ITEM 1. BUSINESS
GENERAL
Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or "Dairy Mart"), operates one of the nation's largest convenience store chains. Founded in 1957, the Company operates or franchises approximately 1,000 stores under the "Dairy Mart" name in 11 states located in the Northeast, Midwest and Southeast. Approximately 420 stores sell gasoline and approximately 335 stores are franchised. The Company also manufactures, processes and distributes certain dairy and other products.
Dairy Mart stores offer a wide range of products and services which cater to the convenience needs of its customers, including milk, ice cream, groceries, beverages, snack foods, candy, deli products, publications, health and beauty aids, tobacco products, lottery tickets and money orders. The stores are typically located in densely populated, suburban areas on sites which are easily accessible to customers and provide ample parking. Dairy Mart stores are generally free standing structures which are well-lit and are designed to encourage customers to purchase high profit margin products, such as deli items, coffee, fountain drinks and other fast food items.
The Company's facilities in Enfield, Connecticut and Cuyahoga Falls, Ohio manufacture and process milk, fruit juices, and other non-carbonated beverages which are distributed to stores in the Northeast and the Midwest regions. The dairy plant in Ohio manufactures and distributes ice cream to most stores. In the Southeast region, the Company distributes dairy products, tobacco products, candy and certain other merchandise to stores in Kentucky and Indiana.
The Company's primary growth strategy is to increase its retail gasoline presence. As a result, almost all of the stores recently opened by the Company are retail units, known as "super pumper" stores, which have approximately four times the gasoline retailing capacity and a significantly larger in-store size than the Company's traditional convenience stores. The Company plans to open approximately 20 new super pumper stores in the fiscal year ending January 28, 1995 and approximately 30 new super pumper stores per year thereafter for the foreseeable future.
The Company is incorporated in Delaware and maintains its principal executive offices at One Vision Drive, Enfield, Connecticut 06082. The Company's telephone number is (203) 741-4444.
STORES
The Company's stores are generally located in densely populated suburban areas, and are situated close to single-family homes and apartments to attract neighborhood shoppers. Store location, design, lighting and layout are intended to cater to customers' desire for fast and convenient access. Approximately
420 locations also sell gasoline, which the Company believes is an important convenience for customers. Shelving and displays, including refrigeration units, deli and other fast food counters and displays, are designed to encourage customers to purchase high profit margin products including impulse purchase items such as candy, fountain drinks and ice cream novelties. Stores are located on sites which are well-lit, easily accessible by customers and provide ample parking. All of the Company's stores also offer extended hours for additional convenience, with over one-half of the stores open 24 hours per day. A traditional Dairy Mart store is typically 2,400 square feet and most are free standing structures.
As of January 29, 1994, the Company operated and franchised retail convenience stores in the following three regions of the United States:
SUPER PUMPER STORES
Super pumper stores are an important part of the Company's strategy to expand and increase its profitability. Super pumper stores have approximately four times the gasoline retailing capacity of traditional gasoline convenience stores. Generally 2,700 square feet, super pumper stores are significantly larger than the Company's traditional convenience stores. The stores are designed to devote a greater amount of space to fast food counters, deli areas and refrigeration display units which attract customers to high profit margin products such as fountain drinks and fresh made sandwiches. Super pumper stores are generally located at high-traffic intersections to provide convenient access to customers, and all have
canopies to shield gasoline customers from inclement weather. As of January 29, 1994, the Company had 34 super pumper stores, a majority of which have been opened since February, 1992 and all of which have been opened since the beginning of fiscal 1990.
UPGRADING EXISTING STORE BASE
Over the next four fiscal years, the Company plans to upgrade and remodel up to 400 stores in order to modernize the stores' look, upgrade their equipment and increase the space devoted to higher profit margin items, such as fountain drinks and fast food and deli items. Management expects that this remodeling program will favorably impact the amount of maintenance capital expenditures required on its existing store base due to the installation of newer, more reliable equipment. The Company also intends to convert approximately 40 traditional gasoline convenience stores to super pumper status over the same period. Stores recently upgraded to super pumper status have shown significantly higher inside store and gasoline sales.
CLOSING UNDER PERFORMING STORES
The Company continually evaluates the performance of each of its stores in order to identify actions aimed at improving the Company's overall profitability. Based upon these evaluations, the Company continues to sell or close certain under performing stores. The Company considers various factors in deciding to sell or close stores, including store location, lease term, rental and other obligations and store performance. Sales or closures of stores, while reducing revenues, generally do not have an adverse effect on overall results, since a majority of such stores operate at a loss. The Company sold or closed approximately 60 stores in fiscal 1994.
GASOLINE OPERATIONS
A major part of the Company's growth strategy is to continue to increase its level of gasoline sales. This strategy enables the Company to significantly increase a store's total level of sales without a commensurate increase in overhead. The Company believes that the sale of gasoline at its stores offers a significant competitive advantage and that customers value this additional convenience. Gasoline sales accounted for approximately 37% of total revenues of the Company for each of the past three fiscal years. As of January 29, 1994, 419 stores sold gasoline. Financial information related to the Company's gasoline operations for the last three fiscal years is set forth in Note 9 to the Consolidated Financial Statements on page.
The Company's gasoline pricing strategy is designed, in part, to provide value to customers by offering the same quality gasoline offered by major oil companies at prices which are generally below nationally advertised brands and comparable to other convenience store chains. The Company obtains its gasoline from major oil company suppliers, primarily through spot market purchases, and believes that there are adequate supplies of fuel available from a number of sources at competitive prices.
Gasoline profit margins have an impact on the Company's income. Such profit margins could be adversely influenced by factors beyond the Company's control, such as volatility in the wholesale gasoline market due to supply interruptions. In addition, gasoline profit margins are continually influenced by competition in each local market area. Substantial decreases in gasoline profit margins, or the volume of gasoline sold, may have an adverse impact on the Company's earnings.
PRODUCT SELECTION
All stores generally offer more than 3,000 food and non-food items limited to a few, well-known brand names as well as the Company's private label products. Most of these items would typically be offered in supermarkets. Food items include a wide variety of products, including canned foods and groceries, dairy products, beverages, snack items, candy, baked goods and food service items, such as fountain soft drinks, coffee, hot dogs, deli meats and deli sandwiches and similar foods. Non-food products and services include gasoline, cigarettes, health and beauty aids, publications, lottery tickets and money orders. In addition to selling well-known brand name products, the stores offer many products that bear the "Dairy Mart" private label, including milk, bakery products, juices and other non-carbonated beverages, ice cream and other dairy products such as dips and cheeses.
In recent years, the Company has been altering the mix of products to emphasize the sale of items carrying higher profit margins. Central to these efforts has been the Company's installation of fast food counters, the "Hot Dog Central" program which includes hot dog grills and related equipment and/or deli areas in approximately 500 stores over the last three fiscal years. Fast food items not only carry higher profit margins but also tend to lead to the purchase of other high profit margin products and impulse items, including salty-snacks, candy and beverages. Dairy Mart has introduced a number of new private label products, including ice cream products and juices, which generally carry a higher gross profit margin than the Company's average gross profit margin on comparable products. These private label products include Dairy Mart's "Party Time" (R) and "Special Occasion" (R) ice cream.
POS SYSTEM
The Company has initiated a program to install a Point-of-Sale (POS) system in all stores within three years. The Company anticipates that, upon completion of this program, each store will be equipped with a scanner and with a dedicated personal computer, into which sales, inventory and other data will be input at scheduled daily intervals, and then automatically transmitted to the Company's headquarters. The Company believes that the POS system will: (i) provide more accurate and timely information regarding store operations, including sales and merchandising, and inventory levels and composition; (ii) reduce paperwork for store managers, thereby allowing them to spend more time interacting with customers and improving operations; (iii) decrease administrative overhead, since the input and verification of data will be automated at both the store and office level; and (iv) improve verification of product costs and retail pricing. The cost of the POS system, including new cash registers and personal computers, is currently estimated to be approximately $7.0 million to $9.0 million, and is anticipated to be funded by third-party equipment financing. The Company believes it will be among the first of the larger convenience store chains to implement a chain-wide POS system.
MANUFACTURING AND DISTRIBUTION OPERATIONS
The Company supplies its stores and most franchised stores through a product distribution system which includes the Company's own manufacturing, distribution and processing facilities, and other distributors. Through its manufacturing, processing and distribution facilities in Connecticut and Ohio, the Company supplies all of the milk and a substantial portion of the ice cream, juices and non-carbonated beverages for the stores in the Northeast and the Midwest. Many other products which are not produced by the Company are supplied to the Northeast and Midwest regions by one wholesale distributor under a ten- year contract entered into in February, 1988. The Company supplies the Southeast region stores in large part through its 35,000 square foot distribution facility located in Louisville, Kentucky.
In fiscal 1993, the Company reversed a prior policy and began to actively market its excess manufacturing and processing capacity to third parties, such as wholesalers and supermarkets. These efforts have resulted in a wholesale arrangement with a regional brand name ice cream distributor which has more than doubled the utilization of the Company's ice cream production capacity since the beginning of fiscal 1993. To accommodate additional growth in the sale of ice cream to third party purchasers, the Company invested approximately $1.4 million to further enhance product quality and to improve the efficiency and capacity of its ice cream production. The Company also intends to continue to pursue sales to third parties of other products produced at its manufacturing and processing facilities.
FRANCHISE OPERATIONS
The Company franchises approximately 335 stores throughout its three geographic regions. Franchise stores generally follow the same operating policies as Company stores, and are subject to Company supervision under franchise agreements. Company operated and franchise stores are of the same basic store design and sell substantially the same products. The Company currently franchises only existing stores. Most franchisees purchase milk, ice cream, dairy products, fruit juices and other non-carbonated beverages distributed by the Company and generally purchase other products through the same suppliers used by the Company.
The Company offers two types of franchising arrangements- the "full" franchise and the "limited" franchise. Under a full franchise agreement, the franchisee purchases and owns both the merchandise inventory and the equipment located in the store, and leases or subleases the store from the Company. Under a limited franchise agreement, the franchisee owns only the merchandise inventory while the Company retains ownership of the store equipment. Franchise fees are higher for limited franchisees. As of January 29, 1994, there were 161 full franchise locations and 174 limited franchise locations.
The Company has recently revised its franchising strategy in order to: (i) improve the level of retail experience of its new franchisees; and (ii) increase the level of financial commitment by new franchisees. As part of this strategy, new franchisees are now required to undergo more rigorous and thorough interviews and background checks, receive increased levels of financial and retail training, and typically make larger initial cash payments.
The following table sets forth the number of stores, on both a Company operated and franchise operated basis, that were opened or acquired, closed or sold, and transferred between Company operated and franchise operated, during the last three fiscal years:
INTERNATIONAL OPERATIONS
The Company conducts business outside the United States as a joint- venturer, licensor or consultant. Currently, the Company is a party to two agreements with convenience store operators in South Korea and Mexico, and continues to pursue similar arrangements in other countries. As with the Company's prior international arrangements, both such agreements require a specified commitment of Company personnel, but do not require any significant commitment of capital.
ADVERTISING
To promote a uniform image for all stores, the Company designs and coordinates advertising for all stores to complement its marketing strategy, which is derived, in part, from market surveys and research. Largely in response to such research, the Company launched a new advertising program entitled "Close to Home" which emphasizes the high percentage of neighborhood locations throughout Dairy Mart's operating regions. In-store, newspaper, and direct-mail advertising, special promotions and seasonal radio and television advertising usually feature certain items which can be purchased at the stores, and frequently include national brand items for which advertising costs are often supplemented by the national brand suppliers. Sales promotions are generally established and maintained on a bi-weekly or monthly basis.
COMPETITION
The convenience store and retail gasoline industries are highly competitive. The number and type of competitors vary by location. The Company presently competes with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains. Some of the Company's competitors have greater financial resources than the Company. Key competitive factors include, among others, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as convenience store customers are more likely to go to stores to purchase convenience goods and services, particularly higher profit margin items such as fast food items, fountain drinks and other beverages, when weather conditions are favorable. Accordingly, the Company's stores generally experience higher revenues and profit margins during the warmer weather months, which fall within the Company's second and third fiscal quarters.
EMPLOYEES
As of January 29, 1994, exclusive of franchisees and franchisees' employees, the Company employed, on a full-time or part-time basis, approximately 5,000 employees.
ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures
relating to its gasoline operations. These laws and regulations relate primarily to underground storage tanks ("USTs"). The United States Environmental Protection Agency has established standards for, among other things: (i) maintaining leak detection; (ii) upgrading UST systems; (iii) taking corrective action in response to releases; (iv) closing USTs to prevent future releases; (v) keeping appropriate records; and (vi) maintaining evidence of financial responsibility for taking corrective action and compensating third parties for bodily injury and property damage resulting from releases. A number of states in which the Company operates also have adopted UST regulatory programs.
In the ordinary course of business, the Company periodically detects releases of gasoline or other regulated substances from USTs it owns or operates. As part of its program to manage USTs, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from its existing and previously operated retail gasoline facilities. The Company accrues its estimates of all costs to be incurred for assessment and remediation for known releases. These accruals are adjusted if and when new information becomes known. Additionally, the Company records as receivables the expected reimbursements of a portion of the total costs from various state environmental trust funds which have provisions for sharing or reimbursing certain costs incurred by UST owners or operators based upon compliance with the terms and conditions of such funds. Due to the nature of such releases, the actual costs of assessment and remediation activities may vary significantly from year to year.
Under current federal and state regulatory programs, the Company also will be obligated by December 22, 1998 to upgrade or replace most existing USTs it owns or operates to meet certain corrosion-, overfill- and spill-protection and leak-detection requirements. The Company currently is evaluating each site on an individual basis to determine the type of expenditures required to comply with these and other requirements under the federal and state UST regulatory programs.
In addition to ongoing assessment and remediation costs, the Company presently estimates that it will be required to make capital expenditures, including those requiring upgrading or replacing of existing USTs, ranging from approximately $16.0 million to $20.0 million in the aggregate over the next five fiscal years to comply with current federal and state UST regulations, which capital expenditures could be reduced for locations (especially low volume locations) which may be closed in lieu of the capital costs of compliance.
The Company's estimates of costs to be incurred for environmental assessment and remediation and for UST upgrading and other regulatory compliance are based on factors and assumptions that could change due to modifications of regulatory requirements, detection of unanticipated environmental conditions, or other unexpected circumstances. As a result, the actual costs incurred may vary significantly from the estimates noted above.
RECENT DEVELOPMENTS
SALE OF SENIOR SUBORDINATED NOTES
On March 3, 1994, the Company issued $75 million of 10.25% Senior Subordinated Notes due 2004 (the "Notes") through a public offering underwritten by Bear, Stearns & Co., Inc. (the "Underwriter").
The Company used part of the net proceeds from the sale of the Notes: (1) to repay the entire indebtedness outstanding of approximately $34.0 million under the Company's credit agreement with
Chemical Bank (as successor to Manufacturers Hanover Trust Company) as agent lender, along with other lenders party thereto, dated as of January 9, 1991, as amended (the "Existing Credit Agreement"); and (2) to redeem all of the Company's outstanding 14.25% Subordinated Debentures Due 2000 ("Subordinated Debentures") in the aggregate principal amount of $27.9 million, which amount includes a premium for early redemption, and which redemption was completed on April 4, 1994. The net proceeds of the sale of the Notes remaining after the payment of the indebtedness under the Existing Credit Agreement, the redemption of the Subordinated Debentures, the payment of the Underwriter's discount, and the payment of fees and expenses was approximately $11.0 million and will be used for working capital and general corporate purposes.
In connection with the above transaction, the Company entered into a senior revolving credit facility with Fleet Bank, National Association ("Fleet") and Society National Bank ("Society") (the "New Credit Agreement"). The New Credit Agreement provides for the availability of up to $30.0 million in revolving credit loans reduced by letters of credit not to exceed $15.0 million in the aggregate. All outstanding indebtedness, if any, under the New Credit Agreement will be due and payable in full on March 1, 1997; however, provided no default exists under the New Credit Agreement, the Company may extend such due date for up to two additional one-year periods, with the consent of the lenders.
All amounts outstanding under the New Credit Agreement are secured by the pledge of all of the outstanding capital stock of most of the Company's direct and indirect subsidiaries, and by amounts payable to the Company which arise by, from, or were created by, loans or other extensions of credit by the Company to any of its subsidiaries. Loans under the New Credit Agreement will generally bear interest, at the Company's option, at the per annum rate of either (1) 0.25% above Fleet's then current prime rate and/or (2) from 2.00% to 2.50% above LIBOR.
ITEM 2.
ITEM 2. PROPERTIES
Of the 1,022 stores in operation as of January 29, 1994, 123 store locations were owned by the Company and 899 were leased. In addition, the Company owns 15 locations and is the primary lessee for 72 locations not currently operated as Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such locations to third parties.
The Company owns its corporate headquarters facility in Enfield, Connecticut. This facility is approximately 77,000 square feet and is located on eighty-eight acres of land. The Company also owns its Northeast region operating office building and manufacturing and processing plant located in a 33,000 square foot building, and its 200,000 square foot Midwest processing plant and regional administrative office located in Cuyahoga Falls, Ohio. The Company leases administrative offices for its Southeast regional offices and leases a warehouse facility in Louisville, Kentucky.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is party to various legal actions which the Company believes are routine in nature and incidental to the operation of its business. The Company believes that the outcome of the proceedings to which the Company currently is party will not have a material adverse effect upon its results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1994.
PART II -------
ITEM 5.
ITEM 5. MARKET INFORMATION FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is limited in the amount of cash dividends that it may pay and the amount of capital stock and subordinated indebtedness that it may repurchase by applicable covenants contained in the New Credit Agreement and Notes. As of January 29, 1994, taking into account such limitations, the Company would have been able to pay approximately $1,100,000 in cash dividends in the aggregate. The Company has not paid any cash dividends during the last two fiscal years.
Both classes of the Company's common stock are traded in the over-the- counter market and are listed for quotation on the National Association of Securities Dealers (NASDAQ), National Market System (NMS). The following table sets forth the high and low sales prices per share of the Company's Common Stock as quoted on the NASDAQ, NMS for the last two fiscal years.
There were approximately 2,800 stockholders as of January 29, 1994. Included in this number are shares held in nominee or street names.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(a) Fiscal 1994 includes an extraordinary loss on extinguishment of debt of $928,000, net of related income tax benefit (see Note 4 of Notes to Consolidated Financial Statements).
(b) Fiscal 1993 includes the cumulative effect of a change in accounting for income taxes of $3,951,000 (see Note 6 of Notes to Consolidated Financial Statements) and a nonrecurring pretax charge for restructuring of $5,200,000 (see Note 12 of Notes to Consolidated Financial Statements).
(c) Long-term debt including capital lease obligations includes the current portion of long-term debt and capital lease obligations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since most of its revenues are received in cash. Currently, the amount of cash generated from operations significantly exceeds all of the current debt service requirements of the Company's long-term debt and capital lease obligations. The capital expenditures of the Company are primarily funded by the excess cash flow available after debt service, but may also be funded using mortgage and equipment financing. Additionally, the Company has a revolving line of credit available to address the seasonality of operations and the timing of certain working capital disbursements. For the fiscal year ended January 29, 1994, the cash flow from operations available after meeting all of the Company's debt service requirements was insufficient to fund total capital expenditures due in large part to payments made related to nonrecurring restructuring expenses (as described below). As a result, the Company obtained new mortgage and equipment financing.
During the fiscal year ended January 29, 1994, the Company paid its trade payables in an average of 24 days, which compares to 23 days for the fiscal year ended January 30, 1993 and 24 days for the fiscal year ended February 1, 1992. The cash flow of the Company is also favorably impacted by the Company's use of funds from the sale of money orders, pending weekly remittance of such funds to the issuer of the money orders. The amount due the issuer each week varies, depending on the volume and dollar values of money orders issued. At January 29, 1994 and January 30, 1993, $6.2 million and $6.0 million, respectively, were due the issuer. The Company's remittance obligation to the issuer of the money orders is primarily secured by an outstanding letter of credit in the amount of $6.5 million.
During the current fiscal year, cash generated by operations was $1.6 million lower than the prior fiscal year. This decrease resulted from the payment in fiscal 1994 of $4.8 million in expenditures (which were accrued in fiscal 1993) related to severance, relocation and other personnel related costs associated with the Company's restructuring, which involved the downsizing and consolidation of three administrative offices into a new corporate headquarters facility in Enfield, Connecticut. The majority of these nonrecurring payments have been made in fiscal 1994. Partially offsetting the effect of the nonrecurring restructuring payments was the increase in earnings in the current fiscal year. See "Results of Operations."
Cash used by the Company's investing activities was $6.2 million lower in the current fiscal year as compared to the prior fiscal year, primarily as a result of the fiscal 1993 purchase of the new corporate headquarters facility. The Company continues to develop new stores and remodel existing locations, the capital expenditures for which are being financed primarily by cash generated from operations and mortgage and equipment financing. In addition, in order to accelerate the development of new super pumper stores, the Company may sell and leaseback certain of its existing super pumper locations and may in the future lease, or sell and leaseback, the real estate of new super pumper locations. Additionally, the Company estimates that future capital expenditure requirements to comply with federal and state underground gasoline storage tank regulations will be approximately $16.0 million to $20.0 million in the aggregate through December, 1998, which cost could be reduced for locations (especially low volume locations) which may be closed in lieu of the capital costs of compliance. The Company has also initiated a program to install in all stores within three years a point-of-sale (POS) system designed to provide more accurate and timely information regarding store operations and to decrease administrative overhead. The cost of the POS system, including new cash registers and personal computers, is currently estimated to be approximately $7.0 million to $9.0 million, and is anticipated to be funded by equipment financing. The ultimate amount of discretionary capital expenditures that the Company will incur in the future will be determined by the available sources of funds, including, but not limited to, those described above.
During the past three fiscal years, the total number of store locations has fluctuated as follows:
The decrease in the overall number of stores is due to the continual closing and/or sale of locations whose performance was deemed to be inadequate, which closings generally occur at the expiration of their lease terms in order to minimize the cost to close.
Subsequent to year end, the Company issued $75.0 million principal amount of 10.25% senior subordinated notes (the "Notes") due March 15, 2004 (see Note 4 to Consolidated Financial Statements). The proceeds from the sale of the Notes, net of estimated offering expenses of $2.6 million, were used to repay the entire outstanding indebtedness under a previous bank term loan and a bank revolving loan and to redeem in full the Company's 14.25% subordinated debentures. Excess proceeds of approximately $11.0 million realized from the sale of the Notes will provide funds for general corporate and working capital purposes. The Company issued the Notes in order to facilitate future growth and to improve the Company's financial and operating flexibility by significantly reducing the Company's near-term debt amortization requirements. The Company's maturities on long-term debt for the next five fiscal years, based on the debt structure in place as of January 29, 1994, as well as after giving effect to the sale of the Notes and the application of the proceeds therefrom are as follows:
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/a/ Includes $2.0 million paid on February 28, 1994 under the terms of the Company's previous credit facility.
In addition to cash flow from operations, potential mortgage, equipment and other financing and the available net proceeds from the sale of the Notes, the Company's sources of liquidity include borrowing availability under a new senior credit facility entered into by the Company subsequent to year end in connection with the issuance of the Notes and the repayment of the previous bank term and revolving loans. This new facility provides for the availability of up to $30.0 million in revolving credit loans reduced by outstanding letters of credit not to exceed $15.0 million in the aggregate (see Note 4 to the Consolidated Financial Statements). As of the date of the issuance of the Notes, the Company did not have outstanding revolving credit loans under the new credit facility, but did have $11.6 million of letters of credit outstanding thereunder including, as discussed above, the letter of credit issued to secure the Company's remittance obligation to the issuer of money orders. The Company intends to utilize the new credit facility as needed for working capital and general corporate purposes, especially to address the seasonality of operations and timing of certain working capital disbursements.
RESULTS OF OPERATIONS
FISCAL 1994 COMPARED TO FISCAL 1993
Revenues for the fiscal year ended January 29, 1994 increased by $12.0 million or 2.1% from the prior fiscal year ended January 30, 1993. This revenue increase was due to higher revenues from the convenience store, gasoline and manufacturing and distribution areas of the Company. Convenience store revenues increased to $355.8 million in fiscal 1994 from $345.4 million in fiscal 1993. This increase was primarily due to a change in the mix of stores in the current fiscal year to include more Company operated stores and fewer franchise stores, since the Company records as revenue the gross sales of Company operated stores compared with franchise fees which are a percentage of franchise store sales. This change in store mix was a result of the Company's ongoing review and evaluation of its store base to determine whether its stores are best suited as either a Company operated or franchise location, using economic and non-economic criteria. Such transfers between Company operated and franchise stores have occurred and will continue in the ordinary course of business, and generally result in minimal transfer costs to the Company. The overall increase in the Company's convenience store revenues was partially offset by decreased revenues resulting from the closing of sixty-one underperforming stores in the current fiscal year. Although such closures had a negative impact on revenues, they did not have a material adverse effect on the results of operations (other than the initial write-off of estimated unrecoverable costs as discussed in Note 1 to the Consolidated Financial Statements), since the majority of stores closed had been operating at a loss. Additionally, comparable store sales decreased by 0.4% in fiscal 1994 as compared to fiscal 1993. This slight decrease was entirely due to the effect of the tobacco industry's cigarette price reductions, substantially all of which were passed on to the Company's customers. These cigarette price reductions lowered comparable store sales by approximately 2.0% for the current fiscal year.
The higher gasoline revenues in fiscal 1994 resulted from an increase in total gasoline gallons sold of 9.7 million gallons. On a per location basis, average gallonage increased by approximately 7.2% in the current fiscal year as compared to the prior fiscal year. These gallonage increases were due primarily to the further development of the Company's new super pumper stores as well as the remodeling and expansion of gasoline facilities at a number of existing locations. Partially offsetting the impact of the higher gallonage on total gasoline revenues was a decrease in the average selling price of gasoline of 3.5 cents per gallon for the current fiscal year as compared to the prior fiscal year.
Manufacturing and distribution revenues increased in the current fiscal year due to the introduction of new business, which began during the second quarter of the prior fiscal year. The new business includes the sale of ice cream to an external distributor as well as the distribution of new product lines, including cigarettes and candy, to stores in certain marketing areas of the Company.
Income from operations increased by $8.6 million in fiscal 1994 as compared to fiscal 1993, due primarily to a $5.2 million nonrecurring charge in the prior fiscal year for restructuring expenses related to the downsizing and consolidation of the Company's administrative offices (see Note 12 to Consolidated Financial Statements) as well as increased income from both gasoline and convenience store operations in the current fiscal year.
Income from gasoline operations increased due to the favorable impact of the higher gasoline gallons described above, combined with an increase in gasoline gross margins in fiscal 1994 as compared to fiscal 1993. Additionally, the Company incurred lower operating costs in the current fiscal year related to compliance with environmental regulations, reflecting a reduction in the expenses associated with the remediation of the Company's gasoline locations after considering expected reimbursements of a portion of total remediation costs from various state environmental trust funds. Such remediation costs are incurred in the ordinary course of business and can fluctuate significantly from year to year.
Income from convenience store operations increased in the current fiscal year due to improved product gross margins as well as higher lottery and money order commissions. The increased product gross margins resulted, in part, from a reduction in costs associated with the Company's last-in, first-out (LIFO) inventory valuation method. This reduction in the LIFO provision resulted from a current year decrease in cigarette prices as discussed above, which constitutes one of the Company's major product categories. The overall increase in product margins for the current fiscal year was partially offset by a lower level of marketing allowances, related to monies received from vendors for specific product promotions, as compared to the prior fiscal year. Selling expenses associated with the convenience store group were increased over the prior year due, in part, to increased advertising and store maintenance expenses.
Income from foreign consulting operations decreased primarily due to the recognition of a one-time license fee in fiscal 1993 which was earned upon the start-up of the Company's Mexican joint venture operation. Income from operations in the Company's manufacturing and distribution operation decreased in fiscal 1994 due primarily to reduced product margins resulting from an increase in raw product costs without a corresponding increase in retail dairy prices. This decrease was partially offset by increased profits realized from the new business described above.
The overall increase in income from operations was also impacted by a decrease in administrative salaries in fiscal 1994 as compared to fiscal 1993 as a result of the corporate consolidation described above which was completed during the second half of the current fiscal year. The Company also benefitted from reduced costs in the current fiscal year related to legal and professional fees. Primarily offsetting these administrative expense decreases were higher costs in the current fiscal year for management bonuses and profit sharing due to the increased earnings in the current fiscal year as well as the implementation of a new 401(k) employee benefit program. Additionally, the Company incurred higher relocation costs in the current fiscal year.
Inflation had little effect on the Company's revenues and income from operations in fiscal years 1994 and 1993, other than the effect of the cigarette price reductions discussed above.
The effective tax rate for the Company was a provision of 42% for the current fiscal year as compared to a benefit of 40% for fiscal 1993 (See Note 6 to the Consolidated Financial Statements). The Company provides for income taxes at the effective rate expected to be incurred for the entire year.
Net income for fiscal 1994 was $866,000 or $.16 per share, as compared to a net loss of $6,850,000 or $1.26 per share for fiscal 1993. The Company incurred an extraordinary loss on extinguishment of debt in the current fiscal year, which reduced net income by $928,000 (See Note 4 to the Consolidated Financial Statements). Included in the net loss for the prior fiscal year was a $3,951,000 charge for the cumulative effect of a change in accounting for income taxes (See Note 6 to the Consolidated Financial Statements). This one-time cumulative charge related to the adoption of SFAS No. 109, "Accounting for Income Taxes."
FISCAL 1993 COMPARED TO FISCAL 1992
Revenues for the fiscal year ended January 30, 1993 increased by $6.8 million or 1.2% from the prior fiscal year ended February 1, 1992. The higher revenues in fiscal 1993 were due to increased revenues from the Company's convenience store group as well as its gasoline and international operations, partially offset by decreased revenues from the Company's manufacturing and distribution operations.
Convenience store revenues increased from $343.0 million in fiscal 1992 to $345.4 million in fiscal 1993. This increase was due to a change in the mix of stores in fiscal 1993 to include more Company operated stores and fewer franchise stores since the Company records as revenue the gross sales of Company operated stores compared with recording the lower franchise fees earned from franchise stores. The overall increase in the Company's convenience store revenues was partially offset by decreased revenues resulting from the closing of underperforming stores. Although such closures had a negative impact on revenues, they did not have a material adverse effect on the results of operations since the majority of stores closed had been operating at a loss. Comparable inside store sales decreased by 2.4% in fiscal 1993 as compared to fiscal 1992, due in large part to a continuing weak economy as well as adverse weather conditions, especially in the fiscal 1993 second fiscal quarter, in all of the Company's major market areas.
The higher gasoline revenues in fiscal 1993 were attributable to an increase in total gasoline gallons sold. On a per location basis, average gallonage increased by approximately 8% in fiscal 1993 as compared to fiscal 1992. These gallonage increases were due primarily to the further development of the Company's new super pumper stores as well as the remodeling and expansion of gasoline facilities at a number of existing locations. The increased gallonage was partially offset by a decrease in the average selling price of gasoline of approximately 2.6 cents per gallon in fiscal 1993.
Revenues from international operations were higher in fiscal 1993 due primarily to the recognition of a $450,000 one-time license fee earned upon the start up of the Company's Mexican joint venture operation. The Company will record its appropriate share of future profit and loss based upon the sales and performance of this one-third owned Mexican joint venture. However, any future earnings potential cannot be quantified at this time.
The Company's manufacturing and distribution revenues decreased in fiscal 1993 due to reduced volume resulting from the lower number of stores as well as the overall decrease in average inside store sales, both of which are discussed above. This was partially offset by increased revenues resulting from
the introduction of new business, which included the sale of ice cream to an external distributor as well as the distribution of new product lines, including cigarettes and candy, to stores in certain marketing areas of the Company.
Income from operations decreased by $13.0 million for fiscal 1993 as compared to fiscal 1992. $5.2 million of this decrease was due to a nonrecurring charge in fiscal 1993 for restructuring expenses related to the downsizing and consolidation of the Company's administrative offices (see Note 12 to the Consolidated Financial Statements). The Company anticipates that expense reductions, including reduced salaries and benefits, travel, telecommunication costs and other office overhead costs, realized from this restructuring will approximate $2.0 million annually which should favorably impact income from operations in future fiscal years once this restructuring is completed.
In addition to the nonrecurring charge, income from operations was also lower in fiscal 1993 due to decreases from the convenience store and manufacturing and distribution groups as well as higher other selling, general and administrative expenses. The decrease from the convenience store group resulted primarily from the reduced comparable inside store sales and an increase in store selling expenses, partially offset by improved product gross margins. The store selling expense increase resulted primarily from increased labor expense, higher medical insurance costs and certain individually large claims incurred in the Company's commercial liability and worker's compensation insurance programs. Income from operations in the Company's manufacturing and distribution operations decreased in fiscal 1993 due to reduced volume resulting from the fewer number of stores as well as reduced product margins resulting from an increase in raw product costs without a corresponding increase in retail dairy prices. This was partially offset by profits realized from the introduction of new business described above. The increase in other selling, general and administrative expenses was caused by increases in group health and commercial liability insurance expense, based on specific claims experience, as well as normal increases in administrative salaries.
Partially offsetting the decreases in income from operations discussed above was an increase in income from international operations, resulting primarily from the recognition of the Mexican joint venture license fee discussed above. Additionally, income from operations in the Company's gasoline operations was essentially the same in fiscal 1993 as compared to fiscal 1992. The positive impact of increased gasoline gallonage described above combined with a slight increase in gasoline margins was offset by an increase in the cost of compliance with environmental regulations due primarily to remediation requirements at gasoline sites closed by the Company.
Inflation had little effect on the Company's revenues and income from operations in fiscal years 1993 and 1992.
Interest expense (net of interest income) decreased by $1,270,000 in fiscal 1993 primarily due to a decrease in average interest rates related to the Company's variable rate term and revolving loans under the existing credit agreement.
The Company recorded a net loss on disposition of properties of $433,000 in fiscal 1993 compared to a net loss of $298,000 in fiscal 1992. The majority of these losses resulted from the closing of underperforming stores and the resulting write-off of abandoned fixtures, equipment and leasehold improvements.
The effective tax rate for the Company was a benefit of 40% for fiscal 1993 as compared to a provision of 42% for fiscal 1992 (See Note 6 to the Consolidated Financial Statements).
The Company recorded a net loss of $6,850,000, or $1.26 per share, for fiscal 1993 as compared to net income of $4,092,000 or $.75 per share, in fiscal 1992. In addition to the items discussed above, the net loss in fiscal 1993 was also partially attributable to a $3,951,000 charge for the cumulative effect of a change in accounting for income taxes (see Note 6 to the Consolidated Financial Statements). This one-time cumulative charge related to the adoption of SFAS No. 109, "Accounting for Income Taxes".
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries and notes thereto, appear on Pages through of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III --------
Information required by items 10, 11 and 12 (Directors and Executive Officers of the Registrant, Executive Compensation and Security Ownership of Certain Beneficial Owners and Management) is incorporated herein by reference from the sections entitled "ITEM 1. - ELECTION OF DIRECTORS - Nominees For Election As Directors", "INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS", "THE BOARD OF DIRECTORS AND ITS COMMITTEES", "OUTSTANDING STOCK AND VOTING RIGHTS", "PRINCIPAL SHAREHOLDERS", and "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its 1994 fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under "CERTAIN TRANSACTIONS" in the Company's definitive proxy statement, and is incorporated herein by reference.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part of this Form 10-K, see Page.
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits:
Exhibit Number:
(3) Articles of Incorporation and Bylaws. The Company's Restated ------------------------------------- Certificate of Incorporation, as amended, was filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended February 1, 1992 and is incorporated herein by reference. The Company's Bylaws, as amended, were filed as Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended February 3, 1990, and are incorporated herein by reference.
(4) Instruments defining the rights of security holders, including -------------------------------------------------------------- indentures. The instruments defining the rights of the holders ----------- of the Company's Common Stock include the Company's Restated Certificate of Incorporation and Bylaws, filed as Exhibit 3 hereto, and those instruments filed as Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Registration No. 33-639) dated November
5, 1985, which are incorporated herein by reference. The instrument defining the rights of the holders of the Company's 10.25% Senior Subordinated Notes due 2004 is the Indenture dated March 3, 1994, among the Company, Society National Bank, as trustee, and certain other parties, which is filed as Exhibit 4.1 hereto.
(10.1) Material Contracts. Credit Agreement dated as of February 25, ------------------- 1994, among the Company, Fleet Bank, National Association and Society National Bank is attached hereto as Exhibit 10.1.
(10.2) 1985 Incentive Stock Option Plan, as amended, and form of Incentive Stock Option Agreement, were filed as Exhibit 10.4 to the Company's annual report on Form 10-K for the fiscal year ended January 30, 1988, and are incorporated herein by reference.
(10.3) 1983 Incentive Stock Option Plan and form of Incentive Stock Option Agreement thereunder were filed as Exhibits 4.1 and 4.2, respectively, to the Company's Registration Statement on Form S-8 (File No. 33-8209) filed on August 26, 1986, and are incorporated herein by reference.
(10.4) 1990 Stock Option Plan and forms of qualified and non-qualified stock option agreements thereunder were filed as Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended February 2, 1991, and are incorporated hereby by reference.
(10.5) Employment Agreement between the Company and Charles Nirenberg, dated December 5, 1991, was filed as Exhibit 10.5 to the Company's annual report on Form 10-K for the fiscal year ended February 1, 1992, and is incorporated herein by reference.
(21) Subsidiaries of the Registrant is attached hereto as Exhibit 21.
(23) Consent of Arthur Andersen & Co. to the incorporation of their reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8, is attached hereto as Exhibit 23.
(b) Reports on Form 8-K
None filed during fourth quarter.
(c) See (3) above.
(d) See (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 29, 1994
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Frank Colaccino By /s/ Gregory G. Landry ---------------------------- -------------------------- Frank Colaccino Gregory G. Landry President and Executive Vice President and Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Dated: April 29, 1994 /s/ Frank Colaccino ---------------------------------------------- Frank Colaccino President, Chief Executive Officer and Director (Principal Executive Officer)
Dated: April 29, 1994 /s/ Charles Nirenberg ---------------------------------------------- Charles Nirenberg Chairman of the Board and Director
Dated: April 29, 1994 /s/ Gregory G. Landry ---------------------------------------------- Gregory G. Landry Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)
Dated: April 29, 1994 /s/ Mitchell J. Kupperman ---------------------------------------------- Mitchell J. Kupperman Executive Vice President Director
Dated: April 29, 1994 /s/ Robert B. Stein, Jr. ---------------------------------------------- Robert B. Stein, Jr. Executive Vice President Director
Dated: April 29, 1994 /s/ Frank W. Barrett ---------------------------------------------- Frank W. Barrett Director
Dated: April 29, 1994 /s/ Theodore W. Leed ---------------------------------------------- Theodore W. Leed Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES -----------------------------------------------------
To Dairy Mart Convenience Stores, Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Dairy Mart Convenience Stores, Inc. and subsidiaries (the Company) included in this Form 10-K, and have issued our report thereon dated April 21, 1994. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying index are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut April 21, 1994
SCHEDULE V
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT
(a) Represents an adjustment to the carrying value of buildings due to a change in accounting for income taxes (See Note 6 of Notes to Consolidated Financial Statements).
SCHEDULE VI
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
(a) Represents an adjustment to the carrying value of buildings due to a change in accounting for income taxes (See Note 6 of Notes to Consolidated Financial Statements).
SCHEDULE VIII
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES VALUATION ACCOUNTS
SCHEDULE X
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION
Royalties, advertising and amortization of intangible assets are not set forth inasmuch as each such item does not exceed 1% of revenues as shown in the related consolidated statements of operations.
Taxes other than payroll and income taxes include excise taxes collected from customers on retail gasoline sales.
DAIRY MART CONVENIENCE STORES, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of January 29, 1994 and January 30, 1993, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended January 29, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dairy Mart Convenience Stores, Inc. and subsidiaries as of January 29, 1994 and January 30, 1993, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut April 21, 1994
Consolidated Statements of Operations and Retained Earnings Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------
Note: Excise taxes approximating $29,209,000, $23,855,000 and $21,230,000 collected from customers on retail gasoline sales are included in Revenues and Cost of goods sold for fiscal years 1994, 1993 and 1992, respectively.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Notes To Consolidated Financial Statements Dairy Mart Convenience Stores, Inc. and Subsidiaries - - ------------------------------------------------------------------------------- January 29, 1994, January 30, 1993 and February 1, 1992
- - ------------------------------------------------------------------------------- 1. Significant Corporate organization and consolidation--The accompanying Accounting financial statements include the accounts of Dairy Mart Policies: Convenience Stores, Inc. and its subsidiaries (the Company). All intercompany transactions have been eliminated.
Nature of business--The Company owns, operates and franchises convenience retail stores, a number of which also sell gasoline. The Company also manufactures and distributes certain dairy and other products for sale at the majority of these locations.
Fiscal year--The Company's fiscal year ends on the Saturday closest to January 31.
Inventory--Store and manufacturing and distribution inventory is stated primarily at the lower of last-in, first-out (LIFO) cost or market. Gasoline inventory is stated at the lower of first-in, first-out (FIFO) cost or market.
Property and depreciation--Property is stated at cost and is depreciated on the straight-line basis for financial reporting purposes over the following estimated useful lives:
------------------------------------------------------------ Buildings.....................................30-40 years ------------------------------------------------------------ Equipment......................................5-20 years ------------------------------------------------------------
Leaseholds are depreciated primarily over 10 years or the life of the lease.
Goodwill and franchise and operating rights--Goodwill represents the excess of cost over fair value of net assets purchased and is being amortized on a straight-line basis over a period of 40 years. Franchise and operating rights represent the value of franchise relationships purchased in connection with past acquisitions and are being amortized on a straight-line basis over 40 years. The Company assesses the recoverability of these intangibles by determining whether the amortization of the goodwill and franchise and operating rights over the remaining lives can be recovered through projected future operating results. At this time, the Company is profitable, and expects full recoverability. Therefore, it is the Company's belief that no impairment of goodwill and franchise and operating rights has occurred.
Income taxes--Effective February 2, 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Prior to the implementation of SFAS No. 109, the Company accounted for income taxes using the deferral method as required by Accounting Principles Board Opinion No. 11.
Self insurance reserves--The Company is self-insured for certain property and liability, and accident and health insurance risks and establishes reserves for estimated outstanding claims based on its historical claims experience and reviews by third-party loss reserve specialists. The Company has purchased insurance coverage for losses that may occur above certain levels. As of January 29, 1994 and January 30, 1993, the Company has established reserves for these risks of $6,696,000 and $6,231,000, respectively, which are recorded on a present value basis using a discount rate of 8%. The Company is considering changing its method of accounting to discount these reserves at a risk free rate of return. The cumulative effect of this change in accounting method, if adopted as of January 29, 1994, would have been a charge of approximately $700,000.
Revenue recognition--The Company recognizes revenues as earned, including franchise revenues. Franchise revenues represent a percentage of franchise store sales remitted to the Company on a weekly or monthly basis, as well as revenues derived from initial fees and the gain on sale of store assets to franchisees. Net Sales of the Company, its Subsidiaries and Franchises is comprised of the Company's revenues plus store sales of franchise locations and excludes related franchise fees.
Store preopening and closing costs--Expenditures of a non- capital nature associated with opening a new store are expensed as incurred. At the time the decision is made to close a store, estimated unrecoverable costs are charged to expense. Such costs include the net book value of abandoned fixtures, equipment, leasehold improvements and a provision for the present value of future lease obligations, less estimated sub-rental income.
Earnings per share--Earnings per share have been calculated based on the weighted average number of shares outstanding and the effect of stock options, if dilutive, during each period. The number of shares used in the calculations for earnings per share were 5,532,201, 5,422,971 and 5,467,514 for the years ended January 29, 1994, January 30, 1993 and February 1, 1992, respectively.
Reclassifications--Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the presentation used for the current year.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - --------------------------------------------------------------------------------
2. Accounts and A summary of accounts and notes receivable as of January Notes Receivable: 29, 1994 and January 30, 1993 is as follows:
The carrying amount of current accounts and notes receivable approximates fair value because of the short maturity of those receivables. The fair value of the Company's noncurrent notes receivable is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of January 29, 1994, the fair value of the noncurrent notes receivable exceeds the carrying value of $2,267,000 by approximately $400,000. As of January 30, 1993, the carrying amount of the noncurrent notes receivable of $3,607,000 approximated the fair value.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - --------------------------------------------------------------------------------
3. Inventory: A summary of inventory as of January 29, 1994, January 30, 1993 and February 1, 1992 is as follows:
The LIFO reserve reflects the difference between stating the inventory at historical LIFO cost and the more current FIFO cost. Had the FIFO method been used, cost of goods sold would have been increased by $825,000 in 1994 and decreased by $758,000 and $470,000 in 1993 and 1992, respectively. Earnings per share would have been decreased by $.09 in 1994, and increased by $.05 in 1992 and loss per share would have been reduced by $.08 in 1993, had the FIFO method been used.
During 1994, the Company liquidated certain LIFO inventory that was carried at higher costs prevailing in prior years. The effect of the liquidation was to decrease net income by approximately $45,000 ($.01 per share). During 1993 and 1992, the Company liquidated certain LIFO inventory that was carried at lower costs prevailing in prior years. The effect of the liquidation was to decrease net loss by approximately $60,000 ($.01 per share) in 1993 and increase net income by $61,000 ($.01 per share) in 1992.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------
4. Long-Term Debt: The Company had the following long-term debt at January 29, 1994 and on a pro forma basis after giving effect to the issuance of the Senior Subordinated Notes and the application of the proceeds therefrom, subsequent to year end, as described below:
Subsequent to year end, the Company issued $75,000,000 principal amount of 10.25% senior subordinated notes (the "Notes") due March 15, 2004. The proceeds received from the sale of the Notes, net of estimated offering costs of $2,600,000, were used to repay the entire outstanding indebtedness under the previous bank term loan and bank revolving loan and to redeem in full the Company's 14.25% subordinated debentures due November, 2000. In connection with this transaction, the Company paid a premium of 2.8%, or $761,000, related to the redemption of the 14.25% subordinated debentures and recorded a charge of $844,000 representing the write-off of the remaining deferred financing costs related to the indebtedness repaid. At January 29, 1994, the Company accounted for the total of the premium paid and the charge for deferred financing costs as an extraordinary loss of $928,000, net of related income tax benefit.
The Notes are redeemable, at the option of the Company, after March 15, 1999 at rates starting at 104.75% of principal amount reduced annually through March 15, 2002 at which time they become redeemable at 100% of principal amount. The terms of the Notes may restrict, among other things, the payment of dividends and other distributions, investments, the repurchase of capital stock and the making of certain other restricted payments by the Company and its subsidiaries, the incurrence of additional indebtedness and new operating lease obligations by the Company or any of its subsidiaries, and certain mergers, consolidations and dispositions of assets. Additionally, according to the terms of the Notes, if a change of control occurs, as defined, each holder of Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof.
In connection with the sale of the Notes and the repayment of the indebtedness referred to above, the Company entered into a senior revolving credit facility with a group of banks which provides for the availability of up to $30,000,000 in revolving credit loans reduced by outstanding letters of credit not to exceed $15,000,000 in the aggregate. The outstanding balance, if any, is due and payable on March 1, 1997; however, provided no default exists under this new credit agreement, the Company may extend such due date for up to two additional one-year periods, with the consent of the lenders. Revolving credit loans under the credit agreement bear interest, at the Company's option, at the agent bank's prime rate plus 1/4% or from 2.00% to 2.50% above LIBOR. The credit agreement also provides for a commitment fee of 1/2% on any unused portion of the revolving credit facility. Among other restrictions, the credit agreement contains financial covenants relating to specified levels of: earnings before interest expense, rent and taxes to interest expense and rent; earnings before interest expense, taxes, depreciation and amortization (EBITDA) less capital expenditures paid in cash to interest expense; indebtedness to EBITDA; as well as the maintenance of a minimum net worth. In connection with the credit agreement, the Company pledged as collateral capital stock of certain subsidiary corporations of the Company, as well as any loans between the Company and its subsidiaries.
The Company is limited in the amount of cash dividends that it may pay and the amount of capital stock and subordinated indebtedness that it may repurchase by applicable covenants contained in the senior revolving credit facility and Notes. As of January 29, 1994, taking into account such limitations, the Company would have been able to pay approximately $1,100,000 in cash dividends in the aggregate.
As of January 29, 1994 and January 30, 1993, the fair value of the bank term loan, bank revolving loan, real estate mortgage notes payable and Small Business Administration debentures approximated the carrying amount. As of January 29, 1994 and January 30, 1993, the fair value of the 14.25% subordinated debentures was approximately $27,900,000 and $28,300,000, respectively.
Maturities on long-term debt for the next five years, as of January 29, 1994 after giving effect to the issuance of the Notes and the application of the proceeds therefrom, are as follows:
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- 5. Leases: The Company leases operating properties, including store locations and office space, under various lease agreements expiring through 2015. Certain of these locations are sublet to the Company's franchisees.
A summary of future minimum lease payments and sublease receipts at January 29, 1994 is as follows:
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- 6. Federal and State The Company adopted the provisions of SFAS No. 109 Income Taxes: effective February 2, 1992 and recorded a charge in fiscal 1993 of $3,951,000 which decreased earnings per share by $.73 for the cumulative effect of this change in accounting principle. The Company also adjusted the carrying value of certain assets and recorded additional depreciation and amortization expense of $452,000 in fiscal 1993 as a result of this change.
The provision for (benefit from) income taxes for the fiscal years ended January 29, 1994, January 30, 1993 and February 1, 1992 was as follows:
The Company is subject to minimum state taxes in excess of statutory state income taxes in many of the states in which it operates. These minimum taxes are included in the provision for (benefit from) state income taxes. In addition, the Company records a reduction in the provision for income taxes for the benefit to be realized from targeted jobs credits in the year in which they arise. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate follows:
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) as of January 29, 1994 and January 30, 1993 were as follows:
As of January 29, 1994, the Company had alternative minimum tax credits aggregating $1,015,000 which carryforward indefinitely for federal income tax purposes. These credits can be used in the future to the extent that the Company's regular tax liability exceeds its liability calculated under the alternative minimum tax method. In addition, the Company had $2,077,000 of targeted jobs credit carryforwards that expire from fiscal 2006 to 2009 and $179,000 of foreign tax credit carryforwards that expire in fiscal 1999. The Company and its subsidiaries file a consolidated federal income tax return but generally file separate state income tax returns. As of January 29, 1994, the Company had net operating loss carryforwards for state income tax purposes of $4,706,000 which expire, if unused, from fiscal 1995 to 2008. No valuation allowance for deferred tax assets was provided as of January 29, 1994 and January 30, 1993.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- 7. Capital Stock: An analysis of the capital stock accounts is as follows: ------------------------------------------------------------
Dividends may be declared and paid on Class A Common Stock without being paid on Class B Common Stock. No dividend may be paid on Class B Common Stock without equal amounts paid concurrently on Class A Common Stock. Holders of Class A Common Stock have one-tenth vote per share and are entitled to elect 25% of the Board of Directors so long as the number of outstanding shares of Class A Common Stock is at least 10% of the total of all shares of Common Stock outstanding. Holders of Class B Common Stock have one vote per share. Holders of Class B Common Stock have the right to convert their shares at any time for an equivalent number of shares of Class A Common Stock.
In June 1986, the stockholders approved an Employee Stock Purchase Plan. The plan, as amended in June, 1992, provides that employees may purchase quarterly, through payroll deductions, up to 250 shares of Class A Common Stock at 85% of the market value. Of the original 1,250,000 shares provided for under this plan, 1,089,805 shares remained available for issuance as of January 29, 1994.
As of January 29, 1994, January 30, 1993, and February 1, 1992, the Company held 521,625 shares of Class A Common Stock and 175,957 shares of Class B Common Stock as treasury shares.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - ------------------------------------------------------------------------------ 9. Gasoline A summary of gasoline operations for the years ended Operations: January 29, 1994, January 30, 1993 and February 1, 1992 is as follows:
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - -------------------------------------------------------------------------------- 10. Employee The Company provides benefits to qualified employees through a Benefit defined contribution profit sharing plan. Contributions under Plans: this plan are made annually in amounts determined by the Company's Board of Directors. The Company recorded a provision for contributions under this plan of $100,000, $100,000 and $400,000 for fiscal 1994, 1993 and 1992, respectively.
Effective January 1, 1993, the profit sharing plan was amended pursuant to section 401(k) of the Internal Revenue Code enabling eligible employees to contribute up to 15% of their annual compensation to the plan, with the Company matching 25% of such contributions up to 6% of the employees' annual compensation. Matching contributions from the Company for fiscal 1994 were $181,000. The Company does not offer any additional postretirement and postemployment benefits to its employees.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - --------------------------------------------------------------------------------
11. Commitments At January 29, 1994, the Company is contingently liable for and outstanding letters of credit amounting to $11,569,000. The Contingencies: Company is also contingently liable as guarantor on certain loans obtained by convenience store operators to finance the purchase of equipment and initial inventory in the approximate amount of $1,200,000 at January 29, 1994. In consideration of these guarantees, the Company participates with the lending institutions in the interest paid on these obligations which are secured by inventory and equipment owned by the convenience store operators.
The Company has certain environmental contingencies related to the ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures related to its gasoline operations. In the ordinary course of business, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from existing and previously operated retail gasoline facilities. The Company accrues its estimates of all costs to be incurred for assessment and remediation for known releases. These accruals are adjusted if and when new information becomes known. Due to the nature of such releases, the actual costs of assessment and remediation may vary significantly from year to year. At January 29, 1994, the Company had recorded an accrual of $2,219,000 for such costs. The Company is entitled to reimbursements of a portion of the above costs from various state environmental trust funds based upon compliance with the terms and conditions of such funds. At January 29, 1994, the Company had recorded a reimbursement receivable of $1,227,000. Additionally, under current federal and state regulatory programs, the Company will be obligated by December, 1998 to upgrade or replace most of its existing underground storage tanks ("USTs"). The Company presently estimates that it will be required to make capital expenditures related to the upgrading or replacing of USTs ranging from approximately $16.0 million to $20.0 million in the aggregate through December, 1998, which capital expenditures could be reduced for locations which may be closed in lieu of the capital costs of compliance. The Company's estimates of costs to be incurred for environmental assessment and remediation and for UST upgrading and other regulatory compliance are based on factors and assumptions that could change due to modifications of regulatory requirements, detection of unanticipated environmental conditions or other unexpected circumstances.
In fiscal 1989, the Company entered into agreements for the wholesale supply of various grocery items to its Northeast and Midwest region stores. Under the supply agreement, the Company is obligated to annually purchase a minimum amount of merchandise for a period of ten years. The level of purchases was achieved during the first six years of the agreement and management believes it is readily achievable for the balance of the agreement. Prices to be charged by the supplier must be competitive.
The Company is party to an employment agreement with the Chairman of the Board of the Company for a five year term that began on February 2, 1992 and ends on January 31, 1997, unless terminated earlier. Under the employment agreement, Mr. Nirenberg receives an annual salary of $500,000, payable in installments according to the Company's normal compensation policy, plus customary fringe benefits.
The Company is party to a number of lawsuits which have arisen in the ordinary course of business. Management does not believe the outcome of this litigation will have a material impact on the Company's results of operations or financial position.
Dairy Mart Convenience Stores, Inc. and Subsidiaries - - --------------------------------------------------------------------------------
12. Nonrecurring In March 1993, the Company announced that it was downsizing Charge for and consolidating its three administrative offices into its Restructuring: new Corporate headquarters facility in Enfield, Connecticut. The Company historically maintained administrative offices in Enfield, Connecticut, Louisville, Kentucky and Cuyahoga Falls, Ohio. In fiscal 1993, the Company recorded a nonrecurring charge of $5,200,000 primarily related to severance, relocation and other personnel related costs associated with the Company's restructuring.