10-Q 1 l83807ae10-q.txt DAIRY MART CONVENIENCE STORES, INC. FORM 10-Q 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 JULY 29, 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 SEPTEMBER 6, 2000 - 4,979,813 -1- 2 PART I. FINANCIAL INFORMATION DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
FOR THE FISCAL FOR THE TWO FISCAL QUARTER ENDED QUARTERS ENDED ------------- -------------- JULY 29, JULY 31, JULY 29, JULY 31, 2000 1999 2000 1999 ---- ---- ---- ---- ------------------------------------------------------------------------------------------------------------------------------ Revenues ................................ $ 195,810 $ 155,550 $ 368,744 $ 281,903 Cost of goods sold and expenses: Cost of goods sold .................... 153,943 117,079 291,353 210,034 Operating and administrative expenses.. 38,414 33,560 76,151 63,914 Interest expense ...................... 3,295 2,697 6,422 5,546 --------- --------- --------- --------- 195,652 153,336 373,926 279,494 --------- --------- --------- --------- Income (loss) before income taxes ....... 158 2,214 (5,182) 2,409 Benefit from (provision for) income taxes ............................. (64) (1,058) 2,394 (1,155) --------- --------- --------- --------- Net income (loss) ..................... $ 94 $ 1,156 $ (2,788) $ 1,254 ------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per share - Basic ....... $ 0.02 $ 0.24 $ (0.57) $ 0.26 Earnings (loss) per share - Diluted ..... $ 0.02 $ 0.23 $ (0.57) $ 0.25
The accompanying notes are an integral part of these financial statements. -2- 3 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)
JULY 29, 2000 JANUARY 29, 2000 -------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash ...................................................... $ 5,194 $ 7,702 Short-term investments .................................... 2,882 155 Accounts and notes receivable ............................. 20,901 20,499 Inventory ................................................. 29,320 34,804 Prepaid expenses and other current assets ................. 2,113 1,704 Deferred income taxes ..................................... 1,636 2,393 --------- --------- Total current assets ................................... 62,046 67,257 Assets held for sale .......................................... 1,646 2,392 Property and equipment, net ................................... 113,359 110,946 Intangible assets, net ........................................ 14,188 14,582 Other assets, net ............................................. 15,497 14,622 --------- --------- Total assets .................................................. $ 206,736 $ 209,799 ---------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations ............... $ 3,403 $ 3,091 Accounts payable .......................................... 50,069 50,916 Accrued expenses .......................................... 9,193 11,651 Accrued interest .......................................... 4,008 3,490 --------- --------- Total current liabilities ............................... 66,673 69,148 Long-term obligations, less current portion above ............. 122,295 120,044 Other liabilities ............................................. 13,502 13,738 Stockholders' equity: Common stock .............................................. 70 69 Paid-in capital ........................................... 32,291 32,107 Retained deficit .......................................... (13,090) (10,302) Treasury stock, at cost ................................... (15,005) (15,005) --------- --------- Total stockholders' equity ............................. 4,266 6,869 --------- --------- Total liabilities and stockholders' equity .................... $ 206,736 $ 209,799 ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. -3- 4 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
FOR THE TWO FISCAL QUARTERS ENDED JULY 29, JULY 31, 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) .......................................... $ (2,788) $ 1,254 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............................. 7,132 5,716 Change in deferred income taxes ............................ (2,691) 1,155 (Gain) loss on disposition of properties, net .............. 219 (1,516) Net change in assets and liabilities: Accounts and notes receivable ............................ (84) (3,210) Inventory ................................................ 5,484 (3,468) Accounts payable ......................................... (847) 7,186 Accrued interest ......................................... 518 18 Other assets and liabilities ............................. (1,178) (257) ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities ...................... 5,765 6,878 ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of short-term investments .......................... (2,727) (421) Purchase of property and equipment .......................... (13,002) (10,065) Net proceeds from sale of property, equipment and assets held for sale ...................................... 4,816 5,887 ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities .......................... (10,913) (4,599) ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase in revolving loan, net ............................. 1,680 100 Borrowings of long-term obligations ......................... 2,266 -- Repayment of long-term obligations .......................... (1,491) (3,380) Issuance of common stock .................................... 185 28 ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities ............ 2,640 (3,252) ---------------------------------------------------------------------------------------------------------- Decrease in cash ............................................... (2,508) (973) Cash at beginning of fiscal year ............................... 7,702 3,367 ---------------------------------------------------------------------------------------------------------- Cash at end of second fiscal quarter ........................... $ 5,194 $ 2,394 ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. -4- 5 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 29, 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 generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature. 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 two fiscal quarters ended July 29, 2000 follows:
COMMON STOCK ISSUED PAID-IN CAPITAL IN AT EXCESS OF $.01 PAR VALUE AMOUNT PAR VALUE -------------- ------ --------- Balance January 29, 2000 6,948,556 $69,477 $32,106,895 Employee stock purchase plan 12,935 129 32,761 Stock options exercised 11,875 119 34,256 Stock awards 43,000 430 117,820 --------- ------- ----------- Balance July 29, 2000 7,016,366 $70,155 $32,291,732 --------- ------- -----------
As of July 29, 2000, there were 2,057,178 shares of Common Stock held as treasury stock at an aggregate cost of $15,004,847 leaving 4,959,188 shares outstanding. -5- 6 3. Earnings (Loss) Per Share Earnings (loss) per share is based on the weighted average number of shares outstanding, including the dilutive effect of stock options, if appropriate, during each period. The weighted average number of shares used in the calculation of basic earnings per share were 4,918,229 and 4,861,686 for the second fiscal quarters ended July 29, 2000 and July 31, 1999, respectively, and 4,906,912 and 4,858,413 for the first two fiscal quarters ended July 29, 2000 and July 31, 1999, respectively. The weighted average number of shares used in the calculation of diluted earnings per share were 5,138,783 and 4,946,245 for the second fiscal quarters ended July 29, 2000 and July 31, 1999, respectively, and 4,906,912 and 4,918,712 for the first two fiscal quarters ended July 29, 2000 and July 31, 1999, respectively. 4. Seasonality The results of operations for the first two fiscal quarters ended July 29, 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 profit margins during the summer months than during the winter months. Historically, Dairy Mart has achieved more favorable financial results in its second and third fiscal quarters, as compared to its first and fourth fiscal quarters. 5. Sale of Former Headquarters Facility During the first quarter of fiscal year 2000, Dairy Mart sold its former headquarters facility in Enfield, Connecticut for $5.3 million. As a result, Dairy Mart recognized an $858,000 pre-tax gain on the sale. A portion of the sale proceeds were used to repay in full a related mortgage of $2.5 million. -6- 7 6. Supplemental Consolidating Financial Information (unaudited) The Company's payment obligations under the Series A and Series B Senior Subordinated Notes (the "Notes") are guaranteed by certain of the Company's subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by each of the Guarantor Subsidiaries. The following supplemental financial information sets forth, on 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"), the Company's non-guarantor subsidiary. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries, and are 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- 8 Supplemental Consolidating Statement of Operations for the Two Fiscal Quarters Ended July 29, 2000 (in thousands)
Parent Guarantor Company Subsidiaries FINOP Eliminations Consolidated ------- ------------ ----- ------------ ------------ Revenues .......................................... $ 171 $ 368,461 $ 112 $ -- $ 368,744 Cost of goods sold and expenses: Cost of goods sold .............................. -- 291,353 -- -- 291,353 Operating and administrative expenses ........... 171 75,970 10 -- 76,151 Interest expense ................................ 5,957 343 122 -- 6,422 ------------------------------------------------------------------------ 6,128 367,666 132 -- 373,926 ------------------------------------------------------------------------ Income (loss) before income taxes and equity in income (loss) of consolidated subsidiaries ...................... (5,957) 795 (20) -- (5,182) Benefit from (provision for) income taxes .................................. 2,740 (355) 9 -- 2,394 ------------------------------------------------------------------------ Income (loss) before equity in income of consolidated subsidiaries ........... (3,217) 440 (11) -- (2,788) Equity in income (loss) of consolidated subsidiaries .................................. 429 (11) -- (418) -- --------- --------- ----- --------- --------- Net income (loss) ............................. $ (2,788) $ 429 $ (11) $ (418) $ (2,788) ===================================================================================================================================
-8- 9 Supplemental Consolidating Balance Sheet as of July 29, 2000 (in thousands)
Parent Guarantor Company Subsidiaries FINOP Eliminations Consolidated ------- ------------ ----- ------------ ------------ ASSETS Current assets: Cash ........................................... $ 2,617 $ 2,465 $ 112 $ -- $ 5,194 Short-term investments ......................... -- -- 2,882 -- 2,882 Accounts and notes receivable .................. 3,233 17,069 599 -- 20,901 Inventory ...................................... -- 29,320 -- -- 29,320 Prepaid expenses and other current assets ............................... 32 2,081 -- -- 2,113 Deferred income taxes .......................... -- 1,636 -- -- 1,636 -------------------------------------------------------------------- Total current assets ......................... 5,882 52,571 3,593 -- 62,046 Assets held for sale .............................. -- 1,646 -- 1,646 Property and equipment, net ....................... -- 113,359 -- -- 113,359 Intangible assets, net ............................ -- 14,188 -- -- 14,188 Other assets, net ................................. 1,995 12,438 1,064 -- 15,497 Investment in and advances to subsidiaries ................................... 137,859 1,350 566 (139,775) -- -------------------------------------------------------------------- Total assets ...................................... $145,736 $195,552 $5,223 $(139,775) $206,736 ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations .................................. $ 2,491 $ 912 $ -- $ -- $ 3,403 Accounts payable ............................... 30,018 20,051 -- -- 50,069 Accrued expenses ............................... 95 9,052 46 -- 9,193 Accrued interest ............................... 3,877 -- 131 -- 4,008 -------------------------------------------------------------------- Total current liabilities .................... 36,481 30,015 177 -- 66,673 -------------------------------------------------------------------- Long-term obligations, less Current portion above .......................... 104,989 14,176 3,130 -- 122,295 Other liabilities ................................. -- 13,502 -- -- 13,502 Stockholders' equity .............................. 4,266 137,859 1,916 (139,775) 4,266 -------------------------------------------------------------------- Total liabilities and stockholders' equity ........................... $145,736 $195,552 $5,223 $(139,775) $206,736 ==============================================================================================================================
-9- 10 Supplemental Consolidating Statement of Cash Flows for the Two Fiscal Quarters Ended July 29, 2000 (in thousands)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ Net cash (used in) provided by operating activities ................................. $ (126) $ 5,643 $ 248 $ -- $ 5,765 ------------------------------------------------------------------ Cash flows from investing activities: Purchase of and change in short-term Investments ..................................... -- 155 (2,882) -- (2,727) Purchase of property and equipment ................ -- (13,002) -- -- (13,002) Proceeds from sale of property, Equipment and assets held for sale .............. -- 4,816 -- -- 4,816 Investment in and advances to subsidiaries .................................... 771 (479) (292) -- -- ------------------------------------------------------------------ Net cash provided by (used in) investing activities ............................ 771 (8,510) (3,174) -- (10,913) ------------------------------------------------------------------ Cash flows from financing activities: Borrowings of long-term obligations ............... -- 1,680 -- -- 1,680 Increase in revolving loan, net ................... 2,266 -- -- -- 2,266 Repayment of long-term obligations ................ (685) (806) -- -- (1,491) Issuance of common stock .......................... 185 -- -- -- 185 ------------------------------------------------------------------ Net cash provided by financing activities .............................. 1,766 874 -- -- 2,640 ------------------------------------------------------------------ Increase (decrease) in cash ......................... 2,411 (1,993) (2,926) -- (2,508) Cash at beginning of fiscal year .................... 206 4,458 3,038 -- 7,702 ------------------------------------------------------------------ Cash at end of second fiscal quarter ................ $ 2,617 $ 2,465 $ 112 $ -- $ 5,194 =============================================================================================================================
-10- 11 Supplemental Consolidating Statement of Operations for the Two Fiscal Quarters Ended July 31, 1999 (in thousands)
Parent Guarantor Company Subsidiaries FINOP Eliminations Consolidated ------- ------------ ----- ------------ ------------ Revenues .......................................... $ 116 $ 281,624 $ 163 $ -- $ 281,903 Cost of goods sold and expenses: Cost of goods sold .............................. -- 210,034 -- -- 210,034 Operating and administrative expenses ........... 152 63,751 11 -- 63,914 Interest expense ................................ 4,981 453 112 -- 5,546 --------------------------------------------------------------------- 5,133 274,238 123 -- 279,494 --------------------------------------------------------------------- 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 (loss) of consolidated subsidiaries .................................... 3,763 20 -- (3,783) -- --------------------------------------------------------------------- Net income (loss) ............................. $ 1,254 $ 3,763 $ 20 $ (3,783) $ 1,254 ==============================================================================================================================
-11- 12 Supplemental Consolidating Balance Sheet As Of January 29, 2000 (In Thousands)
Parent Guarantor Company Subsidiaries FINOP Eliminations Consolidated ------- ------------ ----- ------------ ------------ ASSETS Current assets: Cash......................................... $ 206 $ 4,458 $3,038 $ -- $ 7,702 Short-term investments ....................... -- 155 -- -- 155 Accounts and notes receivable, net ........... 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 =================================================================================================================================
-12- 13 Supplemental Consolidating Statement of Cash Flows for the Two Fiscal Quarters Ended July 31, 1999 (in thousands)
Parent Guarantor Company Subsidiaries FINOP Eliminations Consolidated ------- ------------ ----- ------------ ------------ Net cash (used in) provided by operating activities ................................... $ (569) $ 7,312 $ 135 $ -- $ 6,878 ------------------------------------------------------------------------ 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) -- -- ------------------------------------------------------------------------ Net cash provided by (used in) investing activities ....................... 3,259 (7,576) (282) -- (4,599) ------------------------------------------------------------------------ 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 .................. (455) (371) (147) -- (973) Cash at beginning of fiscal year ............. 519 2,848 -- -- 3,367 ------------------------------------------------------------------------ Cash at end of second fiscal quarter ......... $ 64 $ 2,477 $(147) $ -- $ 2,394 ==============================================================================================================================
-13- 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 2001 RESULTS COMPARED TO SECOND QUARTER FISCAL YEAR 2000 RESULTS CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL FOR THE TWO FISCAL QUARTER ENDED QUARTERS ENDED ------------- -------------- JULY 29, JULY 31, JULY 29, JULY 31, 2000 1999 2000 1999 ---- ---- ---- ---- ----------------------------------------------------------------------------------------------------------------------------- Revenues ............................... $ 195,810 $ 155,550 $ 368,744 $ 281,903 Cost of goods sold and expenses: ....... Cost of goods sold ................... 153,943 117,079 291,353 210,034 Operating and administrative expenses. 38,414 33,560 76,151 63,914 Interest expense ..................... 3,295 2,697 6,422 5,546 --------- --------- --------- --------- 195,652 153,336 373,926 279,494 --------- --------- --------- --------- Income (loss) before income taxes ...... 158 2,214 (5,182) 2,409 Benefit from (provision for) income taxes ............................. (64) (1,058) 2,394 (1,155) --------- --------- --------- --------- Net income (loss) .................... $ 94 $ 1,156 $ (2,788) $ 1,254 ----------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share - Basic ...... $ 0.02 $ 0.24 $ (0.57) $ 0.26 Earnings (loss) per share - Diluted .... $ 0.02 $ 0.23 $ (0.57) $ 0.25
-14- 15 REVENUES Revenues for the first two fiscal quarters of the current year increased $86.8 million compared to the same period for the prior year. Revenues for the second quarter increased $40.2 million compared to the same period for the prior year. A summary of revenues by functional area is shown below:
For the Second Fiscal For the Two Fiscal Quarter Ended Quarters Ended -------------------------- ------------------------- July 29, July 31, July 29, July 31, 2000 1999 2000 1999 -------- --------- -------- -------- (in millions) Convenience Stores $ 101.3 $ 96.7 $ 190.8 $ 175.9 Gasoline 94.2 58.7 177.3 105.5 Other .3 .2 .6 .5 -------- -------- -------- -------- Total $ 195.8 $ 155.6 $ 368.7 $ 281.9 ======== ======== ======== ========
Convenience store revenues increased $14.9 million or 8.5% in the current year first two quarters compared to the prior year first two quarters and convenience store revenues increased $4.6 million, or 4.8% in the current year second quarter. This increase was the result of a 5.5% increase in comparable corporate store merchandise sales in the current year first two quarters compared to the prior year first two quarters, a 1.5% increase in comparable convenience store merchandise sales in the current year second quarter as compared to the prior year second quarter, and the opening of nineteen new stores during the prior four quarters, partially offset by the closure and/or sale of sixty-one under performing stores during the same period. Gasoline revenues increased $71.8 million in the current year first two quarters compared to the prior year as a result of an increase of 20.7 million gallons of gasoline sold and a 41.4 cents per gallon increase in the average retail selling price of gasoline. Gasoline revenues increased $35.5 million in the current year second quarter compared to the prior year as a result of an increase of 8.0 million gallons of gasoline sold and a 44.0 cents per gallon increase in the average retail selling price of gasoline. -15- 16 GROSS PROFIT Gross profit increased $5.7 million for the first two quarters and $3.4 million for the second quarter. A summary of gross profit by functional area is shown below:
For the Second Fiscal For the Two Fiscal Quarter Ended Quarters Ended ------------------------- ------------------------- July 29, July 31, July 29, July 31, 2000 1999 2000 1999 ------- -------- ------- -------- (in millions) Convenience Stores $ 34.3 $ 32.9 $ 64.5 $ 60.6 Gasoline 7.3 5.4 12.5 10.8 Other .3 .2 .6 .5 ------- ------- ------- ------- Total $ 41.9 $ 38.5 $ 77.6 $ 71.9 ======= ======= ======= =======
Convenience store gross profits increased by $3.9 million or 6.4% for the current year first two quarters compared to the prior year, and by $1.4 million or 4.2% in the current year second quarter. The increase was attributable to the increase in convenience store sales, as described above. The convenience store gross profit margin percentage decreased during the current year first two quarters compared to the prior year. This decrease was primarily attributable to an increase in the wholesale cost of cigarettes. Gasoline gross profits increased $1.7 million for the current year first two quarters compared to the prior year first two quarters and increased $1.9 million in the current year second quarter. The increase for the current year first two quarters was primarily attributable to an increase in gallons sold, as described above. The increase for the current year second quarter was primarily attributable to an increase in gallons sold, as described above, and a 1.93 cents per gallon increase in the gasoline gross profit margin as compared to the same period of the prior year. OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses increased $12.3 million for the current year first two quarters compared to the prior year first two quarters, and increased $4.8 million in the current year second quarter. A summary of operating and administrative expenses is shown below: -16- 17
For the Second Fiscal For the Two Fiscal Quarter Ended Quarters Ended ----------------------- ------------------------ July 29, July 31, July 29, July 31, 2000 1999 2000 1999 ------- ------- ------- ------- (in millions) Operating Expenses $ 30.9 $ 27.7 $ 61.4 $ 53.6 General & Administrative Expenses 7.5 5.9 14.8 10.3 ------- ------- ------- ------- Total $ 38.4 $ 33.6 $ 76.2 $ 63.9 ======= ======= ======= =======
Operating expenses increased as a result of higher store wages, equipment rental expenses and occupancy costs. General and administrative expenses were higher due to increased costs for wages, employee benefits and commercial insurance. In addition, both operating and general and administrative expenses were impacted by costs associated with the closing or selling of 61 non-strategic or underperforming stores during the first two quarters of the current year. The prior year first two quarters results include a pre-tax gain of $1.3 million recognized on the sale of certain assets. The prior year first two quarters expenses of $63.9 million are net of the $1.3 million gain. INTEREST EXPENSE, INFLATION AND TAXES Interest expense increased $.9 million for the current year first two quarters compared to the prior year first two quarters, and increased $.6 million in the current year second quarter as a result of increased interest rates and higher average borrowings under the revolving credit facility and capital leases. Inflation did not have a material effect on the Company's revenues, gross profit, and operating and administrative expenses in the first two quarters of fiscal 2001 and 2000 other than the increases in the cost of cigarettes, gasoline and wages in fiscal year 2001, as identified above. The effective tax rate for the Company was a benefit of 46% and a provision of 48% for the first two quarters of fiscal years 2001 and 2000, respectively. 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 July 29, 2000, the Company had $16.6 million in outstanding revolving credit loans and had $5.4 million in outstanding letters of credit under the facility. At July 29, 2000, the Company had $31.6 million available under forward commitments that provide 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. The Company accounts for these real estate transactions as either operating leases or mortgages. -17- 18 The capital expenditures of the Company 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 or leasing including sale/leaseback transactions. CASH FLOW FROM OPERATING ACTIVITIES Net cash provided by operating activities was $5.8 million in the current year first two fiscal quarters compared to $6.9 million in the same period of the prior year. This change was primarily the result of decreased earnings of the Company and an increase in deferred taxes, offset by reductions in inventory and accounts and notes receivable. CASH USED BY INVESTING ACTIVITIES Net cash used in investing activities was $10.9 million in the current year first two fiscal quarters compared to $4.6 million in the same period of the prior year. The increase in cash used was primarily the result of increased purchases of short-term investments, property and equipment and lower proceeds from the sale of property, equipment and assets held for sale. CASH PROVIDED BY FINANCING ACTIVITIES Net cash provided by financing activities was $2.6 million for the current year first two quarters compared to net cash used of $3.3 million for the same period of the prior year. The increase was primarily the result of higher borrowings under the Company's revolving credit facility and fixed asset financing and lowered debt repayments in the first two fiscal quarters of the current year. Prior year debt repayments included repayment of a mortgage obligation on the Company's former headquarters facility. 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 15 new stores, remodeling a certain number of existing store and gasoline locations, and implementing or upgrading office and store technology. During the first two quarters of the current fiscal year, the Company opened 7 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. -18- 19 SIGNIFICANT EVENTS In May, 2000, the Company retained Morgan Keegan & Company, Inc. to explore all the Company's strategic alternatives, including the possible sale of the Company. Management makes no representations as to the likely outcome of any strategic alternatives. 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. -19- 20 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any instruments that it believes would be materially affected by any future interest rate changes. 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. Trial is currently expected to take place in October of calendar year 2000. 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. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held at the Sheraton Suites in Cuyahoga Falls, Ohio, on May 25, 2000. At the Annual Meeting the Company's shareholders elected the following persons, nominated by the Company's Nominating Committee, by the votes indicated: Dairy Mart Nominees For Withheld ------------------- --- -------- Albert T. Adams 2,643,611 8,979 Frank W. Barrett 2,643,611 8,979 J. Kermit Birchfield, Jr. 2,643,611 8,979 John W. Everts 2,643,611 8,979 William A. Foley 2,643,611 8,979 Thomas W. Janes 2,643,611 8,979 Gregory G. Landry 2,643,611 8,979 Robert B. Stein, Jr. 2,643,611 8,979 The Company has previously disclosed the terms of a settlement relating to a proxy contest led by Frank Colaccino in a Current Report filed with the Securities and Exchange Commission on Form 8-K on May 24, 2000. -20- 21 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits: 1. Exhibit (10.1.1) - Second Amendment to Credit Agreement, dated as of July 28, 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. b) 8-K Reports: On May 24, 2000, the Company filed a Current Report on Form 8-K, under Item 5, disclosing the terms of a settlement with the Committee of Concerned Dairy Mart Shareholders that settled a proxy contest initiated by Frank Colaccino. -21- 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 12, 2000 /s/ Gregory G. Landry ----------------------- Gregory G. Landry Vice Chairman and Chief Financial Officer -22-