10-Q 1 l91963ae10-q.txt DAIRY MART CONVENIENCE STORES, INC. 10-Q 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 NOVEMBER 3, 2001 [ ] 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 11, 2001 - 5,006,039 -1- PART 1. FINANCIAL INFORMATION. DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)

FOR THE ~~FIRST~~FISCAL FOR THE THREE FISCAL QUARTER ENDED QUARTERS ENDED ------------------------------ ~~MAY~~---------------------------- 5NOVEMBER 3, ~~APRIL~~OCTOBER 2928, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 ------ ------ ------ ------ ------------------------------------------------------------------------------------------------------------------------------ Revenues..................................~~...................~~ $ ~~161~~167,~~737~~944 $ ~~172~~180,~~934~~723 $ 508,763 $ 549,467 Cost of goods sold and expenses: Cost of goods sold......................~~..................~~ ~~127~~134,~~921~~298 ~~137~~144,~~411~~276 405,724 435,631 Operating and administrative expenses. 38,161 39,986 114,167 116,138 Impairment charge....................... ~~37,425~~- 37- 14,~~736~~824 ~~Interest~~- ~~expense~~Chapter 11 related professional fees.... 1,234 - 1,234 - Interest expense........................~~..............~~ 3,~~974~~724 3,~~126~~372 11,042 9,794 --------- --------- ---------- ---------- ~~169~~177,~~320~~417 ~~178~~187,~~273~~634 ~~Income~~546,991 ~~(loss)~~561,563 --------- --------- ---------- ---------- Loss before ~~incomes~~income taxes and (9,473) (6,911) (38,228) (12,096) extraordinary item......................~~.....~~ ~~(7,583) (5,339)~~ Benefit from (provision for) income taxes................................... - 2,763 (~~150~~248) 25,~~458~~157 ----------- ---------- ----------- ~~Net~~---------- ~~income~~Loss ~~(loss)~~before extraordinary item............ (9,473) (4,148) (38,476) (6,939) Extraordinary loss on early retirement of debt (Note 9)........................~~........~~ $ (71,~~733~~029) $- (21,~~881~~029) ~~===========~~- ~~=============~~--------- ~~Earnings~~--------- ~~(loss)~~---------- ~~per~~---------- ~~share~~Net -loss ~~Basic~~............................... $ (110,502) $ (4,148) $ (39,505) $ (6,939) ------------------------------------------------------------------------------------------------------------------------------ Loss per share - Basic $ (2.5510) $ (0.5983) ~~Earnings~~$ (~~loss~~7.89) $ (1.41) Loss per share - Diluted $ (2.10) $ (0.~~........................~~83) $ (17.5589) $ (01.5941)

The accompanying notes are an integral part of these financial statements. -2- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)

~~MAY~~NOVEMBER 53, 2001 FEBRUARY 3, 2001 ~~2001~~ ---- --------------------------------------------------------------------------------------------- ASSETS Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . .~~..............................................~~ $ 716,~~048~~081 $ 5,667 Short-term investments . . . . . . . . . . . . . .~~.....................................~~ ~~3,388~~484 3,000 Accounts and notes receivable,. ~~net~~. . . . . . . . . .~~.............................~~ 1316,~~208~~366 13,462 Inventory. . . . . . . . . . . . . . . . . . . . .~~...........................................~~ 2524,~~269~~091 24,424 Prepaid expenses and other current assets. . . . .~~...........................~~ 42,~~007~~326 3,612 -----------~~---~~ -------------- Total current assets. . . . . . . . . . . . . .~~.....................................~~ 5259,~~920~~348 50,165 Property and equipment, net. . . . . . . . . . . . . .~~...................................~~ ~~109~~103,~~141~~665 111,448 Intangible assets, net . . . . . . . . . . . . . . . .~~......................................~~ ~~13,547~~- 13,731 Other assets, net. . . . . . . . . . . . . . . . . . .~~........................................~~ 1514,~~132~~916 15,373 -------------- -------------- Total assets . . . . . . . . . . . . . . . . . . . . .~~..............................................~~ $ ~~190~~177,~~740~~929 $ 190,717 ~~==============~~------------------------------------------------------------------------------------------------- ~~==============~~ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations. . . .~~..........................~~ $ 72,~~287~~210 $ 6,043 Accounts payable . . . . . . . . . . . . . . . . .~~........................................~~ 452,~~724~~947 44,361 Accrued expenses . . . . . . . . . . . . . . . . .~~........................................~~ 1612,~~310~~203 15,835 Accrued interest . . . . . . . . . . . . . . . . .~~........................................~~ ~~1,506~~929 3,638 -------------- -------------- Total current liabilities. . . . . . . . . . . .~~..................................~~ 7018,~~827~~289 69,877 Long- ~~term~~Term obligations, less current portion above . .~~........................~~ ~~127~~40,~~442~~931 129,557 Other liabilities. . . . . . . . . . . . . . . . . . .~~........................................~~ 225,~~468~~813 13,555 ~~--------------~~LIABILITIES ~~--------------~~SUBJECT ~~Total~~TO ~~liabilities~~COMPROMISE (Note 1) . . . . . . .~~...............................................~~ ~~220~~174,~~737~~662 ~~212,989~~(a) -~~-------------~~ ~~--------------~~ Stockholders' equity: Common stock . . . . . . . . . . . . . . . . . . .~~..........................................~~ 7170 70 Paid-in capital. . . . . . . . . . . . . . . . . .~~........................................~~ 32,~~423~~427 32,416 Retained deficit . . . . . . . . . . . . . . . . .~~........................................~~ (4779,~~486~~258) (39,753) Treasury stock, at cost. . . . . . . . . . . . . .~~....................................~~ (15,005) (15,005) --------------- --------------- Total stockholders' ~~deficit~~equity. . . . . . . . . . .~~.................................~~ (2961,~~997~~766) (22,272) --------------- --------------- Total liabilities and stockholders' ~~deficit~~equity . . . . . .~~..............................~~ $ ~~190~~177,~~740~~929 $ 190,717 ~~============== ==============~~-------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. (a) Liabilities subject to compromise consist of the following: Trade and other miscellaneous claims . . . . . . . . . . . . . $ 59,104 Secured debt . . . . . . . . . . . . . . . . . . . . . . . . . 19,141 Unsecured debentures . . . . . . . . . . . . . . . . . . . . . 87,886 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 5,140 Unsecured notes. . . . . . . . . . . . . . . . . . . . . . . . 241 Priority claims. . . . . . . . . . . . . . . . . . . . . . . . 3,150 ---------- $ 174,662 ---------- -3- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)

FOR THE ~~FIRST~~THREE FISCAL ~~QUARTER~~QUARTERS ENDED ~~MAY~~NOVEMBER 53, ~~APRIL~~OCTOBER 2928, 2001 2000 ---- ---- Cash flows from operating activities: Net ~~income (~~loss) . . . . . . . . . . . . . . . . . . . . . . . . .~~..................................~~ $ (739,~~733~~505) $ (26,~~881~~939) Adjustments to reconcile net ~~income (~~loss) to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . 11,278 10,711 Impairment charge . . . . . . . . . . . . . . . . . . . .~~..........~~ 314,~~717~~824 ~~3,525~~- ~~Deferred~~Change in deferred income taxes . . . . . . . . . . . . .~~.......................................~~ 61- (32,~~373~~771) Loss on disposition of properties, net. . . . . . . . . .~~........................~~ 39314 10310 Net change in assets and liabilities: Accounts and notes receivable . . . . . . . . . . . . .~~.............................~~ ~~282~~(2,733) 2,~~362~~910 Inventory . . . . . . . . . . . . . . . . . . . . . . .~~.......................................~~ ~~(845)~~333 28,~~795~~717 Accounts payable. . . . . . . . . . . . . . . . . . . .~~...................................~~ 1,~~363~~957 (14,~~235~~899) Accrued interest. . . . . . . . . . . . . . . . . . . .~~...................................~~ (2,~~132)~~431 (1,~~849~~865) Other assets and liabilities,. ~~net~~. . . . . . . . . . . . .~~.........................~~ 98,~~044~~572 ~~317~~(4,764) -------------- ---------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities . . . . .~~.......................~~ ~~3,796~~ (~~329~~2,529) 1,410 -------------- ---------------------------------------------------------------------------------------- Cash flows ~~used~~from ~~for~~ investing activities: Purchase of short-term investments . . . . . . . . . . . .~~..............................~~ ~~(388)~~2,516 (2,~~832~~700) Purchase of property and equipment . . . . . . . . . . . .~~..............................~~ (13,~~469~~928) (815,~~462~~363) ~~Proceeds~~Net proceeds from sale of property, equipment and ~~equipment~~assets held for sale . . . . . . . . . . . . . . . . . .~~..............~~ ~~374~~1,303 35,~~640~~158 -------------- ---------------------------------------------------------------------------------------- Net cash (used ~~for)~~in investing activities . . . . . . . . . . . .~~...........................~~ (~~1,483~~109) (712,~~654~~905) --------------- --------------------------------------------------------------------------------------- Cash flows from financing activities: ~~Borrowings~~Increase onin revolving loan, net. . . . . . . . . . . . . .~~.............................~~ ~~(4)~~5,854 64,~~148~~014 Borrowings of long-term obligations. . . . . . . . . . . .~~.............................~~ --40,931 ~~600~~4,827 Repayment of long-term obligations . . . . . . . . . . . .~~..............................~~ (~~928~~33,744) (~~717~~2,486) Issuance of ~~Common~~common ~~Stock~~stock . . . . . . . . . . . . . . . . .~~...................................~~ --11 12245 -------------- ---------------------------------------------------------------------------------------- Net cash ~~(used for)~~ provided ~~from~~by financing activities . . . . . . . . . .~~...............~~ ~~(932)~~13,052 6,~~043~~600 --------------- --------------------------------------------------------------------------------------- Increase (decrease) in cash . . . . . . . . . . . . . . . . .~~...................................~~ 110,~~381~~414 (14,~~940~~895) Cash at beginning of fiscal year. . . . . . . . . . . . . . .~~................................~~ 5,667 7,702 -------------- ---------------------------------------------------------------------------------------- Cash at end of ~~first~~third fiscal quarter . . . . . . . . . . . . .~~...............................~~ $ 716,~~048~~081 $ 52,~~762~~807 ~~==============~~------------------------------------------------------------------------------------------------------ ~~==============~~ Supplemental disclosures: Interest paid .............................................~~.................~~ $ 67,~~103~~369 $ 511,~~094~~654 Income ~~Taxes~~taxes ~~Refunded~~ refunded......................................~~................~~ $ -- $ 78-

The accompanying notes are an integral part of these financial statements. -4- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 3, 2001 (Unaudited) 1. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 On September 24, 2001 (the "Petition Date"), the Company and substantially all of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for protection (the "Filing") under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Debtors are currently operating their business as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 01-42400 (AJG). The Chapter 11 Cases do not include Financial Opportunities, Inc., a subsidiary of the Company. CONSEQUENCE OF FILING As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. On September 26, 2001, the Debtors received interim approval of their Debtor-In-Possession ("DIP") credit facility, and on October 19, 2001, the Company received approval on its entire $46 million DIP credit facility. The DIP credit facility has an initial term of twelve months with an option to extend the term of the facility upon the satisfaction of certain conditions. As a result, the Company expects to continue to pay for employee salaries and benefits, ongoing operations (including payments to vendors) and other working capital needs. -5- FINANCIAL STATEMENT PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," and on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the unaudited consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements. Substantially all of the Company's pre-petition debt is now in default due to the Filing. As described below, the accompanying unaudited consolidated financial statements present the Debtors' pre-petition debt under the caption "Liabilities Subject to Compromise." As required by SOP 90-7, the Company, beginning in the third quarter of fiscal year 2002, recorded the Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP 90-7. As reflected in the unaudited consolidated financial statements, "Liabilities Subject to Compromise" refer to Debtor's liabilities incurred prior to the commencement of the Chapter 11 Cases. The amounts of the various liabilities that are subject to compromise are reflected in the attached balance sheet. These amounts represent the Company's estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further developments with respect to disputed claims; (4) rejection of executory contracts and unexpired leases; (5) the determination as to the value of any collateral security claims; (6) proofs of claim; or (7) other events. Payment terms for these amounts will be established in connection with the Chapter 11 Cases. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtor as of the date of the Filing. Differences between amounts recorded by the -6- Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings of the Chapter 11 Cases. No bar dates have been set for the filing of proofs of claim against the Debtors. Accordingly, the ultimate number and allowed amount of such claims are not presently known. The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, gasoline and sales taxes held in trust, and certain other pre-petition claims. The Company believes, based on information presently available to it, that cash available from operations and the DIP Financing will provide sufficient liquidity to allow it to continue to operate through the initial term of the DIP credit facility. However, the ability of the Company to continue operation on a going concern basis (including its ability to meet post-petition obligations of the Debtors) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (v) the ability of the Company to maintain profitability following such confirmation. 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 February 3, 2001. DEBTOR-IN-POSSESSION FINANCIAL STATEMENTS The condensed financial statements of the Debtors are presented as follows: -7- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS (Unaudited) (in thousands, except per share amounts) September 24, 2001- November 3, 2001 -------------------------------------------------------------------------------- Revenues . . . . . . . . . . . . . . . . . . . . . $ 68,930 Cost of goods sold and expenses: Cost of goods sold . . . . . . . . . . . . . . . 54,615 Operating and administrative expenses. . . . . . 15,473 Interest expense . . . . . . . . . . . . . . . . 1,591 --------- 71,679 --------- Loss before income taxes and extraordinary item. . (2,749) Benefit from (provision for) income taxes. . . . . - -------- Loss before extraordinary item . . . . . . . . . . (2,749) Extraordinary loss on early retirement of debt (Note 9). . . . . . . . . . . . . . . . . . (1,029) ---------- Net loss . . . . . . . . . . . . . . . . . . . . $ (3,778) -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. -8- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES DEBTOR-IN-POSSESSION BALANCE SHEET (Unaudited) (in thousands) NOVEMBER 3, 2001 -------------------------------------------------------------------------------- ASSETS Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . $ 14,162 Accounts and notes receivable. . . . . . . . . . . 16,059 Inventory. . . . . . . . . . . . . . . . . . . . . 24,091 Prepaid expenses and other current assets. . . . . 2,326 ----------- Total current assets. . . . . . . . . . . . . . 56,638 Property and equipment, net. . . . . . . . . . . . . . 103,665 Other assets, net. . . . . . . . . . . . . . . . . . . 13,473 ----------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 173,776 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . $ 2,947 Accrued expenses . . . . . . . . . . . . . . . . . 12,195 Accrued interest . . . . . . . . . . . . . . . . . 866 ------------ Total current liabilities. . . . . . . . . . . . 16,008 Long Term obligations . . . . . . . . . . . . . . . . 40,931 Other liabilities. . . . . . . . . . . . . . . . . . . 5,813 LIABILITIES SUBJECT TO COMPROMISE. . . . . . . . . . . 174,662 (a) Stockholders' equity: Common stock . . . . . . . . . . . . . . . . . . . 70 Paid-in capital. . . . . . . . . . . . . . . . . . 32,427 Retained deficit . . . . . . . . . . . . . . . . . (81,130) Treasury stock, at cost. . . . . . . . . . . . . . (15,005) ------------ Total stockholders' equity. . . . . . . . . . . (63,638) ------------ Total liabilities and stockholders' equity . . . . . . $ 173,776 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. (a) Liabilities subject to compromise consist of the following: Trade and other miscellaneous claims . . . . . . . . . . . . . $ 59,104 Secured debt . . . . . . . . . . . . . . . . . . . . . . . . . 19,141 Unsecured debentures . . . . . . . . . . . . . . . . . . . . . 87,886 Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 5,140 Unsecured notes. . . . . . . . . . . . . . . . . . . . . . . . 241 Priority claims. . . . . . . . . . . . . . . . . . . . . . . . 3,150 ------------ $ 174,662 ------------ -9- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES DEBTOR-IN-POSSESSION STATEMENT OF CASH FLOWS (Unaudited) (in thousands) NOVEMBER 3, 2001 ---- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,778) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . 1,701 Loss on disposition of properties, net. . . . . . . . . . 22 Net change in assets and liabilities: Accounts and notes receivable . . . . . . . . . . . . . (2,528) Inventory . . . . . . . . . . . . . . . . . . . . . . . (98) Accounts payable. . . . . . . . . . . . . . . . . . . . (3,597) Accrued interest. . . . . . . . . . . . . . . . . . . . 866 Other assets and liabilities. . . . . . . . . . . . . . (381) -------------------------------------------------------------------------------- Net cash used in operating activities . . . . . . . . . . . . (7,793) -------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment . . . . . . . . . . . . (94) Net proceeds from sale of property, equipment and assets held for sale . . . . . . . . . . . . . . . . . . 54 -------------------------------------------------------------------------------- Net cash used in investing activities . . . . . . . . . . . . (40) -------------------------------------------------------------------------------- Cash flows from financing activities: Increase in revolving loan, net. . . . . . . . . . . . . . 903 Borrowings of long-term obligations. . . . . . . . . . . . 40,931 Repayment of long-term obligations . . . . . . . . . . . . (30,237) -------------------------------------------------------------------------------- Net cash provided by financing activities . . . . . . . . . . 11,597 -------------------------------------------------------------------------------- Increase in cash . . . . . . . . . . . . . . . . . . . . . . 3,764 Cash at beginning of period . . . . . . . . . . . . . . . . . 10,398 -------------------------------------------------------------------------------- Cash at end of period . . . . . . . . . . . . . . . . . . . . $ 14,162 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. -10- 2. CHANGES IN CAPITAL ACCOUNTS An analysis of the capital stock accounts for the first three fiscal quarters ended November 3, 2001 follows:

COMMON STOCK ISSUED AT PAID-IN CAPITAL IN AT EXCESS OF $.01 PAR VALUE AMOUNT PAR VALUE -------------------------- --------------~~------~~ ----------------------- Balance February 3, 2001 7,059,205 $ 70,~~583~~592 $32,415,~~823~~803 Employee stock purchase plan 24,~~566~~012 2640 611,~~780~~006 Stock options exercised - - - Stock awards - - - -------------------------- -------------------- -----------------~~------~~ Balance ~~May~~November 53, 2001 7,~~061~~063,~~771~~217 $ 70,~~609~~632 $32,~~422~~426,~~603~~809 -------------------------- -------------------- -----------------~~------~~

As of November 3, 2001, there were 2,057,178 shares of Common Stock held as treasury stock at an aggregate cost of $15,004,847 leaving 5,006,039 shares outstanding. 3. EARNINGS (LOSS) PER SHARE Earnings (loss) per share is based on the weighted average number of shares outstanding, including the dilutive effect of stock options, if appropriate, during each period. The weighted average number of shares used in the calculation of basic earnings per share were 5,006,039 and 4,978,813 for the third fiscal quarters ended November 3, 2001 and October 28, 2000, respectively, and 5,004,668 and 4,931,212 for the first three fiscal quarters ended November 3, 2001 and October 28, 2000, respectively. The weighted average number of shares used in the calculation of diluted earnings per share were 5,006,039 and 4,979,813 for the third fiscal quarters ended November 3, 2001 and October 28, 2000, respectively, and 5,004,668 and 4,913,212 for the first three fiscal quarters ended November 3, 2001 and October 28, 2000, respectively. 4. SEASONALITY The results of operations for the first three fiscal quarters ended November 3, 2001 are not necessarily indicative of results to be expected for the full fiscal year. The convenience store industry in Dairy Mart's marketing areas experiences a higher percentage of revenues and profit margins during the summer months than during the winter months. Historically, Dairy Mart has achieved more favorable financial results in its second and third fiscal quarters, as compared to its first and fourth fiscal quarters. 5. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED) -11- The Company's payment obligations under the Series A and Series B Senior Subordinated Notes (the "Notes") are guaranteed by certain of the Company's subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by each of the Guarantor Subsidiaries. The following supplemental financial information sets forth, on a consolidating basis, statements of operations, balance sheets and cash flow information for Dairy Mart Convenience Stores, Inc. ("Parent Company"), for the Guarantor Subsidiaries and for Financial Opportunities, Inc. ("FINOP"), the Company's non-guarantor subsidiary. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries, and are omitted accordingly. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and inter-company balances and transactions. -12- Supplemental Consolidating Statement of Operations for the Three Fiscal Quarters Ended November 3, 2001 (in thousands)

-13- Supplemental Consolidating Balance Sheet as of November 3, 2001 (in thousands)

~~PARENT~~Parent ~~GUARANTOR~~Guarantor ~~COMPANY~~Company ~~SUBSIDIARIES~~Subsidiaries FINOP ~~ELIMINATIONS~~Eliminations ~~CONSOLIDATED~~Consolidated ------- ------------ ----- ------------ ------------ ASSETS Current assets: Cash . . . . . . . . . . . . . . . .~~.......................~~ $ 12,~~731~~781 $ 411,~~832~~381 $ ~~485~~1,919 $ - $ 716,~~048~~081 Short-term investments . . . . . . .~~...............~~ - ~~452~~- ~~2,936~~484 - ~~3,388~~484 Accounts and notes receivable,. ~~net~~. . .~~.......~~ 13- 1216,~~409~~059 ~~786~~307 - 1316,~~208~~366 Inventory. . . . . . . . . . . . . .~~.....................~~ - 2524,~~269~~091 - - 2524,~~269~~091 Prepaid expenses and other current assets . . . 44. 3. . . . . . 23 2,~~963~~303 - - 42,~~007~~326 -------------- ---------------- -------------- ---------------- -------------- Total current assets . . . . . . .~~............~~ 12,~~788~~804 4653,~~925~~834 42,~~207~~710 - 5259,~~920~~348 Property and equipment, net . . . . .~~...............~~ ~~- 109,141 - - 109,141 Intangible assets, net~~.~~........................~~ - 13103,~~547~~665 - - 13103,~~547~~665 Other assets, net . . . . . . . . . . .~~...................~~ 1,~~720~~608 12,~~771~~677 ~~641~~631 - 1514,~~132~~916 Investment in and (advances to) subsidiaries . . . ~~112~~. . . . . . . . . 156,~~026~~825 1,~~745~~060 ~~248~~812 (~~114~~158,~~019~~697) - -------------- ---------------- -------------- ---------------- -------------- Total assets. . . . . . . . . . . . . .~~.....................~~ $ ~~115~~161,~~534~~237 $ ~~184~~171,~~129~~236 $ 54,~~096~~153 $ (~~114~~158,~~019~~697) $ ~~190~~177,~~740~~929 ~~===========~~---------------------------------------------------------------------------------------------------------------------------------- ~~=========== ========= =========== ===========~~ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term ~~obligations~~Obligations. . . . . . . . . . . .~~..................~~ $ ~~6,338~~- $ ~~949~~- $ -2,210 $ - $ 72,~~287~~210 Accounts payable . . . . . . . . . .~~..................~~ 252,~~809~~947 ~~19,915~~- - - 452,~~724~~947 Accrued expenses . . . . . . . . . .~~..................~~ ~~755~~1,306 1510,~~536~~889 198 - 1612,~~310~~203 Accrued interest . . . . . . . . . .~~..................~~ ~~1,371~~866 - ~~135~~63 - ~~1,506~~929 -------------- ---------------- -------------- ---------------- -------------- Total current liabilities. . . . .~~...........~~ 345,~~273~~119 3610,~~400~~889 ~~154~~2,281 - 7018,~~827~~289 -------------- ---------------- -------------- ---------------- -------------- Long-term obligations, less ~~current~~Current portion above. . . . . . . . 39,760 1,171 - - 40,931 Liabilities Subject to Compromise . . .~~............~~ ~~111~~178,~~258~~124 ~~13,054~~ (3,~~130~~462) - ~~127~~- 174,~~442~~662 Other liabilities . . . . . . . . . . .~~...................~~ - 225,~~468~~813 - - 225,~~468~~813 Stockholders' equity. ~~(deficit)~~. . . . . . . . .~~........~~ (2961,~~997~~766) ~~112~~156,~~207~~825 1,~~812~~872 (~~114~~158,~~019~~697) (2961,~~997~~766) -------------- ---------------- -------------- ---------------- -------------- Total liabilities and stockholders' equity ~~(deficit)~~. . . . . . . .~~....................~~ $ ~~115~~161,~~534~~237 $ ~~184~~171,~~129~~236 $ 54,~~096~~153 $ (~~114~~158,~~019~~697) $ ~~190~~177,~~740~~929 =========== =========== ========= ============ =======================================================================================

-14- Supplemental Consolidating Statement of Cash Flows for the Three Fiscal Quarters Ended November 3, 2001 (in thousands)

~~PARENT~~Parent ~~GUARANTOR~~Guarantor ~~COMPANY~~Company ~~SUBSIDIARIES~~Subsidiaries FINOP ~~ELIMINATIONS~~Eliminations ~~CONSOLIDATED~~Consolidated ------- ------------ ----- ------------ ------------ Net cash provided by (used in) ~~provided by~~ operating activities . . . . . . . .~~................~~ $ (613,~~875~~616) $ 1011,~~555~~596 $ ~~116~~(509) $ - $ 3(2,~~796~~529) ------------- ---------------- --------------- --------------- ------------ Cash flows from investing activities: Purchase of and change in short-term ~~investments~~Investments. . . . . . . . . . . .~~..................~~ - ~~(452)~~1 642,515 - ~~(388)~~2,516 Purchase of property and equipment .~~.........~~ - (13,~~469~~928) - - (13,~~469~~928) ~~Net~~Proceeds ~~proceeds~~ from sale of property, ~~equipment~~Equipment and assets held for sale~~.......~~ - ~~374~~1,303 - - ~~374~~1,303 Investment in and (advances to) subsidiaries . . . . . . . . . . .~~.................~~ 52,~~278~~934 (52,~~156~~847) (~~122~~87) - - ------------- ---------------- --------------- --------------- ------------ Net cash provided by (used in) ~~provided by~~ investing activities . . . . . . .~~..............~~ 52,~~278~~934 (65,~~703~~471) ~~(58)~~2,428 - (~~1,483~~109) ------------- ---------------- --------------- --------------- ------------ Cash flows from financing activities: ~~Increase~~Borrowings inof ~~revolving~~long-term ~~loan~~obligations 39,760 ~~net.............~~1,171 - ~~(4)~~ - -40,931 ~~(4)~~Increase ~~Borrowings~~in ofrevolving ~~long~~loan, ~~term~~net. ~~obligations~~. .~~.......~~ -5,854 - - - -5,854 Repayment of long-term obligations .~~............~~ (~~400~~32,681) (~~528~~1,063) - - (~~928~~33,744) Issuance of common stock . . . . . .~~..............~~ 711 ~~(7)~~ - - - 11 ------------- ---------------- --------------- --------------- ------------ Net cash provided by (used in) financing activities . . . . . . . .~~...............~~ ~~(393)~~12,944 ~~(539)~~108 - - ~~(932)~~13,052 ------------- ---------------- --------------- --------------- ------------ Increase (decrease) in cash . . . . .~~...............~~ (12,~~990)~~262 36,~~313~~233 581,919 - 110,~~381~~414 Cash at beginning of fiscal year . . .~~............~~ ~~3,721~~519 15,~~519~~148 ~~427~~- - 5,667 ------------- ---------------- --------------- --------------- ------------ Cash at end of ~~first~~third fiscal quarter. .~~..........~~ $ 12,~~731~~781 $ 411,~~832~~381 $ ~~485~~1,919 $ - $ 716,~~048~~081 =========== ============= =========== ========== ====================================================================================

-15- Supplemental Consolidating Statement of Operations for the Three Fiscal Quarters Ended October 28, 2000 (in thousands)

-16- Supplemental Consolidating Balance Sheet As Of February 3, 2001 (In Thousands)

~~PARENT~~Parent ~~GUARANTOR~~Guarantor ~~COMPANY~~Company ~~SUBSIDIARIES~~Subsidiaries FINOP ~~ELIMINATIONS~~Eliminations ~~CONSOLIDATED~~Consolidated ------- ------------ ----- ------------ ------------ ASSETS Current assets: Cash ......................................... $ 3,721 $ 1,519 $ 427 $ - $ 5,667 Short-term investments........................ - - 3,000 - 3,000 Accounts and notes receivable, net............ 60 12,546 856 - 13,462 Inventory..................................... - 24,424 - - 24,424 Prepaid expenses and other current assets............................... 66 3,546 - - 3,612 Deferred income taxes......................... - - - - ------- ------------- ----------- ------------- ----------------------- Total current assets........................ 3,847 42,035 4,283 - 50,165 Property and equipment, net...................... - 111,448 - - 111,448 Intangible assets, net........................... - 13,731 - - 13,731 Other assets, net................................ 1,809 12,921 643 - 15,373 Investment in and (advances to) subsidiaries.................................... 118,966 1,699 244 (120,909) - ----------- ------------- ----------- ------------- ------------------- Total assets................................~~...~~ $ 124,622 $ 181,834 $ 5,170 $ (120,909) $ 190,717 ~~===========~~------------------------------------------------------------------------------------------------------------------------ ~~============= =========== ============= ===========~~ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations............................... $ 5,230 $ 813 $ - $ - $ 6,043 Accounts payable.............................. 25,544 18,817 - - 44,361 Accrued expenses.............................. 599 15,213 23 - 15,835 Accrued interest.............................. 3,564 - 74 - 3,638 ----------- ------------- ----------- ------------- ------------------- Total current liabilities................... 34,937 34,843 97 - 69,877 Long-term obligations, less current portion above........................... 111,957 14,470 3,130 - 129,557 Other liabilities................................ - 13,555 - - 13,555 Stockholders' equity ~~(deficit)~~............................. (22,272) 118,966 1,943 (120,909) (22,272) ------------ ------------- ----------- ------------- ------------------ Total liabilities and stockholders' equity ~~(deficit)~~............................ $ 124,622 $ 181,834 $ 5,170 $ (120,909) $ 190,717 ~~=========== ============= =========== ============= ===========~~------------------------------------------------------------------------------------------------------------------------

-17- Supplemental Consolidating Statement of Cash Flows for the Three Fiscal Quarters Ended October 28, 2000 (in thousands)

~~PARENT~~Parent ~~GUARANTOR~~Guarantor ~~COMPANY~~Company ~~SUBSIDIARIES~~Subsidiaries FINOP ~~ELIMINATIONS~~Eliminations ~~CONSOLIDATED~~Consolidated ------- ------------ ----- ------------ ------------ Net cash provided by (used in) ~~provided by~~ operating activities . . . . . . . .~~................~~ $ (79,~~797~~760) $ 710,~~391~~938 $ 77232 $ - $ ~~(329)~~1,410 ------------- ---------------- --------------- --------------- ----------- Cash flows from investing activities: ~~Purchase~~Decrease ~~of and change~~ in short-term ~~investments~~Investments. . . . . . . . . . . .~~..................~~ - ~~128~~154 (2,~~960~~854) - (2,~~832~~700) Purchase of property and equipment .~~.........~~ - (815,~~462~~363) - - (815,~~462~~363) ~~Proceeds~~Net proceeds from sale of property, Equipment and ~~equipment~~assets ~~...........................~~held for sale - 35,~~640~~158 - - 35,~~640~~158 Investment in and (advances to) ~~subsidiaries~~Subsidiaries . . . . . . . . . . .~~..................~~ 45,~~886~~351 (4,~~731~~941) (~~155~~410) - - ------------- ---------------- --------------- --------------- ----------- Net cash provided by (used in) ~~investing~~Investing activities . . . . . . . .~~.............~~ 45,~~886~~351 (914,~~425~~992) (3,~~115~~264) - (712,~~654~~905) ------------- ---------------- --------------- ---------- ----- ----------- Cash flows from financing activities: Borrowings onof ~~revolving~~long-term ~~loan,~~obligations ~~net...........~~- 64,~~148~~827 - - ~~- 6~~4,~~148~~827 ~~Borrowings~~Increase ofin ~~long-term~~revolving ~~obligations~~loan, net. . .~~.........~~ -2,266 ~~600~~1,748 - - ~~600~~4,014 Repayment of long-term obligations .~~............~~ ~~(324)~~1,693 (~~393~~4,179) - - (~~717~~2,486) Issuance of ~~Common~~common ~~Stock~~stock . . . . . .~~.................~~ 12244 -1 - - 12245 ------------- ---------------- --------------- --------------- ----------- Net cash provided by (used in) financing activities . . . . . . . .~~...............~~ 54,~~836~~203 ~~207~~2,397 - - 6,~~043~~600 ------------- ---------------- --------------- --------------- ----------- (Decrease) ~~increase~~ in cash . . . . .~~...............~~ ~~2,925~~(206) (1,~~827~~657) (3,~~038~~032) - (14,~~940~~895) Cash at beginning of fiscal year . . .~~............~~ 206 4,458 3,038 - 7,702 ------------- ---------------- --------------- --------------- ----------- Cash at end of ~~first~~third fiscal quarter .~~...........~~ $ ~~3,131~~- $ 2,~~631~~801 $ -6 $ - $ 52,~~762~~807 =========== ============= =========== ========== =================================================================================

-18- 6. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS On February 4, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment to FASB Statement No. 133." These statements, which establish the accounting and financial reporting requirements for derivative instruments, require companies to recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The adoption of this standard did not have a material impact on the Company's consolidated financial statements. 7. ACCOUNTING STANDARDS NOT YET ADOPTED In July, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In August, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and, in October, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 141 requires all business combinations completed after June 30, 2001, to be accounted for under the purchase method. This standard also establishes, for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 141 also requires that the excess of the fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. The Company will account for all future business combinations under SFAS No. 141. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. Goodwill and other intangibles that have indefinite lives will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives, which is no longer limited to 40 years. The Company will adopt this statement effective February 3, 2002, as required. The adoption should have no impact on the Company as a result of the impairment charge recorded during the second quarter as discussed in Note 8. SFAS No. 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: (i) the timing of liability recognition; (ii) initial measurement of the liability; (iii) -19- allocation of asset retirement cost to expense; (iv) subsequent measurement of the liability; and (v) financial statement disclosures. SFAS No. 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. This standard becomes effective for fiscal years beginning after June 15, 2002. The Company will adopt the statement effective February 2, 2003. The transition adjustment, if any, resulting from the adoption of SFAS No. 143 will be reported as a cumulative effect of a change in accounting principle. At this time, the Company has not yet determined what impact, if any, the adoption of this statement will have on either its financial position or results of operations. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business, as previously defined in that Opinion. SFAS No. 144 provides a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. Many of the provisions of SFAS No. 121 are retained, however, SFAS No. 144 clarifies some of the implementation issues related to SFAS No. 121. SFAS No. 144 also broadens the presentation of discontinued operations to include more disposal transactions. This statement is effective for fiscal years beginning after December 15, 2001, with early adoption encouraged. The Company will adopt this statement no later than February 3, 2002. At this time, the Company has not yet determined what impact, if any, the adoption of this statement will have on either its financial position or results of operations. 8. IMPAIRMENT CHARGE Management reviews long-lived assets and certain identifiable intangible assets for impairment whenever circumstances indicate that the carrying account may not be recoverable. As a result of the termination of the merger agreement with DM Acquisition Corp., the Company recognized an impairment charge of $14.8 million in the second quarter of fiscal year 2002 in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived -20- Assets to be Disposed Of." The impairment charge related to goodwill and other intangible assets including franchise rights and favorable leases. 9. EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT On October 19, 2001, the Company retired the outstanding balance of approximately $26.5 million on its existing $30 million Revolving Credit Agreement. This debt became due when the Company defaulted by, among other things, not paying a $250,000 amendment fee to its lenders. On October 19, 2001, the Company received court approval of its entire $46 million DIP credit facility, and the Company retired its Revolving Credit Agreement with proceeds from the DIP credit facility. An extraordinary loss of approximately $1.0 million was incurred as a result of the early retirement which represented the write-off of remaining unamortized deferred financing costs at that date. No tax benefit has been recorded due to the uncertainty as to the Company's ability to utilize current operating losses to offset future income tax liabilities. -21- DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11 On September 24, 2001 (the "Petition Date"), the Company and substantially all of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for protection (the "Filing") under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Debtors are currently operating their business as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered under Case No. 01-42400 (AJG). The Chapter 11 Cases do not include Financial Opportunities, Inc., a subsidiary of the Company. CONSEQUENCE OF FILING As a consequence of the Filing, all pending litigation against the Debtors is stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code. On September 26, 2001, the Debtors received interim approval of its Debtor-In-Possession ("DIP") credit facility, and on October 19, 2001, the Company received approval on its entire $46 million DIP credit facility. The DIP credit facility has an initial term of twelve months, with an option to extend the term of the facility upon satisfaction of certain conditions. As a result, the Company expects to continue to pay for employee salaries and benefits, ongoing operations (including payments to vendors) and other working capital needs. Substantially all of the Company's pre-petition debt is now in default due to the Filing. As described below, the accompanying unaudited consolidated -22- financial statements present the Debtors' pre-petition debt under the caption "Liabilities Subject to Compromise." As required by SOP 90-7, the Company, beginning in the third quarter of fiscal year 2002, recorded the Debtors' pre-petition debt instruments at the allowed amount, as defined by SOP 90-7. As reflected in the unaudited consolidated financial statements, "Liabilities Subject to Compromise" refer to Debtor's liabilities incurred prior to the commencement of the Chapter 11 Cases. The amounts of the various liabilities that are subject to compromise are reflected in the attached balance sheet. These amounts represent the Company's estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (1) negotiations; (2) actions of the Bankruptcy Court; (3) further developments with respect to disputed claims; (4) rejection of executory contracts and unexpired leases; (5) the determination as to the value of any collateral security claims; (6) proofs of claim; or (7) other events. Payment terms for these amounts will be established in connection with the Chapter 11 Cases. Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtor as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings of the Chapter 11 Cases. No bar dates have been set for the filing of proofs of claim against the Debtors. Accordingly, the ultimate number and allowed amount of such claims are not presently known. The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, gasoline and sales taxes held in trust, and certain other pre-petition claims. The Company believes, based on information presently available to it, that cash available from operations and the DIP Financing will provide sufficient liquidity to allow it to continue to operate through the initial term of the DIP credit facility. However, the ability of the Company to continue operation on a going concern basis (including its ability to meet post-petition obligations of the Debtors) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company's ability to comply with the terms of the DIP Financing and any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) confirmation of -23- a plan or plans of reorganization under the Bankruptcy Code, and (v) the ability of the Company to maintain profitability following such confirmation. RESULTS OF OPERATIONS: THIRD QUARTER FISCAL YEAR 2002 RESULTS COMPARED TO THIRD QUARTER FISCAL YEAR 2001 RESULTS CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

~~CONSOLIDATED~~FOR ~~STATEMENTS~~THE OFFISCAL ~~OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)~~ FOR THE ~~FIRST~~THREE FISCAL QUARTER ENDED QUARTERS ENDED ----------------------------- ~~MAY~~----------------------------- 5NOVEMBER 3, ~~APRIL~~OCTOBER 2928, NOVEMBER 3, OCTOBER 28, 2001 2000 2001 2000 ---- ---- ---- ---- --------------------------------------------------------------------------------------------------------------------------------- Revenues . . . . . . . . . . . . . . . .~~..........................~~ $ ~~161~~167,~~737~~944 $ ~~172~~180,~~934~~723 $ 508,763 $ 549,467 Cost of goods sold and expenses: Cost of goods sold . . . . . . . . . . 134,298 144,276 405,724 435,631 Operating and administrative expenses. 38,161 39,986 114,167 116,138 Impairment charge. . . . . . . . . . . - - 14,824 - Chapter 11 related professional fees .~~......~~ ~~127~~1,~~921~~234 ~~137~~- 1,~~411~~234 ~~Operating~~- &Interest ~~administrative~~expense ~~expenses~~. . . . . . . . . . . 373,~~425~~724 373,~~736~~372 ~~Interest~~11,042 ~~expense~~9,794 --------- --------- ---------- ---------- 177,417 187,634 546,991 561,563 --------- --------- ---------- ---------- Income (loss) before income taxes and (9,473) (6,911) (38,228) (12,096) extraordinary items . . . . . . . . . Benefit from (provision for) income taxes. . . . . . . . . . . . . . . . .~~.....~~ 3- 2,~~974~~763 3(248) 5,~~126~~157 ----------- ---------- ~~169,320 178,273~~ ----------- ---------- Income (loss) before ~~income~~extraordinary ~~taxes~~items. . . . . . . . . . . . . . . . . (79,~~583~~473) (54,~~339~~148) ~~Benefit~~(38,476) ~~from~~(6,939) Extraordinary loss on early retirement of debt (~~provision~~Note ~~for~~9) ~~income~~. ~~taxes~~. . . . . . . . . . (~~150~~1,029) 2- (1,~~458~~029) - ----------- ---------- ----------- ---------- Net income (loss). . . . . . . . . . .~~......................~~ $ (710,~~733~~502) $ (24,~~881~~148) ~~==========~~$ ~~==========~~(39,505) $ (6,939) --------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share - Basic $ (2.10) $ (0.~~................~~83) $ (17.5589) $ (01.5941) Earnings (loss) per share - Diluted $ (2.10) $ (0.~~..............~~83) $ (17.5589) $ (01.5941)

-24- REVENUES Revenues for the third fiscal quarter decreased $12.8 million compared to the same period for the prior fiscal year. Revenues for the first three fiscal quarters decreased $40.7 million compared to the same period for the prior fiscal year. A summary of revenues by functional area is shown below:

~~FOR~~For ~~THE~~the ~~FIRST~~Third ~~FISCAL~~Fiscal ~~QUARTER~~For ~~ENDED~~the ~~(IN~~Three ~~MILLIONS)~~Fiscal ~~MAY~~Quarter 5Ended Quarters Ended -------------------------------------------- ------------------------------------- November 3, ~~APRIL~~October 2928, November October 2001 2000 3, 2001 28, 2000 ------------------ ----------------- ---------------- --------------- (in millions) Convenience Stores $ 93.3 $94.~~.............................~~9 $274.3 84$285.7 $Gasoline 8974.85 ~~Gasoline~~85.~~........................................~~6 76233.9 83263.0 Other .1 .~~.........................................~~2 0.16 0.18 ------------------ ----------------- ---------------- --------------- Total $167.~~..........................................~~9 $ ~~161~~180.7 $508.8 ~~172~~$549.95 =================== ================= ================ ===============

Convenience store revenues decreased $1.6 million or 1.7%, for the third fiscal quarter compared to the same period for the prior fiscal year. This decrease was primarily due to a 1.1% increase in comparable convenience store merchandise sales and the sale, closure or franchising of eighteen underperforming company-operated stores during the four quarters ended November 3, 2001, partially offset by the opening of one new store during the same period. Convenience store revenues decreased $11.4 million, or 4.0%, for the first three fiscal quarters compared to the same period for the prior fiscal year. This decrease was primarily due to a 1.0% decrease in comparable convenience store merchandise sales and the sale, closure, or franchising of underperforming stores, as described above, partially offset by the opening of one new store during the same period. Gasoline revenues decreased $11.1 million for the third fiscal quarter compared to the same period for the prior fiscal year. This decrease was the result of a 4.6 million gallon decrease in the number of gallons sold in the third fiscal quarter and a decrease in the average selling price of gasoline of 8.2 cents per gallon in the third fiscal quarter, as compared to the same period for the prior fiscal year. Gasoline revenues decreased $29.1 million for the first three fiscal quarters compared to the same period for the prior fiscal year. This decrease was primarily the result of a 16.4 million gallon decrease in the number of gallons sold in the first three fiscal quarters, which included a decrease of 10.3 million gallons in comparable gasoline locations, a decrease in the average selling price of gasoline of 3.1 cents per gallon, and the sale or closure of twelve underperforming gasoline locations during the four quarters ended November 3, 2001, partially offset by the opening of one new gasoline location during the same period. -25- GROSS PROFIT Gross profits decreased $2.8 million for the third fiscal quarter compared to the same period for the prior fiscal year. Gross profits decreased $10.8 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~~For ~~THE~~the ~~FIRST~~Third ~~FISCAL~~Fiscal ~~QUARTER~~For ~~ENDED~~the ~~(IN~~Three ~~MILLIONS)~~Fiscal ~~MAY~~Quarter 5Ended Quarters Ended ------------------------------------------- ------------------------------------- November 3, ~~APRIL~~October 2928, November 3, October 28, 2001 2000 2001 2000 ---------------- ----------------- ---------------- ----------------- (in millions) Convenience Stores~~...............................~~ $ 28.26 $31.4 30$87.28 $95.6 Gasoline 4.9 4.~~.......................................~~8 514.57 517.24 Other .1 .~~.........................................~~2 0.16 0.18 ---------------- ----------------- ---------------- ----------------- Total $33.6 $36.~~.........................................~~4 $103.1 33$113.8 $================ ~~35.5~~================= ================ =================

Convenience store gross profits decreased $2.8 million, or 8.9%, for the third fiscal quarter compared to the same period for the prior fiscal year. This decrease was primarily attributable to the decrease in convenience store revenues, as described above, and an increase in the cost of dairy and tobacco products. Convenience store gross profits decreased $7.8 million, or 8.2%, for the first three fiscal quarters compared to the same period for the prior fiscal year. This decrease was primarily attributable to the decrease in convenience store revenues for the first three fiscal quarters, as described above, and an increase in the cost of dairy and tobacco products, partially offset by income generated from the implementation of an ATM surcharge during the prior fiscal year. Gasoline gross profits increased $0.1 million for the third fiscal quarter compared to the same period for the prior fiscal year. This increase was primarily attributable to an increase in the average gasoline profit margin of 0.9 cents per gallon, partially offset by the decrease in gasoline gallons sold described above, as compared to the same period for the prior fiscal year. Gasoline gross profits decreased $2.7 million for the first three fiscal quarters compared to the same period for the prior fiscal year. This decrease was primarily attributable to the reduction in gallons sold as described above, and a 0.7 cent per gallon decrease in the average gasoline profit margin, as compared to the same period for the prior fiscal year. -26- OPERATING EXPENSES, ADMINISTRATIVE EXPENSES AND THE IMPAIRMENT CHARGE Operating expenses, administrative expenses and the impairment charge decreased $0.6 million for the third fiscal quarter compared to the same period for the prior fiscal year. Operating expenses, administrative expenses and the impairment charge increased $14.1 million for the first three fiscal quarters compared to the same period for the prior fiscal year. A summary of operating expenses, administrative expenses and the impairment charge is shown below:

~~FOR~~For ~~THE~~the ~~FIRST~~Third ~~FISCAL~~Fiscal ~~QUARTER~~For ~~ENDED~~the ~~(IN~~Three ~~MILLIONS)~~Fiscal ~~MAY~~Quarter 5Ended Quarters Ended ----------------------------------------- ------------------------------------- November 3, ~~APRIL~~October 2928, November 3, October 28, 2001 2000 2001 2000 ------------------- -------------------- ------------------ ----------------- (in millions) Operating Expenses~~...............................~~ $30.8 29$31.0 $90.8 30$92.0 Impairment Charge - - 14.8 - General & Administrative Expenses 8.6 9.~~..............~~0 824.46 724.71 ------------------ ----------------- ---------------- ----------------- Total $39.~~..........................................~~4 $ 3740.40 $130.2 37$116.71 ================== ================= ================ =================

Operating expenses reflected little change for the third fiscal quarter, as compared to the same period for the prior fiscal year. Savings realized from the sale, closure or franchising of eighteen underperforming stores, as described above, were offset by increases in store labor costs, equipment depreciation, and occupancy expenses. Operating expenses decreased $1.2 million for the first three fiscal quarters compared to the same period for the prior fiscal year. This decrease was primarily attributed to store dispositions, as described above, and a $0.7 million reduction in store cash losses, partially offset by an increase in equipment depreciation and occupancy expenses. An impairment charge of $14.8 million was recorded during the second quarter of the current fiscal year. This impairment charge is described in greater detail in Note 8 of the Notes to Consolidated Financial Statements. General and administrative expenses decreased $0.4 million for the third fiscal quarter, as compared to the same period of the prior fiscal year. Savings realized from a decrease in labor costs of $0.7 million was partially offset by an increase in deferred financing costs and Chapter 11 related professional fees. General and administrative expenses increased $0.5 million for the first three fiscal quarters compared to the same period for the prior fiscal year. This increase was primarily attributable to an increase in severance and related costs associated with a reduction in corporate headquarter positions, an increase in corporate governance costs and Chapter 11 related professional fees, partially offset by a decrease in wages and store closing costs. -27- INTEREST EXPENSE, INFLATION AND TAXES Interest expense increased $0.4 million for the third fiscal quarter compared to the same period for the prior fiscal year. Interest expense increased $1.2 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 the average outstanding balance of the revolving credit facility and an increase in bank fees, partially offset by a decrease in interest rates. Inflation did not have a material effect on the Company's revenues, gross profit, and operating and administrative expenses in the third quarter and first three quarters of fiscal 2002 and 2001. The Company did not record a tax benefit in the current year third quarter and the current year first three fiscal quarters because of the uncertainty as to its ability to utilize current operating losses to offset potential future income tax liabilities. The Company recorded a tax benefit at the effective rate of 40% for the third quarter and 43% for the first three quarters of fiscal year 2001. The effective rate was higher than the statutory rate because of the nondeductible amortization of acquired assets. CAPITAL EXPENSES As a result of the Filing, the Company has continued to defer new store openings and related capital expenditures. Any additional capital expenditures are expected to be paid with proceeds from the DIP credit facility. LIQUIDITY AND CAPITAL RESOURCES On September 24, 2001, as a consequence of impending liquidity issues facing the Company during the second quarter of fiscal year 2002 and after not making the $250,000 payment due under its credit facility and the $4.5 million payment due on its 10 1/4 Senior Subordinated Notes due 2004, the Company, and substantially all of its subsidiaries, filed for Chapter 11 protection. On September 26, 2001, the Company received interim approval of its DIP credit facility, and on October 19, 2001, the Company received approval of its entire $46 million DIP credit facility. As a result, the old credit facility was retired, and the Company expects to continue to pay for employee salaries and benefits, ongoing operations (including payments to vendors) and other working capital needs using funds acquired from its DIP credit facility. The Company has also identified stores with negative cash flow that it expects to close in the near future. Such closings are expected to create income from the sale of assets as well as to minimize losses suffered by the Company due to the poor performance of these stores. However, the Company's Chapter 11 filing, recurring operating losses and reduced cash flows from operating activities as well as other previously disclosed conditions raise substantial doubt about the Company's ability to continue as a going concern CASH FLOW FROM OPERATING ACTIVITIES Net cash used in operating activities was $2.5 million in the first three quarters of the current fiscal year compared to net cash provided by operating activities of $1.4 million in the same period of the prior fiscal year. This change was primarily the result of decreased earnings of the Company and an increase in accounts receivable, partially offset by increases in accounts payable, accrued interest and other liabilities. -28- CASH USED BY INVESTING ACTIVITIES Net cash used in investing activities was $0.1 million in the first three quarters of the current fiscal year compared to $12.9 million in the same period of the prior year. The decrease in cash used was primarily the result of decreased purchases of property and equipment. CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Net cash provided by financing activities was $13.0 million for the first three quarters of the current fiscal year compared to net cash provided by financing activities of $6.6 million for the same period of the prior year. The increase in cash provided by financing activities was primarily generated by the proceeds from debtor-in-possession financing, largely offset by the paydown on the former Credit Facility. 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. 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 implement its Business Segmentation Plan and Business Restructuring Plan, to reorganize the Company under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York, to pay its employee salaries and benefits, to pay for its ongoing operations (including payments to vendors) and other working capital needs, to comply with the terms of the DIP Financing and any cash management order enter by the Bankruptcy Court in connection with the Chapter 11 Cases, to maintain adequate cash on hand, to generate cash from operations, to receive confirmation of a plan or plans or reorganization under the Bankruptcy Code, to -29- maintain profitability following such confirmation, 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 ability of the Company to reorganize itself and successfully emerge from its Chapter 11 bankruptcy, perceptions of the Company by the Company's customers and vendors regarding the Company's bankruptcy filing and their willingness to continue to do business with the Company after its bankruptcy, 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. -30- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not have any instruments that it believes would be materially affected by any future interest rate changes. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in an action brought by a former supplier of certain dairy products to convenience stores formerly owned by the Company in Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores"). The action is entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. District Court for the State of Connecticut). This action was commenced on April 17, 1997, by New England Dairies, Inc. ("NED") alleging that the Company committed an anticipatory breach of a supply agreement entered into between NED and the Company on April 25, 1995 ("the Agreement"), when the Company entered into a contract with a third party to sell all company-owned and franchised convenience stores in New England, without requiring the third party purchaser to assume the Agreement. NED's complaint alleges lost profits in the amount of $3.7 million. 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 of this case to the court was completed on December 7, 2000. The court has not yet rendered a decision. The Company has recognized no provision for any possible loss in the accompanying financial statements. As a result of the Company's bankruptcy, this litigation was automatically stayed pending the result of the bankruptcy or further action of the bankruptcy court. On October 12, 2001, however, the United States Bankruptcy Court for the Southern District of New York granted relief from the automatic stay solely to permit a final decision and the entry of judgment. In the event a judgment is entered against the Company, such judgment would be treated as a pre-petition claim against the Company. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. Item 3. DEFAULTS UPON SENIOR SECURITIES. Prior to securing DIP financing, the Company was in default under its Revolving Credit Agreement for failing to pay a $250,000 amendment fee to its lenders (due in the event the Company failed to consummate its merger by September 1, 2001) and for failing to comply with certain financial ratio covenants. The Company also did not make an interest payment of approximately $4.5 million that was due September 17, 2001, according to its 10 1/4% Senior Subordinated Notes due 2004. On September 24, 2001, the Company and substantially all of its subsidiaries filed voluntary petitions for protection under Chapter 11. On October 19, 2001, the Company received court approval of a $46 million DIP credit facility, and the Company retired its Revolving Credit Agreement with proceeds from the DIP credit facility. As of the date of its bankruptcy filing, the Company had an outstanding balance (including interest) of approximately $93.7 million on its senior subordinated notes. -31- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 5. OTHER INFORMATION. None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS: 1. Exhibit (10) - Loan and Security Agreement by and among Dairy Mart Convenience Stores, Inc. and certain of its subsidiaries that are signatories hereto, as Debtors and Debtors-In-Possession, as Borrowers, certain of its subsidiaries that are Signatories hereto, as Debtors and Debtors-In-Possession, as Guarantors, the Lenders that are Signatories hereto as the Lenders, and Foothill Capital Corporation as the Arranger and Administrative Agent. Dated as of September 26, 2001. 2. Exhibit (11) - Statement re: Computation of Per-Share Earnings. REPORTS ON FORM 8-K: On December 18, 2001, the Company filed a Current Report on Form 8-K, under Item 3, disclosing the filing by Dairy Mart Convenience Stores, Inc. and substantially all of its subsidiaries, for protection under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. -32- 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 18, 2001 /s/ GREGORY G. LANDRY -------------------------------------- Gregory G. Landry President & Chief Executive Officer -33-

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