10-Q 1 l85385ae10-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 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 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 THREE FISCAL QUARTER ENDED QUARTERS ENDED -------------- -------------------- OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- 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
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)
OCTOBER 28, JANUARY 29, 2000 2000 ---- ---- 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 ============== ==============
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 THREE FISCAL QUARTERS ENDED ----------------------------------- OCTOBER 28, OCTOBER 30, 2000 1999 ---- ---- 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 ============== ==============
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 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:
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 32,500 325 93,285 Stock awards 43,000 430 117,820 -------------------------- -------------------- ----------------------- Balance October 28, 2000 7,036,991 $ 70,361 $ 32,350,761 -------------------------- -------------------- -----------------------
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 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 7 SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 28, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ 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) ============= ============= =========== ========= ============
7 8 SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS AS OF OCTOBER 28, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ 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 =========== =========== ========= =========== ===========
8 9 SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 28, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ 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 =========== ============= =========== ========== ===========
9 10 SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 30, 1999 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ 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 ============ ============ ========== ========= ===========
10 11 SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS 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............... 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 =========== ============= =========== ============ ===========
11 12 SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE FISCAL QUARTERS ENDED OCTOBER 30, 1999 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ 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 =========== ============= =========== ========== ===========
12 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)
FOR THE THIRD FISCAL FOR THE THREE FISCAL QUARTER ENDED QUARTERS ENDED -------------- -------------- OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, 2000 1999 2000 1999 ----- ----- ----- ---- 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
13 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:
FOR THE THIRD FISCAL FOR THE THREE FISCAL QUARTER ENDED QUARTERS ENDED -------------- -------------- OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, 2000 1999 2000 1999 ----- ----- ----- ---- 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 ======== ======== ========= ========
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 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:
FOR THE THIRD FISCAL FOR THE THREE FISCAL QUARTER ENDED QUARTERS ENDED ------------- -------------- OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, 2000 1999 2000 1999 ----- ----- ----- ---- 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 ======== ======== ========= ========
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 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:
FOR THE THIRD FISCAL FOR THE THREE FISCAL QUARTER ENDED QUARTERS ENDED -------------- -------------- OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30, 2000 1999 2000 1999 ----- ----- ----- ---- 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 ======== ======== ========= ========
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 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 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 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 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