (6,939) $ 1,780
=========== ============= ============ ===========
Earnings (loss) per share - Basic............................ $ (0.83) $ 0.11 $ (1.41) $ 0.37
Earnings (loss) per share - Diluted.......................... $ (0.83) $ 0.10 $ (1.41) $ 0.36
</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 28, JANUARY 29,
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 2,807 $ 7,702
Short-term investments................................................... 2,855 155
Accounts and notes receivable............................................ 17,909 20,499
Inventory................................................................ 26,087 34,804
Prepaid expenses and other current assets................................ 2,001 1,704
Deferred income taxes.................................................... 1,901 2,393
-------------- --------------
Total current assets................................................... 53,560 67,257
Assets held for sale........................................................ 0 2,392
Property and equipment, net................................................. 113,782 110,946
Intangible assets, net...................................................... 13,994 14,582
Other assets, net........................................................... 17,655 14,622
-------------- --------------
Total assets................................................................... $ 198,991 $ 209,799
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations.............................. $ 22,982 $ 3,091
Accounts payable......................................................... 46,017 50,916
Accrued expenses......................................................... 7,733 11,651
Accrued interest......................................................... 1,625 3,490
-------------- --------------
Total current liabilities.............................................. 78,357 69,148
Long term obligations, less current portion above........................... 106,677 120,044
Other liabilities........................................................... 13,782 13,738
-------------- --------------
Total liabilities...................................................... 198,816 202,930
-------------- --------------
Stockholders' equity:
Common stock............................................................. 70 69
Paid-in capital.......................................................... 32,351 32,107
Retained deficit......................................................... (17,241) (10,302)
Treasury stock, at cost.................................................. (15,005) (15,005)
-------------- --------------
Total stockholders' equity............................................. 175 6,869
-------------- --------------
Total liabilities and stockholders' equity..................................... $ 198,991 $ 209,799
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 28, OCTOBER 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ (6,939) $ 1,780
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 10,711 8,863
Change in deferred income taxes.......................................... (2,771) 388
(Gain) loss on disposition of properties, net........................... 310 (1,101)
Net change in assets and liabilities:
Accounts and notes receivable.......................................... 2,910 (5,537)
Inventory.............................................................. 8,717 (6,974)
Accounts payable....................................................... (4,899) 8,953
Accrued interest....................................................... (1,865) (2,212)
Other assets and liabilities........................................... (4,764) (427)
--------------- --------------
Net cash provided by operating activities...................................... 1,410 3,733
-------------- --------------
Cash flows from investing activities:
Purchase of short-term investments.......................................... (2,700) (113)
Purchase of property and equipment, net..................................... (15,363) (15,659)
Net proceeds from sale of property, equipment and
assets held for sale..................................................... 5,158 5,953
-------------- --------------
Net cash used in investing activities.......................................... (12,905) (9,819)
--------------- --------------
Cash flows from financing activities:
Increase in revolving loan, net............................................. 4,014 7,300
Borrowings of long-term obligations......................................... 4,827 1,859
Repayment of long-term obligations.......................................... (2,486) (3,781)
Issuance of common stock.................................................... 245 74
-------------- --------------
Net cash provided by financing activities...................................... 6,600 5,452
-------------- --------------
Decrease in cash............................................................... (4,895) (634)
Cash at beginning of fiscal year............................................... 7,702 3,367
-------------- --------------
Cash at end of third fiscal quarter............................................ $ 2,807 $ 2,733
============== ==============
</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 28, 2000
(UNAUDITED)
The unaudited consolidated financial statements for Dairy Mart Convenience
Stores, Inc. and Subsidiaries ("Dairy Mart" or the "Company") 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 accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented,
and which are of a normal, recurring nature. These financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's Form 10-K, filed with the Securities and Exchange
Commission for the fiscal year ended January 29, 2000.
1. ACCOUNTING POLICIES
The financial statements included herein have been prepared in accordance with
the accounting policies described in Note 1 to the January 29, 2000 audited
consolidated financial statements included in the Company's Form 10-K. Certain
prior year amounts have been reclassified to conform to the presentation used
for the current year.
2. CHANGES IN CAPITAL ACCOUNTS
An analysis of the capital stock accounts for the first three fiscal quarters
ended October 28, 2000 follows:
<TABLE>
<CAPTION>
COMMON STOCK ISSUED PAID-IN CAPITAL IN
AT EXCESS OF
$.01 PAR VALUE AMOUNT PAR VALUE
-------------------------- -------------------- -----------------------
<S> <C> <C> <C>
Balance January 29, 2000 6,948,556 $ 69,477 $32,106,895
Employee stock purchase plan 12,935 129 32,761
Stock options exercised 32,500 325 93,285
Stock awards 43,000 430 117,820
-------------------------- -------------------- -----------------------
Balance October 28, 2000 7,036,991 $ 70,361 $ 32,350,761
-------------------------- -------------------- -----------------------
</TABLE>
As of October 28, 2000, there were 2,057,178 shares of Common Stock held as
treasury stock at an aggregate cost of $15,004,847 leaving 4,979,813 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 4,979,813 and 4,866,454 for the
third fiscal quarter ended October 28, 2000 and October 30, 1999, respectively,
and 4,931,212 and 4,861,093 for the first three fiscal quarters ended October
28, 2000 and October 30, 1999, respectively. The weighted average number of
shares used in the calculation of diluted earnings per share was 4,979,813 and
4,999,982 for the third fiscal quarter ended October 28, 2000 and October 30,
1999, respectively, and 4,931,212 and 4,945,802 for the first three fiscal
quarters ended October 28, 2000 and October 30, 1999, respectively.
5
<PAGE> 6
4. SEASONALITY
The results of operations for the first three fiscal quarters ended October 28,
2000 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 gross profits during the summer
months than during the winter months. Historically, Dairy Mart has achieved more
favorable financial results in its second and third fiscal quarters, as compared
to its first and fourth fiscal quarters.
5. SALE OF FORMER HEADQUARTERS FACILITY
During the first quarter of fiscal year 2000, Dairy Mart sold its former
headquarters facility in Enfield, Connecticut for $5.3 million. As a result,
Dairy Mart recognized an $858,000 pre-tax gain on the sale. A portion of the
sale proceeds were used to repay in full a related mortgage of $2.5 million.
6. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
Dairy Mart's payment obligations under the Series A and Series B Senior
Subordinated Notes are guaranteed by certain of Dairy Mart's subsidiaries
("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed
on an unsecured, senior subordinated, joint and several basis by each of the
Guarantor Subsidiaries. The following supplemental financial information sets
forth, on a consolidating basis, statements of operations, balance sheets and
cash flow information for Dairy Mart Convenience Stores, Inc. ("Parent
Company"), for the Guarantor Subsidiaries and for Financial Opportunities, Inc.
("FINOP"), Dairy Mart's non-guarantor subsidiary. Separate complete financial
statements of the respective Guarantor Subsidiaries would not provide additional
information which would be useful in assessing the financial condition of the
Guarantor Subsidiaries, and are omitted accordingly.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and inter-company balances and
transactions.
7. LONG-TERM OBLIGATIONS
The Company has amended its existing revolving credit agreement. Among the items
amended were certain financial covenants to remove conditions of violation under
the former covenants and the addition of a requirement for the Company to reduce
to zero the balance under the revolving credit loans for at least 30 consecutive
days during the period between July 1 and September 30 each year. Additionally,
the amendment requires the Company to make a prepayment of not less than
$20,000,000 on March 15, 2001. Accordingly, the outstanding balance of $18.3
million on the credit agreement at October 28, 2000, has been classified as a
current liability in the accompanying balance sheet.
6
<PAGE> 7
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 28, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 211 $ 549,085 $ 171 $ - $ 549,467
Cost of goods sold and expenses:
Cost of goods sold.............................. - 435,631 - - 435,631
Operating and administrative expenses .......... 262 115,860 16 - 116,138
Interest expense................................ 9,297 316 181 - 9,794
------------ ------------ ---------- --------- -----------
9,559 551,807 197 - 561,563
------------ ------------ ---------- --------- -----------
Loss before income taxes
and equity in income (loss) of
consolidated subsidiaries.................... (9,348) (2,722) (26) - (12,096)
Benefit from income taxes.......................... 4,300 845 12 - 5,157
------------ ------------ ---------- --------- -----------
Loss before equity in
income (loss) of consolidated subsidiaries...... (5,048) (1,877) (14) - (6,939)
Equity in income (loss) of consolidated
subsidiaries.................................... (1,891) (14) - 1,905 -
------------- ------------- ---------- --------- -----------
Net income (loss) ........................... $ (6,939) $ (1,891) $ (14) $ 1,905 $ (6,939)
============= ============= =========== ========= ============
</TABLE>
7
<PAGE> 8
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
AS OF OCTOBER 28, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash ....................................... $ - $ 2,801 $ 6 $ - $ 2,807
Short-term investments...................... - 1 2,854 - 2,855
Accounts and notes receivable............... 2,153 15,199 557 - 17,909
Inventory................................... - 26,087 - - 26,087
Prepaid expenses and other current assets... 13 1,988 - - 2,001
Deferred income taxes....................... - 1,901 - - 1,901
----------- ----------- --------- ----------- -----------
Total current assets................... 2,166 47,977 3,417 - 53,560
Assets held for sale........................... - - - - -
Property and equipment, net.................... - 113,782 - - 113,782
Intangible assets, net......................... - 13,994 - - 13,994
Other assets, net.............................. 3,484 13,109 1,062 - 17,655
Investment in and (advances to) subsidiaries... 133,277 1,232 711 (135,220) -
----------- ----------- --------- ----------- -----------
Total assets................................... $ 138,927 $ 190,094 $ 5,190 $ (135,220) $ 198,991
=========== =========== ========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations.............................. $ 22,064 $ 918 $ - $ - $ 22,982
Accounts payable............................ 27,094 18,923 - - 46,017
Accrued expenses............................ 243 7,441 49 - 7,733
Accrued interest............................ 1,557 - 68 - 1,625
----------- ----------- --------- ----------- -----------
Total current liabilities................ 50,958 27,282 117 - 78,357
Long term obligations, less
current portion above....................... 87,794 15,753 3,130 - 106,677
Other liabilities.............................. - 13,782 - - 13,782
Stockholders' equity........................... 175 133,277 1,943 (135,220) 175
----------- ----------- --------- ----------- -----------
Total liabilities and stockholders' equity..... $ 138,927 $ 190,094 $ 5,190 $ (135,220) $ 198,991
=========== =========== ========= =========== ===========
</TABLE>
8
<PAGE> 9
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 28, 2000
(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........................ $ (9,760) $ 10,938 $ 232 $ - $ 1,410
------------ ------------- ----------- ---------- -----------
Cash flows from investing activities:
Purchase of and change in short-term
investments.............................. - 154 (2,854) - (2,700)
Purchase of property and equipment.......... - (15,363) - - (15,363)
Net proceeds from sale of property,
equipment and assets held for sale....... - 5,158 - - 5,158
Investment in and (advances to)
subsidiaries............................ 5,351 ( 4,941) (410) - -
----------- -------------- ----------- ---------- -----------
Net cash (used in) provided by
investing activities..................... 5,351 (14,992) (3,264) - (12,905)
----------- -------------- ----------- ---------- -----------
Cash flows from financing activities:
Increase in revolving loan, net............. 2,266 1,748 - - 4,014
Borrowings of long term obligations......... - 4,827 - - 4,827
Repayment of long-term obligations.......... 1,693 (4,179) - - (2,486)
Issuance of common stock.................... 244 1 - - 245
----------- ------------- ----------- ---------- -----------
Net cash provided by
financing activities....................... 4,203 2,397 - - 6,600
----------- ------------- ----------- ---------- -----------
Decrease in cash............................... (206) (1,657) (3,032) - (4,895)
Cash at beginning of fiscal year............... 206 4,458 3,038 - 7,702
----------- ------------- ----------- ---------- -----------
Cash at end of third fiscal quarter............ $ - $ 2,801 $ 6 $ - $ 2,807
=========== ============= =========== ========== ===========
</TABLE>
9
<PAGE> 10
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.............................. - 328,156 - - 328,156
Operating and administrative expenses .......... 224 98,383 17 - 98,624
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 (loss) of consolidated subsidiaries...... (4,685) 6,419 46 - 1,780
Equity in income (loss) of consolidated
subsidiaries.................................... 6,465 46 - (6,511) -
------------ ------------ ---------- --------- -----------
Net income (loss)........................... $ 1,780 $ 6,465 $ 46 $ (6,511) $ 1,780
============ ============ ========== ========= ===========
</TABLE>
10
<PAGE> 11
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
AS OF JANUARY 29, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR
COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash ....................................... $ 206 $ 4,458 $ 3,038 $ - $ 7,702
Short-term investments...................... - 155 - - 155
Accounts and notes receivable............... 3,526 16,199 774 - 20,499
Inventory................................... - 34,804 - - 34,804
Prepaid expenses and other current assets... 71 1,633 - - 1,704
Deferred income taxes....................... - 2,393 - - 2,393
----------- ------------- ----------- ------------- -----------
Total current assets..................... 3,803 59,642 3,812 - 67,257
Assets held for sale........................... - 2,392 - - 2,392
Property and equipment, net.................... - 110,946 - - 110,946
Intangible assets, net......................... - 14,582 - - 14,582
Other assets, net.............................. 1,820 11,735 1,067 - 14,622
Investment in and (advances to)
subsidiaries................................ 140,164 1,638 301 (142,103) -
----------- ------------- ----------- ------------ -----------
Total assets................................... $ 145,787 $ 200,935 $ 5,180 $ (142,103) $ 209,799
=========== ============= =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long term obligations.................... $ 2,008 $ 1,083 $ - $ - $ 3,091
Accounts payable............................ 28,056 22,860 - - 50,916
Accrued expenses............................ 119 11,493 39 - 11,651
Accrued interest............................ 3,417 1 72 - 3,490
----------- ------------- ----------- ------------- -----------
Total current liabilities................ 33,600 35,437 111 - 69,148
Long term obligations, less
current portion above....................... 105,318 11,596 3,130 - 120,044
Other liabilities.............................. - 13,738 - - 13,738
Stockholders' equity........................... 6,869 140,164 1,939 (142,103) 6,869
----------- ------------- ----------- ------------ -----------
Total liabilities and
stockholders' equity........................ $ 145,787 $ 200,935 $ 5,180 $ (142,103) $ 209,799
=========== ============= =========== ============ ===========
</TABLE>
11
<PAGE> 12
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:
Purchase of and change 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
Borrowings of long-term obligations......... 1,859 - - - 1,859
Repayment of long-term obligations.......... (3,618) (163) - - (3,781)
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>
12
<PAGE> 13
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
THIRD QUARTER FISCAL YEAR 2001 RESULTS COMPARED TO THIRD QUARTER FISCAL YEAR
2000 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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----- ----- ----- ----
<S> <C> <C> <C> <C>
Revenues.......................................... $ 180,723 $ 156,424 $ 549,467 $ 438,211
Cost of goods sold and expenses:
Cost of goods sold............................. 144,276 118,138 435,631 328,156
Operating & administrative expenses........... 39,986 34,711 116,138 98,624
Interest expense............................... 3,372 2,627 9,794 8,058
----------- ---------- ----------- ----------
187,634 155,476 561,563 434,838
----------- ---------- ----------- ----------
Income (loss) before income taxes................. (6,911) 948 (12,096) 3,373
Benefit from (provision for) income taxes......... 2,763 (437) 5,157 (1,593)
----------- ---------- ----------- ----------
Net income (loss)................................. $ (4,148) $ 511 $ (6,939) $ 1,780
============ ========== =========== ==========
Income (loss) per share- Basic.................... $ (0.83) $ 0.11 $ (1.41) $ 0.37
Income (loss) per share- Diluted.................. $ (0.83) $ 0.10 $ (1.41) $ 0.36
</TABLE>
13
<PAGE> 14
REVENUES
Revenues for the third fiscal quarter increased $24.3 million compared to the
same period for the prior fiscal year. Revenues for the first three fiscal
quarters increased $111.3 million compared to the same period for the prior
fiscal 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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----- ----- ----- ----
<S> <C> <C> <C> <C>
Convenience Stores............................... $ 94.9 $ 93.0 $ 285.7 $ 268.8
Gasoline......................................... 85.6 63.1 263.0 168.6
Other ........................................... .2 .3 .8 .8
-------- -------- ---------- --------
Total ........................................... $ 180.7 $ 156.4 $ 549.5 $ 438.2
======== ======== ========= ========
</TABLE>
Convenience store revenues increased $1.9 million, or 2.0%, for the third fiscal
quarter compared to the same period for the prior fiscal year. This increase was
primarily due to a 0.3% increase in comparable convenience store merchandise
sales, the opening of sixteen new stores during the four fiscal quarters ended
October 28, 2000, partially offset by the sale or closure of fifty-two
underperforming stores during the same period, and the implementation of a
surcharge on automated teller machine transactions.
Convenience store revenues increased $16.9 million, or 6.3%, for the first three
fiscal quarters compared to the same period for the prior fiscal year. This
increase was primarily due to a 3.7% increase in comparable convenience store
merchandise sales, partially offset by the net reduction in the number of
stores, as described above.
Gasoline revenues increased $22.5 million for the third fiscal quarter compared
to the same period for the prior fiscal year. This increase consisted of $8.3
million in revenues based on an increase of 6.9 million gallons of gasoline
sold, or 13.2%, compared to the same period for the prior fiscal year, and an
increase of $14.2 million based on an increase in the average selling price of
gasoline of 24.2 cents per gallon compared to the same period for the prior
fiscal year.
Gasoline revenues increased $94.4 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. This increase consisted
of $30.7 million in revenues based on an increase of 27.6 million gallons of
gasoline sold, or 18.2%, compared to the same period for the prior fiscal year,
and an increase of $63.7 million based on an increase in the average selling
price of gasoline of 35.5 cents per gallon compared to the same period for the
prior fiscal year.
14
<PAGE> 15
GROSS PROFITS
Gross profits decreased $1.9 million for the third fiscal quarter compared to
the same period for the prior fiscal year. Gross profits increased $3.7 million
for the first three fiscal quarters compared to the same period for the prior
fiscal year. 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 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----- ----- ----- ----
<S> <C> <C> <C> <C>
Convenience Stores............................... $ 31.4 $ 31.7 $ 95.6 $ 92.2
Gasoline......................................... 4.8 6.3 17.4 17.1
Other ........................................... .2 .3 .8 .8
-------- -------- ---------- --------
Total ........................................... $ 36.4 $ 38.3 $ 113.8 $ 110.1
======== ======== ========= ========
</TABLE>
Convenience store gross profits decreased $0.3 million, or 0.9%, for the third
fiscal quarter compared to the same period for the prior fiscal year. This
decrease was primarily attributable to an increase in cigarette sales relative
to total sales, as compared to the same period for the prior fiscal year.
Cigarette sales experience a lower gross profit margin than merchandise sales in
total. Additionally, the Company experienced a reduction in the gross profit
margin of tobacco products, which resulted from increases in wholesale costs
during the four fiscal quarters ended October 28, 2000.
Convenience store gross profits increased $3.4 million, or 3.7%, for the first
three fiscal quarters compared to the same period for the prior fiscal year.
This increase was primarily attributable to the increase in convenience store
revenues for the current year first three fiscal quarters, as described in the
Revenues section of this analysis, partially offset by lower tobacco gross
profit margins, as described above.
Gasoline gross profits decreased $1.5 million for the third fiscal quarter
compared to the same period for the prior fiscal year. This decrease was
primarily attributable to a reduction in the average gasoline profit margin of
4.0 cents per gallon compared to the same period for the prior fiscal year. The
average cost of gasoline increased 26.5 cents per gallon, or 24%, for the third
fiscal quarter compared to the same period for the prior year. Competitive
pressure in the gasoline markets served by the Company held the average retail
sales price of gasoline to an increase of 20% for the third fiscal quarter,
compared to the same period for the prior year. Additionally, the increased
average retail sales price of gasoline and increased volume of "pay at the pump"
transactions, caused credit card fees to increase $0.4 million during the third
fiscal quarter compared to the same period for the prior fiscal year.
Gasoline gross profits increased $.3 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. This increase was the net
result of additional gasoline gross profit, based on the revenue increase
described in the Revenues section of this analysis, largely offset by a
reduction in the average gasoline gross profit margin of 1.6 cents per gallon
compared to the same period for the prior fiscal year.
15
<PAGE> 16
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $5.3 million for the third
fiscal quarter compared to the same period for the prior fiscal year. Operating
and administrative expenses increased $17.5 million for the first three fiscal
quarters compared to the same period for the prior fiscal year. A summary of
operating and administrative expenses is shown below:
<TABLE>
<CAPTION>
FOR THE THIRD FISCAL FOR THE THREE FISCAL
QUARTER ENDED QUARTERS ENDED
-------------- --------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----- ----- ----- ----
<S> <C> <C> <C> <C>
Operating Expenses............................... $ 31.0 $ 27.8 $ 92.3 $ 81.3
General & Administrative Expenses................ 9.0 6.9 23.8 17.3
-------- -------- --------- --------
Total ........................................... $ 40.0 $ 34.7 $ 116.1 $ 98.6
======== ======== ========= ========
</TABLE>
Operating expenses increased $3.2 million for the third fiscal quarter compared
to the same period for the prior fiscal year. This increase was primarily due to
an increase in store labor costs, gasoline equipment maintenance and rental
costs, advertising costs, and occupancy expenses.
Operating expenses increased $11.0 million for the first three fiscal quarters
compared to the same period for the prior fiscal year. This increase was
primarily due to an increase in store labor costs, gasoline equipment
maintenance and rental costs, depreciation expense, and occupancy expenses.
General and administrative expenses increased $2.1 million for the third fiscal
quarter compared to the same period for the prior fiscal year. This increase was
primarily due to a $1.3 million charge related to the settlement of a lawsuit
involving the recovery of costs associated with a previously settled shareholder
derivative action. The current settlement is described more fully in the Legal
Proceedings section of this document. Additionally, general and administrative
expenses increased by $0.5 million as a result of costs incurred to sell or
close underperforming stores.
General and administrative expenses increased $6.5 million for the first three
fiscal quarters compared to the same period for the prior fiscal year. This
increase was primarily due to the $1.3 million settlement described in the
preceding paragraph, a $1.7 million increase in costs incurred to sell or close
under-performing stores, and $0.9 million associated with corporate governance
activities, including the ongoing review of the Company's strategic
alternatives. Additionally, general and administrative expenses for the first
three fiscal quarters of the prior fiscal year are presented net of a $1.2
million gain recognized on the sale of assets. The balance of the increase in
general and administrative expenses was primarily related to an increase in
insurance costs.
16
<PAGE> 17
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense increased $.7 million for the third fiscal quarter compared to
the same period for the prior fiscal year. Interest expense increased $1.7
million for the first three fiscal quarters compared to the same period for the
prior fiscal year. The increase for the third fiscal quarter and the first three
fiscal quarters, as compared to the same periods for the prior fiscal year, was
primarily attributable to an increase in capital lease borrowings, an increase
in the average outstanding balance of the revolving credit facility and an
increase in interest rates.
As noted in the analyses above, the Company experienced increases in the cost of
tobacco products, gasoline and wages during the first three quarters of the
current fiscal year.
The effective tax rate for the Company was a benefit of 43% for the first three
quarters of the current fiscal year and a provision of 47% for the same period
of the prior fiscal year. The effective tax rates are higher than the statutory
rates due to nondeductible amortization of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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. The Company 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 28, 2000, the Company had $18.3 million in
outstanding revolving credit loans and had $5.4 million in outstanding letters
of credit under the facility. The terms of the credit facility have been amended
to change certain financial covenants for the fiscal third quarter and to
require the Company to (a) make a prepayment of not less than $20 million on or
before March 15, 2001 and (b) to reduce annually the outstanding revolving loan
amounts to zero for 30 consecutive days during the period from July 1 through
September 30. These amounts would be available for reborrowing after these
requirements are met. The Company, through proceeds derived from the sale of
underperforming stores, the execution of long-term vendor agreements, and other
arrangements, expects to meet these obligations and currently has letters of
intent with respect to various of these agreements and arrangements. There can
be no assurance, however, that the Company will be able to sell the stores or
enter into long-term vendor contracts or other arrangements on terms, if at all,
that will generate sufficient cash to repay the requisite amounts under the
senior credit facility. The Company's ability to borrow under the senior credit
facility and maintain adequate short-term liquidity is subject to the Company
meeting these requirements and other financial covenants required under the
Senior Credit Facility.
At October 28, 2000, the Company had $87.7 million, net of original issue
discount of $0.8 million, outstanding in 10.25% senior subordinated notes due
March 15, 2004.
The capital expenditures of the Company are generally funded by cash provided by
operating activities, proceeds from the sale of property, equipment and assets
held for sale and other forms of long-term asset financing or leasing including
sale/leaseback transactions.
17
<PAGE> 18
CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities was $1.4 million for the first three
fiscal quarters of the current fiscal year compared to $3.7 million for the same
period of the prior fiscal year. This decrease was primarily due to a decrease
in net income. This decrease was partially offset by a decrease in inventory
netted against a corresponding decrease in accounts payable.
CAPITAL EXPENDITURES
The Company had previously disclosed that it anticipated spending approximately
$15.3 million, net of sale leaseback transactions, for capital expenditures in
fiscal year 2001 by purchasing store and gasoline equipment for up to fifteen
new stores, remodeling a certain number of existing store and gasoline
locations, and implementing or upgrading office and store technology. During the
first three fiscal quarters of the current fiscal year, the Company opened eight
new locations. In May, 2000 the Company announced that it retained an investment
banker to explore all the Company's strategic alternatives, including the
possible sale of the Company. As a result, the Company expects that the balance
of the new store openings and related capital expenditures will be deferred
pending the results of this evaluation of strategic alternatives.
ENVIRONMENTAL RESPONSIBILITY
The Company's financial statements are prepared in conformity with 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. The Company 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.
SIGNIFICANT EVENTS
During the summer and fall of 2000, the Company has been conducting a process of
reviewing its strategic alternatives, including a potential sale of the Company.
As part of that process, the Company received two formal indications of interest
at the end of July, 2000. These parties conducted further due diligence on the
Company. One of these bidders declined to make a definitive offer. At the
request of the other bidder, the Company's Board of Directors (the "Board")
twice extended the deadline for submission of definitive offers to October 13,
2000. Approximately one week before the deadline, a new bidder also offered to
submit a proposal on the due date. At a meeting of the Board on October 12,
2000, Mr. Stein, the Chairman, President and Chief Executive Officer of the
Company, expressed his concern that, based upon comments by the bidders in the
due diligence process, the level of the anticipated bids would be disappointing.
He further informed the Board that he might be interested in making a proposal
to acquire the Company for a price higher than what the other bidders might
offer. The Board determined to isolate Mr. Stein from the third-party proposals
and authorized Mr. Stein to try to put together a proposal to acquire the
Company.
On October 13, 2000 the Company's advisors received two third-party proposals,
one of which still required extensive due diligence. On October 17, 2000, after
an indication by Mr. Stein that he intended to submit a proposal to acquire the
Company, the Board formed a special committee of independent directors to review
and evaluate all proposals for the Company, including Mr. Stein's which was
subsequently received on October 23, 2000. Mr. Stein's proposal offered the
highest price but was subject to certain contingencies. Each of these proposals
required further clarification and refinement. The Special Committee's advisors
engaged in extensive discussions with these bidders in order to clarify and
improve each of these proposals. One third-party bidder requested a 60-day
exclusive opportunity to conduct due diligence and secure financing. The Special
Committee declined to accept this request. On November 20, 2000, the other
third-party bidder, which had conducted extensive due diligence, withdrew its
original offer citing the recent negative operating trends of the Company.
18
<PAGE> 19
On December 6, 2000, upon the receipt of a revised proposal from Mr. Stein, the
Special Committee authorized Mr. Stein to continue to attempt to complete an
acquisition of the Company with the full support of the Board, the Company and
its advisors. Mr. Stein is currently in the process of finalizing the structure
of an investment group that would pursue a proposal to acquire the Company. Mr.
Stein is negotiating with various parties to provide funds for the proposed
acquisition. Mr. Stein has advised the Committee that he currently has
commitments for up to $110 million of financing and that active discussions with
the Company's existing subordinated debtholders have begun. No assurance can be
given that Mr. Stein will be able to complete this proposal, or if it can be
completed, what form it may take or the ultimate value stockholders may realize.
BUSINESS OUTLOOK
This Form 10-Q contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are generally identified by the words
"anticipate", "believe", "expect", "plan", "intend", "should", "estimate", and
similar expressions. These forward-looking statements include statements
relating to the Company's plans and objectives to upgrade and remodel store
locations, to build new stores, to sell or lease certain assets, to explore
strategic alternatives, including the possible sale of the Company, as well as
the availability of supplies of gasoline, the estimated costs for environmental
remediation and the sufficiency of the Company's liquidity and the availability
of capital. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to, the
availability of financing and additional capital to fund the Company's business
strategy on acceptable terms, if at all, the future profitability of the
Company, the availability of desirable store locations, the Company's ability to
negotiate and enter into lease, acquisition and supply agreements on acceptable
terms, competition and pricing in the Company's market area, volatility in the
wholesale gasoline market due to supply interruptions, modifications of
environmental regulatory requirements, detection of unanticipated environmental
conditions, the timing of reimbursements from state environmental trust funds,
the Company's ability to manage its long-term indebtedness, weather conditions,
the favorable resolution of certain pending and future litigation, general
economic conditions and other factors disclosed in this Form 10-Q and the
Company's other filings with the Securities and Exchange Commission. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in an action brought by a former supplier of certain
dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and
Dairy Mart, Inc., Civil Action No. 397CU00894 (US District Court, CT). The
defendants are contesting the claims and, at this time, the Company is not able
to determine what the results of this litigation will be. The trial was
completed on December 7, 2000 and it is not known when the judge will issue his
ruling. The Company has recognized no provision for any possible loss in the
accompanying financial statements. The action is more fully described in the
Company's Form 10-K for the fiscal year ended January 29, 2000 as filed with the
Securities and Exchange Commission.
The Company was a plaintiff in an action entitled Dairy Mart Convenience Stores,
Inc. v. RLI Insurance Group and RLI Insurance Company and RLI Corporation, Civil
Action Number 5:00 CV 1043 (US District Court for the Northern District of Ohio,
Eastern Division), brought against RLI Insurance Group to recover $3.0 million
under the Company's directors and officers excess liability insurance policy for
legal fees incurred in the course of defending certain directors and officers of
the Company in the Dairy Mart Convenience Stores, Inc. Derivative Litigation.
The $3.0 million was recorded as a receivable by the Company. On November 28,
2000, the Company reached an agreement in principle with RLI Insurance Group to
settle the litigation for $1.8 million. Accordingly, a reduction in accounts
receivable and other costs related to this settlement were recognized in the
amount of $1.3 million during the third quarter and were included in general and
administrative expenses.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
1. Exhibit (10.1.1) - Third Amendment to Credit Agreement,
dated as of October 27, 2000 among the Company, the
Banks from time to time parties hereto and Citizens
Bank of Connecticut, as agent is filed herewith.
2. Exhibit (11) - Statement re Computation of Per-Share
Earnings.
3. Exhibit (27) - Financial Data Schedule. Submitted in
electronic format only.
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 12, 2000 /S/ GREGORY G. LANDRY
-----------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
20
