-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kRcZH+6TXV+qSh9V8VV3xBi4qXl2N67b+9xc9jFZ20QFtd7dgY8bVr5Azd8YXMZH v/JiIGpEi385uutI3+H9og== 0000922632-95-000019.txt : 19950530 0000922632-95-000019.hdr.sgml : 19950530 ACCESSION NUMBER: 0000922632-95-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950515 DATE AS OF CHANGE: 19950518 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAIRY MART CONVENIENCE STORES INC CENTRAL INDEX KEY: 0000721675 STANDARD INDUSTRIAL CLASSIFICATION: 5412 IRS NUMBER: 042497894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12497 FILM NUMBER: 95540302 BUSINESS ADDRESS: STREET 1: ONE VISION DRIVE CITY: ENFIELD STATE: CT ZIP: 06082 BUSINESS PHONE: 2037414444 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark one) X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 28, 1995 Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From to 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 juris- (I.R.S. Employer diction of incorporation Identification No.) or organization) ONE VISION DRIVE, ENFIELD, CT 06082 (Address of principal executive offices) Registrant's telephone number, including area code (203) 741-4444 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock (Par Value $.01) Class B Common Stock (Par Value $.01) (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of May 8, 1995, 2,782,109 shares of Class A Common Stock and 2,785,665 shares of Class B Common Stock were outstanding, and the aggregate market value of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES, INC., held by nonaffiliates was approximately $17,547,101. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal year are incorporated by reference in Part III. PART I ITEM 1. BUSINESS General Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or "Dairy Mart"), was founded in 1957 and operates one of the nation's largest convenience store chains. As of the fiscal year ending January 28, 1995, the Company operated or franchised approximately 960 stores under the "Dairy Mart" name in 11 states located in the Northeast, Midwest and Southeast, of which 406 stores sold gasoline and 317 stores were franchised. 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. However, subsequent to the end of fiscal 1995, the Company entered into agreements to sell its dairy manufacturing and distribution operations in both Connecticut and Ohio and announced its intention to sell its distribution center in Kentucky (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Strategic Initiatives-Dairy Manufacturing & Distribution Operations"). 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 400 locations also sell gasoline. 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 typical Dairy Mart store ranges between 2,400 and 2,700 square feet and is a free standing structure. As of January 28, 1995, the Company operated and franchised retail convenience stores in the following three regions of the United States: Number of Northeast Region Stores Massachusetts . . . . . . . . . . . . . . . . 64 Connecticut . . . . . . . . . . . . . . . . . 59 New York . . . . . . . . . . . . . . . . . . 37 Rhode Island. . . . . . . . . . . . . . . . . 22 Total Northeast Stores . . . . . . . . . . . 182 Midwest Region Ohio. . . . . . . . . . . . . . . . . . . . . 498 Michigan. . . . . . . . . . . . . . . . . . . 43 Pennsylvania. . . . . . . . . . . . . . . . . 31 Total Midwest Stores . . . . . . . . . . . . 572 Southeast Region Kentucky. . . . . . . . . . . . . . . . . . . 160 Indiana . . . . . . . . . . . . . . . . . . . 21 Tennessee . . . . . . . . . . . . . . . . . . 14 North Carolina. . . . . . . . . . . . . . . . 12 Total Southeast Stores . . . . . . . . . . . 207 Total Stores . . . . . . . . . . . . . . 961 Upgrade and Remodel of Existing Store Base and Closing Underperforming Stores Management has implemented a plan to upgrade and remodel the Company's retail and gasoline locations and to downsize its store operations through the closing or sale of underperforming locations. During fiscal 1995, the Company decided to close or sell 143 retail convenience stores, of which 72 had been closed or sold as of January 28, 1995. (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- Strategic Initiatives-Upgrade and Remodel of Existing Store Base" and "-Underperforming Stores"). Gasoline Operations Gasoline sales enable the Company to significantly increase a store's total level of sales without a commensurate increase in overhead. Gasoline sales accounted for approximately 35% of total revenues of the Company for each of the past three fiscal years. As of January 28, 1995, 406 stores sold gasoline; however, the Company plans to close or sell approximately 57 additional gasoline facilities that do not meet the Company's criteria for capital investment in fiscal 1996. 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. 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 a significant 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. 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. 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 private label products, which generally carry a higher gross profit margin than the Company's average gross profit margin on comparable products. Manufacturing and Distribution Operations The Company supplied its stores and most franchised stores through a product distribution system which included 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 supplied 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 were not produced by the Company were, and continue to be, supplied to the Northeast and Midwest regions by one wholesale distributor under a ten-year contract entered into in February, 1988. The Company supplied the Southeast region stores in large part through its 35,000 square foot distribution facility located in Louisville, Kentucky. In April, 1995, the Company entered into agreements to sell its dairy manufacturing and distribution operations in both Connecticut and Ohio and announced its intention to sell its distribution center in Kentucky. In conjunction with these transactions, the Company has entered into long-term marketing and supply agreements to purchase milk and dairy products at competitive prices, primarily under the Company's private label (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- Strategic Initiatives-Dairy Manufacturing & Distribution Operations"). Franchise Operations The Company franchises 317 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. In the past, most franchisees purchased their products from the Company or the suppliers used by the Company. In the future, since the Company has agreed to sell its manufacturing and distribution businesses in both Connecticut and Ohio and announced its intention to sell its distribution center in Kentucky, the Company will encourage its franchisees to purchase their products from the 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 28, 1995, there were 146 full franchise locations and 171 limited franchise locations. The Company's franchising strategy seeks 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:
January 28, 1995 January 29, 1994 January 30, 1993 CompanyFranchise CompanyFranchise CompanyFranchise OperatedOperated TotalOperatedOperatedTotalOperatedOperatedTotal At beginning of period. 687 335 1,022 709 3701,079 685 4491,134 Opened or acquired..... 10 1 11 4 - 4 6 - 6 Closed or sold......... (57) (15) (72) (50) (11) (61) (34) (27) (61) Transferred (net)...... 4 (4) -- 24 (24) -- 52 (52) -- At end of period....... 644 317 961 687 335 1,022 709 370 1,079
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. 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. 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, super market 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 28, 1995, exclusive of franchisees and franchisees' employees, the Company employed, on a full-time or part-time basis, approximately 4,400 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 estimated 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 $12.0 to $16.0 million in the aggregate over the next four 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. During fiscal 1995, the Company decided to close 81 retail gasoline facilities that do not meet the Company's criteria for capital investment. The Company had closed 24 of these locations by January 28, 1995 (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources-Environmental Responsibility"). The Company's estimate 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 estimate noted above. ITEM 2. PROPERTIES Of the 961 stores in operation as of January 28, 1995, 121 store locations were owned by the Company and 840 were leased. In addition, the Company owns 18 locations and is the primary lessee for 90 locations not currently operated as Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such locations to third parties. From time to time the Company enters into sale-leaseback transactions whereby the Company sells retail locations and leases such locations back from the purchasers. 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. The Company is attempting to sell its corporate headquarters facility in Enfield, Connecticut, and the buildings and real estate that formerly comprised its Connecticut and Ohio manufacturing and distribution facilities (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Strategic Initiatives-Dairy Manufacturing & Distribution Operations," "-Non-operating Assets" and Notes 12 and 13 to the Consolidated Financial Statements). 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. 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 1995. PART II ITEM 5. MARKET INFORMATION FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has not paid any cash dividends during the last two fiscal years and pursuant to loan covenants contained in the Company's amended senior revolving credit facility, is currently restricted from paying any dividends and from repurchasing its capital stock. The Company's Class A Common Stock and Class B Common Stock are traded on The Nasdaq Stock Market under the symbols DMCVA and DMCVB. The following table sets forth the high and low sales prices per share of both classes of the Company's Common Stock, as quoted on The Nasdaq Stock Market, for the last two fiscal years.
Class A Class B Common Common Stock Stock High Low High Low Fiscal Year Ended January 28, 1995: First Quarter 7 1/4 5 3/4 8 6 3/4 Second Quarter 6 1/2 3 3/4 6 3/4 4 1/4 Third Quarter 4 1/4 2 1/2 4 3/4 2 1/4 Fourth Quarter 4 2 5/8 4 1/4 2 7/8 Fiscal Year Ended January 29, 1994: First Quarter 6 4 1/2 6 3/4 4 3/4 Second Quarter 5 7/8 4 3/8 6 3/8 4 11/16 Third Quarter 6 7/8 5 1/2 6 3/4 5 5/8 Fourth Quarter 7 5 3/4 7 1/2 5 3/4 There were approximately 2,800 stockholders as of May 8, 1995. Included in this number are shares held in nominee or street names.
ITEM 6.SELECTED FINANCIAL DATA Five Year Summary
Five Years Ended January 28, 1995 1995(a) 1994(a) 1993(a) 1992 1991 (in thousands, except per share amounts) Operating Results: Net Sales of the Company, Its Subsidiaries and Franchises............. $ 753,460 $ 761,300 $ 775,013 $ 795,539 $ 808,336 Revenues.............................................................. 596,782 591,500 580,014 572,761 587,734 Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (EBITDA)........................... 4,377 23,646 16,323 28,852 28,526 Interest Expense...................................................... 9,219 7,644 7,456 8,260 8,366 Income (Loss) Before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Changes...................... (17,319) 3,102 (4,797) 7,021 6,802 Net Income (Loss) .................................................... (11,150) 866 (6,850) 4,092 3,813 Earnings (Loss) Per Share: Before Extraordinary Item and Cumulative Effect of Accounting Changes....................................... (1.94) .33 (.53) .75 .72 Net Earnings (Loss) Per Share.................................... (2.01) .16 (1.26) .75 .72 Cash Dividends Paid Per Share......................................... - - - - - Balance Sheet Net Property and Equipment............................................ $ 69,563 $ 92,014 $ 90,643 $ 82,974 $ 81,399 Total Assets.......................................................... 172,228 169,442 175,178 165,555 165,068 Long-Term Debt Including Capital Lease Obligations (b)............ 90,268 77,343 81,035 79,119 78,576 Stockholders' Equity.................................................. 22,817 33,870 32,732 39,100 34,842 (a) The results for the years presented include nonrecurring and unusual items as follows: 1995 1994 1993 1992 1991 (in thousands) Nonrecurring Pre-tax Charges: Regulatory and Financing Fees and Expenses......................... $ 1,216 $ - $ - $ - $ - Administrative Severance, Settlement and Related Costs............. 2,800 - 5,200 - - Costs to Divest of Dairy Manufacturing and Distribution Operations. 2,500 - - - - Writedown of Non-operating Properties to Net Realizable Value...... 3,584 - - - - Costs of Store Closings............................................ 3,900 - - - - $ 14,000 - 5,200 - - Other Unusual Items, Net of Related Income Tax Effect: Extraordinary Loss on Extinguishment of Debt....................... $ - $ 928 $ - $ - $ - Loss from Cumulative Effect of Accounting Changes.................. 389 - 3,951 - - (b) Long-term debt including capital lease obligations includes the current portion of long-term debt and capital lease obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary Results of Operations The Company's net loss for fiscal 1995 was $11.2 million as compared to net income of $866,000 for fiscal 1994 and a net loss of $6.9 million for fiscal 1993. Each years' results included nonrecurring or unusual items as follows:
Fiscal Years (in millions) 1995 1994 1993 Nonrecurring pre-tax charges: Regulatory and financing fees and expenses$ 1.2 $ -- $ -- Administrative severance, settlement and related costs 2.8 -- 5.2 Costs to divest of dairy manufacturing and distribution operations 2.5 -- -- Writedown of non-operating properties to net realizable value 3.6 -- -- Costs of store closings 3.9 -- -- $14.0 $ -- $5.2 Other unusual items, net of related income tax effect: Extraordinary loss on extinguishment of debt$ -- $0.9 $ -- Loss from cumulative effect of accounting changes 0.4 -- 4.0 The pre-tax results from fiscal 1995 recurring operations decreased $6.4 million from the prior fiscal year. Gasoline results declined $2.1 million in fiscal 1995 compared to fiscal 1994 due to lower gasoline gross margins combined with an increase in environmental remediation costs. Manufacturing and distribution results declined by $1.9 million reflecting the continued underutilization of existing plant capacity and the impact of competitive pricing pressures at the wholesale and retail levels. Convenience store results also declined by $800,000 in fiscal 1995 as compared to fiscal 1994, due primarily to the benefit received in fiscal 1994 associated with the substantial reduction in cigarette prices and the corresponding favorable impact on the Company's last-in, first-out (LIFO) inventory valuation method. Results in fiscal 1995 as compared to fiscal 1994 also reflect a higher level of interest expense associated with the increased level of borrowings subsequent to the recapitalization of the Company's debt structure. Strategic Initiatives In fiscal 1995, management determined it was necessary to fundamentally reassess the Company's direction. As a result, management has redefined certain of its strategies and implemented new corporate initiatives. The overall objective of these strategies and initiatives is to focus the Company's capital and management resources on its core retail business of operating customer friendly, competitively priced convenience stores. In order to accomplish its objective, the Company has (1) recapitalized to reduce the near-term debt obligations and allow its operating cash flow to be reinvested in the chain; (2) downsized its store operations through the sale or closing of underperforming locations; (3) agreed to the divestiture of its dairy manufacturing and distribution operations; (4) targeted certain of its non-operating assets for sale; and (5) reduced a significant portion of its administrative overhead. These actions allow the Company to expand its retail operations through new store construction and the upgrading and remodeling of its existing locations. A more detailed explanation of these initiatives is as follows: Capital Structure The Company issued $75.0 million principal amount of 10.25% Senior Subordinated Notes (the "Notes"), all of the principal of which is due March 15, 2004. The net proceeds from the sale of the Notes were used to repay substantially all of the Company's outstanding indebtedness and thus reduced the principal repayment requirements for the next five years by approximately $53 million. Underperforming Stores The Company has historically evaluated the performance of each of its stores in order to determine its contribution to the Company's overall profitability. In fiscal 1995, management has raised the acceptable level that a store's performance must meet in order for the store to be eligible for on-going capital expenditure support from the Company. Accordingly, the Company has closed or plans to close 143 of its retail convenience stores and 81 of its retail gasoline facilities due to their inability to meet the Company's economic and non-economic criteria for long-term stability and growth. Dairy Manufacturing & Distribution Operations The Company has entered into agreements to sell its dairy manufacturing and distribution operations in Ohio and Connecticut and is negotiating the sale of its distribution center in Kentucky. In conjunction with these transactions, the Company has entered into long-term marketing and supply agreements to purchase milk and dairy products at competitive prices, primarily under the Company's private label. The capital raised from these transactions, supplemented by the expected profit and cash flow enhancements, will be used to fund future capital expenditures. Non-Operating Assets In an effort to redirect capital from within the business to enhance overall returns and increase liquidity, management has identified certain non-operating assets which it has sold or intends to sell. Management has established an internal rate of return criteria to evaluate assets in order to optimize the return on the Company's capital investment. Administrative Overhead The Company has decreased its general and administrative costs through the downsizing and consolidation of its three administrative offices into one central location and through further reduction of its administrative support staff in fiscal 1995. These actions are intended to bring the Company's cost structure in line with its downsized operations. Further reductions in all areas of the Company's operating and overhead expenses are anticipated through on-going reviews of cost reduction opportunities. New Stores A major component in the Company's growth strategy is to continue to build new stores and increase its level of gasoline sales. All new store locations have significantly expanded gasoline retailing capacity and devote a greater amount of selling space to high profit margin products. Upgrade and Remodel of Existing Store Base Management has implemented a plan to upgrade and remodel the Company's retail and gasoline locations to cater to the always changing convenience needs of today's customer. The plan includes modernizing and re-imaging the store's appearance, upgrading the gasoline facilities and installing the most modern environmental protection equipment. Remodeled stores will also have more space devoted to higher profit margin items and certain stores will introduce "Branded Fast Food" concepts, such as Taco Bell, Subway and Pizza Hut, to attract customers and enhance performance. Technological Upgrade The Company's Information Systems group is currently evaluating several technological upgrades and procedural enhancement opportunities to increase the efficiency of the existing store operations and corporate support functions. These enhancements will provide more detailed and timely information regarding store operations, including composition of sales, inventory levels and product pricing and profit analysis. Results of Operations Revenues
Revenues for fiscal 1995 increased $5.3 million from fiscal 1994 and revenues for fiscal 1994 increased $11.5 million from fiscal 1993. A summary of revenues by operating area for the three fiscal years is shown below:
Fiscal Years (in millions) 1995 1994 1993 Convenience store $355.4 $355.8 $347.3 Gasoline 210.5 206.2 202.8 Manufacturing and distribution 28.6 27.1 25.9 Other 2.3 2.4 4.0 Total $596.8 $591.5 $580.0
Convenience store revenues decreased $400,000, or 0.1%, in fiscal 1995 as compared to fiscal 1994 due to a net reduction of 61 store locations, offset by a 2.8% increase in comparable store sales. Although the reduction in store locations had a negative impact on revenues, they did not have a material adverse effect on the results from operations, since the majority of stores closed or sold had been operating at a loss. Convenience store revenues increased $8.5 million, or 2.4%, in fiscal 1994 as compared to fiscal 1993 due primarily to a change in the mix of stores in fiscal 1994 to include more company owned and operated stores and fewer franchise operated stores, offset by the effect of a net reduction of 57 store locations. The Company records as revenue the gross sales of company owned and operated stores compared with franchise fees which are a percentage of gross sales of franchise operated stores. Gasoline revenues increased in fiscal 1995 as compared to fiscal 1994 due to an increase in the average selling price of gasoline of 2.1 cents per gallon. Gasoline gallons sold increased marginally in fiscal 1995 as compared to fiscal 1994 despite the decrease in gasoline facilities from 419 sites to 406 sites during fiscal 1995. Gasoline revenues increased in fiscal 1994 as compared to fiscal 1993 due to an increase in total gasoline sold of 9.7 million gallons. This gallonage increase was due primarily to further development of new stores having a major gasoline presence and the remodeling and expansion of gasoline facilities at a number of existing locations. Partially offsetting the impact of the higher gallonage on gasoline revenues in fiscal 1994 was a decrease in the average selling price of gasoline of 3.2 cents per gallon as compared to fiscal 1993. Manufacturing and distribution revenues increased both in fiscal 1995 and fiscal 1994 primarily due to the recognition of new wholesale business introduced in the second quarter of fiscal 1993, which included selling ice cream products to an unaffiliated distributor and a new product line marketed in certain operating regions of the Company. These increases were partially offset by an overall decline in demand for manufactured dairy product as a result of the reduced number of store locations. Other revenues decreased in fiscal 1994 as compared to fiscal 1993 due to the recognition of a one-time licensing fee earned in fiscal 1993 related to the start-up of the Company's Mexican joint venture operation and reduced interest income earned in fiscal 1994. Gross Margins Gross margins for fiscal 1995 decreased $4.2 million from fiscal 1994 and gross margins for fiscal 1994 increased $6.4 million from fiscal 1993. A summary of the gross margins by operating area for the three fiscal years is shown below:
Fiscal Years (in millions) 1995 1994 1993 Convenience store $130.0 $130.8 $126.2 Gasoline 24.0 25.4 20.0 Manufacturing and distribution 0.7 2.6 4.6 Other 2.3 2.4 4.0 Total $157.0 $161.2 $154.8
Convenience store gross margins decreased by $800,000 in fiscal 1995 as compared to fiscal 1994 due to an increase in costs associated with the Company's LIFO inventory valuation method. The fiscal 1995 LIFO provision reflected a normal inflationary increase, while the fiscal 1994 LIFO provision was reduced due to a substantial decrease in cigarette prices, which constitute one of the Company's major product categories. Convenience store gross margins increased $4.4 million in fiscal 1994 as compared to fiscal 1993 due to improved product gross margins, higher lottery and money order commissions and the effect of the reduction in the fiscal 1994 LIFO provision described above. Gasoline gross margins decreased by $1.4 million in fiscal 1995 as compared to fiscal 1994 primarily due to a decrease of 0.6 cents in gross margin per gallon. Gasoline gross margins increased $5.4 million in fiscal 1994 as compared to fiscal 1993 due to the favorable impact of higher gallons sold combined with an increase of 2.1 cents in gross margin per gallon. Manufacturing and distribution gross margins declined in fiscal 1995 and fiscal 1994 due to the continued underutilization of existing plant capacity and the impact of competitive product pricing. These decreases in gross margins were partially offset by increased profits realized from the new business introduced in fiscal 1993 as described above. Selling and General and Administrative Expenses Selling expenses for fiscal 1995 increased $700,000 from fiscal 1994 and selling expenses for fiscal 1994 increased $3.3 million from fiscal 1993. A summary of selling expenses by operating area and general and administrative expenses for the three fiscal years is shown below:
Fiscal Years (in millions) 1995 1994 1993 Selling expenses: Convenience store $104.3 $104.3 $101.8 Gasoline 11.9 11.2 10.4 116.2 115.5 112.2 General and administrative expenses 34.0 34.5 34.3 Total $150.2 $150.0 $146.5
Convenience store selling expenses remained constant in fiscal 1995 as compared to fiscal 1994. Higher store labor and rent costs were offset by the reduction in the number of store locations as described above. Convenience store selling expenses increased $2.5 million in fiscal 1994 as compared to fiscal 1993 due to the change in store mix to include more company owned and operated stores and fewer franchise operated stores and higher advertising and store maintenance expenses. The Company is obligated to pay for only certain selling expenses associated with franchise operated stores versus all of the selling expenses associated with company owned and operated stores. This increase was partially offset by the reduction in the number of store locations described above. Gasoline selling expenses increased $700,000 in fiscal 1995 as compared to fiscal 1994 primarily due to increased environmental expenses associated with the remediation of gasoline locations after considering expected reimbursements from various state environmental trust funds. Gasoline selling expenses increased $800,000 in fiscal 1994 as compared to fiscal 1993 due to increased gallons sold described above, partially offset by a decrease in environmental remediation costs. General and administrative expenses decreased in fiscal 1995 as compared to fiscal 1994 due to reduced administrative staff. General and administrative expenses increased in fiscal 1994 as compared to fiscal 1993 due to higher personnel related costs, partially offset by a decrease in administrative staff resulting from the consolidation of regional corporate offices (see "Strategic Initiatives-Administrative Overhead"). Interest Expense, Inflation and Taxes Interest expense increased in fiscal 1995 as compared to fiscal 1994 and fiscal 1993, due to an increased level of borrowings associated with the issuance of the Notes (see "Strategic Initiatives-Capital Structure") and to a lesser extent the overall increase in current interest rates on variable rate borrowings. Inflation did not have a material effect on the Company's revenues, gross margins, selling and general and administrative expenses in fiscal 1995, fiscal 1994 and fiscal 1993, respectively, other than the effect of cigarette price reductions discussed above. The effective tax rate for the Company was a benefit of 38% and 40% for fiscal years 1995 and 1993, respectively, and a provision of 42% for fiscal 1994 (see Note 6 to the Consolidated Financial Statements). Liquidity and Capital Resources The Company generates substantial operating cash flow since most of its revenues are received in cash. The amount of cash generated from operations significantly exceeded the current debt service requirements of the Company's long-term debt and capital lease obligations after giving effect to the Company's recapitalization of its outstanding debt during the first quarter of fiscal 1995 (see "Cash Provided by Financing Activities"). The fiscal 1995 capital expenditures of the Company were primarily funded by the excess proceeds from the debt recapitalization, after retirement of substantially all of the Company's previously existing debt obligations, and by excess operating cash flow after debt service. In addition, the Company has a revolving line of credit available, although not utilized during the last twelve months, to address the timing of certain working capital disbursements in the future. Management believes that the cash flow from operations and the sale of certain underperforming and non-operating assets will provide the Company with ample liquidity and the capital necessary to achieve its expansion initiatives in its retail operations (see "Strategic Initiatives- New Stores" and "-Upgrade and Remodel of Existing Store Base"). Cash Provided by Operating Activities During fiscal 1995, net cash generated by operations was $7.6 million lower than prior fiscal year. This decrease was primarily due to the unfavorable results of recurring operations in fiscal 1995 as compared to fiscal 1994 (see "Summary Results of Operations"), and the cash outflows related to certain nonrecurring charges recorded in fiscal 1995 (see Note 12 to the Consolidated Financial Statements). During fiscal 1995, the Company paid its trade payables in an average of 24 days, which compares to 24 days and 23 days for fiscal 1994 and fiscal 1993, respectively. 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. As of January 28, 1995 and January 29, 1994, the amounts due the issuer were $5.3 million and $6.2 million, respectively. 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. Cash Provided by Financing Activities Net cash provided by financing activities increased by $14.1 million from the prior fiscal year as a result of the recapitalization of the Company's debt structure through the issuance of $75.0 million of 10.25% Senior Subordinated Notes (the "Notes"), all of the principal of which is due March 15, 2004 (see Note 4 to the Consolidated Financial Statements). The proceeds from the issuance of the Notes, net of $2.3 million of offering costs, were used to repay a previously existing bank term loan and bank revolving loan and redeem in full the Company's 14.25% subordinated debentures. The excess proceeds from the issuance of the Notes were primarily used to fund capital expenditures in fiscal 1995. The recapitalization of the Company's debt structure has been integral toward accomplishing management's overall objective of redirecting the Company's capital for purposes of expanding its retail operations. As a result of the recapitalization, the Company significantly reduced its near-term debt service requirements thus improving the Company's financial and operating flexibility. Maturities of the Company's long-term debt obligations before and immediately following the issuance of the Notes are as follows through fiscal 1999:
Maturities of Long-Term Debt Obligations Fiscal Year Pre-issuance Post-issuance (in millions) 1995 $ 8.1 $ 3.1 1996 18.0 1.7 1997 22.1 0.8 1998 6.0 0.8 1999 6.9 1.6 $61.1 $ 8.0
In connection with the issuance of the Notes, the Company entered into a senior revolving credit facility which provided 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. As of January 28, 1995, the Company had no outstanding revolving credit loans under the credit facility, but did have $13.1 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. Subsequent to fiscal 1995, management finalized an amendment to the senior revolving credit facility. Under the terms of the amended senior revolving credit facility, the Company has temporarily reduced the total availability to $20.0 million with $15.0 million available for the issuance of letters of credit. As of the date of the amendment, the Company had no outstanding revolving credit loans under the credit facility, but did have $12.9 million of letters of credit outstanding thereunder. The Company may utilize the amended credit facility as needed for working capital and general corporate purposes (see Note 4 to the Consolidated Financial Statements). Cash Used by Investing Activities Net cash used by investing activities increased by $8.8 million from the prior fiscal year, primarily due to an increased level of capital expenditures associated with new store construction and the upgrading of existing stores. Consistent with certain strategic initiatives described above, the Company strengthened its investment in its retail operations by adding 11 new store locations and by upgrading a majority of store locations with new fountain soda equipment which offers an expanded variety of high margin products. In addition, the Company's investing activities were increased in the current fiscal year due to the short-term investment of $3.9 million in U.S. Treasury Bills partially offset by the sale of $1.9 million of such investments. Capital Expenditures The Company anticipates spending approximately $22 million for capital expenditures in fiscal 1996 by purchasing store and gasoline equipment for new store locations, remodeling approximately 15% of its existing stores, introducing the "Branded Fast Food" concept in a number of stores, and significantly upgrading certain gasoline locations to provide credit card readers at the pump, improve outdoor lighting and to meet current environmental standards (see "Environmental Responsibility"). These capital expenditures will be funded primarily by cash generated from operations and from cash received on the disposition of underperforming and non-operating assets held for sale as of January 28, 1995. Subsequent to fiscal 1995, the Company also sold and leased back 16 of its existing store properties (see Note 13 to the Consolidated Financial Statements) and intends to lease the real estate for the majority of new store locations. Environmental Responsibility The Company accrues its estimate of all costs to be incurred for assessment and remediation with respect to releases of regulated substances from existing and previously operated retail gasoline facilities. As of January 28, 1995, the Company had recorded an accrual of $2,302,000 for such costs, the majority of which are anticipated to be spent over the next 3 to 5 years. The Company is entitled to reimbursement of a portion of the above costs from various state environmental trust funds based upon compliance with the terms and conditions of such trust funds. As of January 28, 1995, the Company had recorded a net state trust fund reimbursement receivable of $1,031,000 (representing a gross receivable of $1,432,000 less an allowance of $401,000). Although there are no assurances as to the timing, the Company anticipates receiving reimbursements from the state environmental trust funds within one to four years from the payment of the reimbursable assessment and remediation expenses. In addition, the Company estimates that future capital expenditure requirements to comply with federal and state underground gasoline storage tank regulations will be approximately $12.0 to $16.0 million in the aggregate through December 1998. These costs could be reduced for low volume locations closed in lieu of the capital cost of compliance. The Company's estimate of costs to be incurred for environmental assessment and remediation and for required underground storage tank upgrading and other regulatory compliance are based on factors and assumptions that could change due to modifications of regulatory requirements or detection of unanticipated environmental conditions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated financial statements of the Company and its subsidiaries and notes thereto, appear on Pages F-1 through F-15 of this Form 10-K. 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 1995 fiscal year. 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. 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 F-1. (2) Financial Statement Schedules: Page Report of Independent Public Accountants on Schedules 29 Schedule II - Valuation Accounts 30 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. (3.1) 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. (3.2) The Company's Amended and Restated Bylaws are filed as Exhibit 3.2 attached hereto. (4) Instruments defining the rights of security holders, including indentures. (4.1) The instruments defining the rights of the holders of the Company's Common Stock include the Company's Restated Certificate of Incorporation and Amended and Restated Bylaws, filed as Exhibits 3.1 and 3.2 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. (4.2) 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 was filed as Exhibit 4.1 to the Company's Form 10-K for the fiscal year ended January 29, 1994, and is incorporated herein by reference. (10) Material Contracts. (10.1) Amended Credit Agreement dated as of May 12, 1995, among the Company, Fleet Bank, National Association and Society National Bank is filed as Exhibit 10.1 attached hereto. (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 herein 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. (10.6) 1995 Stock Option Plan for Outside Directors is filed as Exhibit 10.6 attached hereto. (10.7) Agreement regarding employment matters dated September 16, 1994 between the Company and Gregory G. Landry is filed as Exhibit 10.7 attached hereto. (10.8) Agreement regarding employment matters dated September 16, 1994 between the Company and Robert B. Stein, Jr. is filed as Exhibit 10.8 attached hereto. (10.9) Agreement regarding employment matters dated September 16, 1994 between the Company and Mitchell J. Kupperman is filed as Exhibit 10.9 attached hereto. (10.10) Settlement agreement dated January 27, 1995 between the Company and Frank Colaccino is filed as Exhibit 10.10 attached hereto. (21) Subsidiaries of the Registrant is attached hereto as Exhibit 21. (23) Consent of Arthur Andersen LLP to the incorporation of their reports included in this Form 10-K, into the Company's previously field Registration Statements on Forms S-8, is attached hereto as Exhibit 23. (27) Financial Data Schedule is filed as Exhibit 27 attached hereto. (b) Reports on Form 8-K None filed during the Company's fourth quarter. (c) See (3) above. (d) See (2) above. SIGNATURES Pursuant to the requirement 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: May 15, 1995 DAIRY MART CONVENIENCE STORES, INC. By /s/ Robert B. Stein, Jr. Robert B. Stein, Jr. President By /s/ Gregory G. Landry Gregory G. Landry Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Director 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: May 15, 1995 /s/ Robert B. Stein, Jr. Robert B. Stein, Jr. President and Director Dated: May 15, 1995 /s/ Gregory G. Landry Gregory G. Landry Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Director Dated: May 15, 1995 /s/ Mitchell J. Kupperman Mitchell J. Kupperman Executive Vice President Director Dated: May 15, 1995 /s/ Charles Nirenberg Charles Nirenberg Chairman of the Board and Director Dated: May 15, 1995 /s/ Frank W. Barrett Frank W. Barrett Director Dated: May 15, 1995 /s/ John W. Everets, Jr. John W. Everets, Jr. Director Dated: May 15, 1995 /s/ Theodore W. Leed Theodore W. Leed Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE 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 May 15, 1995. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states 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 LLP Hartford, Connecticut May 15, 1995 SCHEDULE II DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES VALUATION ACCOUNTS
Column A Column B Column C Column D Column E Additions Balance at Charge to Deductions Balance at Beginning Costs and Other and Accounts End of Description of Period Expenses Recoveries Written off Period Reserve for Doubtful Accounts: Fiscal Year End January 30, 1993$ 1,183,423$ 955,220$ --$ (485,519)$ 1,653,124 Fiscal Year End January 29, 1994 1,653,124 958,336 -- (787,283) 1,824,177 Fiscal Year End January 28, 1995 1,824,177 1,053,818 14,057(1,163,810) 1,728,242
DAIRY MART CONVENIENCE STORES, INC. INDEX TO FINANCIAL STATEMENTS
Form 10-K Page Report of Independent Public Accountants F-2 Consolidated Statements of Operations and Retained Earnings for the Fiscal Years Ended January 28, 1995, January 29, 1994 and January 30, 1993. F-3 Consolidated Balance Sheets as of January 28, 1995 and January 29, 1994 F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 28, 1995, January 29, 1994 and January 30, 1993 F-5 Notes to Consolidated Financial Statements for the Fiscal Years Ended January 28, 1995, January 29, 1994 and January 30, 1993 F-6 to 15 F-1
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 28, 1995 and January 29, 1994, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended January 28, 1995. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also 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 28, 1995 and January 29, 1994, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 1995, in conformity with generally accepted accounting principles. Hartford, Connecticut Arthur Andersen LLP May 15, 1995 F-2 Consolidated Statements of Operations and Retained Earnings
For the Years Ended January 28, 1995, January 29, 1994 and January 30, 1993 1995 1994 1993 (in thousands, except per share amounts) Net Sales of the Company, Its Subsidiaries and Franchises......................... $ 753,460 $ 761,300 $ 775,013 Revenues.......................................................................... $ 596,782 $ 591,500 $ 580,014 Cost of goods sold and expenses: Cost of goods sold........................................................... 439,757 430,254 425,180 Selling, general and administrative expenses................................. 150,245 150,006 146,542 Interest expense............................................................. 9,219 7,644 7,456 Loss on disposition of properties, net....................................... 880 494 433 Nonrecurring charges......................................................... 14,000 - 5,200 614,101 588,398 584,811 Income (loss) before income taxes, extraordinary item and cumulative effect of accounting changes.............................. (17,319) 3,102 (4,797) (Provision for) benefit from income taxes......................................... 6,558 (1,308) 1,898 Income (loss) before extraordinary item and cumulative effect of accounting changes................................................ (10,761) 1,794 (2,899) Extraordinary loss on extinguishment of debt (net of income tax benefit of $677).. - (928) - Income (loss) before cumulative effect of accounting changes............ (10,761) 866 (2,899) Cumulative effect of accounting changes........................................... (389) - (3,951) Net income (loss)....................................................... $ (11,150) $ 866 $ (6,850) Earnings (loss) per share: Before extraordinary item and cumulative effect of accounting changes......... $ (1.94) $ .33 $ (.53) Extraordinary loss on extinguishment of debt.................................. - (.17) - Cumulative effect of accounting changes ...................................... (.07) - (.73) Earnings (loss) per share......................................................... $ (2.01) $ .16 $ (1.26) Retained earnings, beginning of year.............................................. $ 11,329 $ 10,463 $ 17,313 Net income (loss)................................................................. (11,150) 866 (6,850) Retained earnings, end of year.................................................... $ 179 $ 11,329 $ 10,463 Note: Excise taxes approximating $36,332,000, $29,209,000 and $23,855,000 collected from customers on retail gasoline sales are included in Revenues and Cost of goods sold for fiscal years 1995, 1994 and 1993, respectively. The accompanying notes are an integral part of these financial statements. F-3
Consolidated Balance Sheets
January 28, 1995 and January 29, 1994 1995 1994 (in thousands, except share amounts) Assets Current Assets: Cash.................................................................................... $ 4,512 $ 6,632 Short-term investment................................................................... 2,053 -- Accounts and notes receivable........................................................... 12,398 11,770 Inventory............................................................................... 26,044 26,269 Prepaid expenses and other current assets............................................... 1,945 2,013 Deferred income taxes................................................................... 3,537 2,098 Total current assets................................................................. 50,489 48,782 Net Book Value of Property and Equipment Held For Sale ................................. 23,378 -- Property and Equipment: Land and improvements................................................................... 9,180 15,199 Buildings and leaseholds................................................................ 31,370 54,231 Equipment............................................................................... 59,358 75,418 99,908 144,848 Less - Accumulated depreciation......................................................... 30,345 52,834 Net property and equipment........................................................... 69,563 92,014 Property Under Capital Leases, net of accumulated amortization of $1,617 and $5,145......... 1,015 1,760 Other Assets: Goodwill, net of accumulated amortization of $3,218 and $2,864.......................... 10,647 10,961 Franchise and operating rights, net of accumulated amortization of $2,830 and $2,488.... 7,314 7,656 Notes receivable........................................................................ 2,494 2,267 Other................................................................................... 7,328 6,002 Total other assets................................................................... 27,783 26,886 Total assets............................................................................... $ 172,228 $ 169,442 Liabilities and Stockholders' Equity Current Liabilities: Current portion of long-term debt........................................................ $ 1,285 $ 3,071 Current portion of capital lease obligations............................................. 285 1,038 Accounts payable......................................................................... 28,942 29,461 Accrued expenses......................................................................... 17,214 14,632 Accrued interest......................................................................... 3,052 1,095 Total current liabilities............................................................ 50,778 49,297 Long-Term Debt, less current portion above................................................. 87,324 71,604 Capital Lease Obligations, less current portion above..................................... 1,374 1,630 Other Liabilities and Deferred Credits...................................................... 6,837 6,222 Deferred Income Taxes....................................................................... 3,098 6,819 Commitments and Contingencies (Note 11) Stockholders' Equity: Class A Common Stock, par value $.01, 20,000,000 shares authorized, 3,290,460 and 3,268,729 issued........................................................ 33 33 Class B Common Stock, par value $.01, 10,000,000 shares authorized, 2,961,953 and 2,956,015 issued........................................................ 30 30 Paid-in capital in excess of par value................................................... 27,580 27,483 Retained earnings........................................................................ 179 11,329 Treasury stock, at cost.................................................................. (5,005) (5,005) Total stockholders' equity........................................................... 22,817 33,870 Total liabilities and stockholders' equity................................................. $ 172,228 $ 169,442 The accompanying notes are an integral part of these financial statements. F-4
Consolidated Statements of Cash Flows
For the Years Ended January 28, 1995, January 29, 1994 and January 30, 1993 1995 1994 1993 (in thousands) Cash flows from operating activities: Net income (loss) ...................................................................... $ (11,150) $ 866 $ (6,850) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting changes............................................. 389 -- 3,951 Extraordinary loss on extinguishment of debt........................................ -- 928 -- Cash flow effect of nonrecurring items.............................................. 9,953 (4,833) 5,200 Depreciation and amortization....................................................... 12,477 12,900 13,664 Change in deferred income taxes..................................................... (5,160) (95) (3,647) Loss on other disposition of properties, net........................................ 880 494 433 (Increase) decrease in accounts and notes receivable................................ (628) (152) 1,438 Decrease (increase) in inventory.................................................... 225 588 (2,726) Increase in accounts payable........................................................ 242 932 2,286 Decrease (increase) in other current assets and liabilities, net.................... (28) 1,787 1,090 (Decrease) increase in other noncurrent liabilities and deferred credits............ (508) 870 1,147 Net cash provided by operating activities................................................. 6,692 14,285 15,986 Cash flows from investing activities: Purchase of short-term investments...................................................... (3,953) -- -- Proceeds from sale of short-term investments............................................ 1,900 -- -- Purchase of property and equipment...................................................... (17,772) (13,749) (17,992) Proceeds from sale of property and equipment............................................ 1,120 1,925 1,603 Increase in long-term notes receivable.................................................. (1,621) (291) (1,057) Proceeds from long-term notes receivable................................................ 1,394 1,631 2,074 (Increase) decrease in intangibles and other assets, net................................ (334) 15 (1,383) Net cash used by investing activities..................................................... (19,266) (10,469) (16,755) Cash flows from financing activities: Issuance of senior subordinated notes, net of offering costs............................ 72,702 - - Repayment of term debt.................................................................. (22,000) (7,000) (4,000) Retirement of subordinated debentures................................................... (27,944) - - (Decrease) increase in revolving loan, net.............................................. (12,100) 300 5,400 Additional long-term debt .............................................................. 1,362 4,915 2,327 Repayment of other long-term debt and capital lease obligations......................... (1,663) (2,154) (1,811) Increases in common stock and paid-in capital........................................... 97 272 482 Net cash provided by (used in) financing activities....................................... 10,454 (3,667) 2,398 (Decrease) increase in cash............................................................... (2,120) 149 1,629 Cash at beginning of year................................................................. 6,632 6,483 4,854 Cash at end of year....................................................................... $ 4,512 $ 6,632 $ 6,483 Supplemental disclosures: Cash paid during the year - Interest................................................................................ $ 8,293 $ 7,700 $ 7,191 Income taxes............................................................................ 879 1,199 1,535 Noncash investing and financing activities - Capital lease obligations............................................................... - 330 - Investment in Mexican Joint Venture..................................................... - - 500 The accompanying notes are an integral part of these financial statements. F-5
Notes To Consolidated Financial Statements January 28, 1995, January 29, 1994 and January 30, 1993 1. Significant Accounting Policies: Corporate organization and consolidation - The accompanying financial statements include the accounts of Dairy Mart Convenience Stores, Inc. and its subsidiaries (the Company). All intercompany transactions have been eliminated. Nature of the business - The Company owns, operates and franchises convenience retail stores, a number of which also sell gasoline. The Company also manufactured and distributed certain dairy and other products for sale at the majority of these locations, which operations were discontinued subsequent to January 28, 1995 (see Note 13). Fiscal year - The Company's fiscal year ends on the Saturday closest to January 31. Short-term investment - The Company's short-term investment consists of a U.S. Treasury Bill with a maturity of less than one year. The Company is accounting for this investment as being available for sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As of January 28, 1995, the fair market value of the U.S. Treasury Bill approximated its cost. 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. Net book value of property and equipment held for sale - Property and equipment held for sale represents operating and non-operating assets which the Company intends to sell. The Company reduced the carrying value of certain of these assets to their estimated net realizable value by taking a nonrecurring charge to earnings in the current fiscal year (see Note 12).
Property and equipment - Property and equipment are stated at cost and 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, if shorter. 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 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. The Company's management anticipates a return to profitability in fiscal 1996. Therefore, management believes that no impairment of goodwill and franchise and operating rights has or will occur. 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. The cumulative effect of this change in accounting method resulted in a charge in fiscal 1993 of $3,951,000. 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 28, 1995 and January 29, 1994, the Company had established reserves for these risks of $8,702,000 and $6,696,000, respectively, which are recorded on a present value basis. The Company historically has recorded its self insurance reserves using a discount rate based upon the Company's incremental borrowing rate which was 8% as of January 29, 1994. As of January 30, 1994, the Company changed its method of accounting to discount its self insurance reserves at a risk free rate of return. The cumulative effect of this change in accounting method was a charge to income of $389,000, net of the applicable income tax benefit of $271,000. Fair value of financial instruments - In accordance with Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments", as amended, the Company has disclosed the fair value, related carrying value and method for determining fair value for the following financial instruments in the accompanying footnotes as referenced: short-term investments (see Note 1), accounts and notes receivable (see Note 2) and long-term debt (see Note 4). Revenue recognition - The Company recognizes revenues as earned, including franchise revenues and interest income. 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 Class A and Class B 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 5,540,874, 5,532,201 and 5,422,971 for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, respectively. Reclassifications - Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the presentation used for the current year. F-6
2. Accounts and Notes Receivable: A summary of accounts and notes receivable as of January 28, 1995 and January 29, 1994 is as follows:
1995 1994 (in thousands) Franchise accounts receivable....................................................................... $ 5,067 $ 5,017 Franchise notes receivable.......................................................................... 3,010 2,476 Marketing allowances and other...................................................................... 8,543 8,368 16,620 15,861 Less allowance for doubtful accounts and notes...................................................... 1,728 1,824 Net accounts and notes receivable................................................................... 14,892 14,037 Less noncurrent notes receivable.................................................................... 2,494 2,267 Current accounts and notes receivable............................................................... $ 12,398 $ 11,770 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 28, 1995, the fair value of the noncurrent notes receivable exceeds the carrying value of $2,494,000 by approximately $140,000. 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.
3. Inventory: A summary of inventory as of January 28, 1995, January 29, 1994 and January 30, 1993 is as follows:
1995 1994 1993 (in thousands) Inventory valued at FIFO cost..................................................................... $30,800 $30,852 $32,265 LIFO reserve...................................................................................... (4,756) (4,583) (5,408) Inventory primarily valued at LIFO cost........................................................... $26,044 $26,269 $26,857 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 decreased by $173,000 and $758,000 in 1995 and 1993, respectively, and increased by $825,000 in 1994. Loss per share would have been reduced by $.02 and $.08 in 1995 and 1993, respectively. Earnings per share would have decreased by $.09 in 1994, had the FIFO method been used. During 1995 and 1993, the Company liquidated certain LIFO inventory that was carried at lower costs prevailing in prior years. The effect of the liquidation decreased the net loss by approximately $56,000 ($.01 per share) in 1995, and by approximately $60,000 ($.01 per share) in 1993. 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). F-7
4. Long-Term Debt: The Company had the following long-term debt as of January 28, 1995:
Interest Maturity January 28, 1995 Rate (Fiscal Year) Current Long-Term Total (in thousands) Senior Subordinated Notes........................................ 10.25% 2005 $ -- $75,000 $75,000 Bank revolving loan.............................................. Prime 1998 -- -- -- Real estate mortgage notes payable............................... 6.25%-12.0% 1996-2012 262 5,677 5,939 Small Business Administration debentures......................... 7.9%-10.7% 1999-2006 -- 4,220 4,220 Equipment financing.............................................. Various 1996-2000 1,023 2,427 3,450 $ 1,285 $87,324 $88,609 In March 1994, 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 offering costs of $2,298,000, 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. 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 of $677,000, in the fiscal year ended January 29,1994. 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 (the "Facility") with a group of banks which provided 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. As of January 28, 1995, the Company had no outstanding revolving credit loans under the Facility, but did have $13.1 million of letters of credit outstanding thereunder. Subsequent to January 28, 1995, management finalized an amendment to the Facility. Under the terms of the amended Facility, the Company has temporarily reduced the total availability to $20.0 million with $15.0 million available for the issuance of letters of credit. As of the date of the amendment, the Company had no outstanding revolving credit loans under the Facility, but did have $12.9 million of letters of credit outstanding thereunder. The outstanding balance of any revolving credit loans is due and payable on May 31, 1996. Revolving credit loans under the amended Facility bear interest at prime and the Company must also pay a commitment fee of 1/2% on any unused portion of the amended Facility. Among other restrictions, the amended Facility contains financial covenants relating to specified levels of: earnings before interest expense, rent and taxes to interest expense and rent; cash flows from operations and proceeds from sales of assets and equity offerings, as defined, to interest expense, capital expenditures and current maturities of long-term debt; indebtedness to earnings before interest expense, taxes, depreciation and amortization; as well as the maintenance of a minimum net worth. In connection with the amended Facility, the Company pledged as collateral the capital stock of and any loans to certain subsidiary corporations of the Company and, may upon the occurrence of certain events, pledge as collateral additional assets of the Company and its subsidiary corporations. The Company is restricted from paying any dividends and from repurchasing its capital stock by applicable covenants contained in the amended Facility. As of January 28, 1995 and January 29, 1994, the fair value of the bank revolving loan, real estate mortgage notes payable and Small Business Administration debentures approximated the carrying amount. As of January 28, 1995, the fair value of the Notes was approximately $56,250,000. As of January 28, 1995, maturities on long-term debt for the next five years are as follows: January 28, Fiscal Year 1995 (in thousands) 1996 .......................................................................... $1,285 1997 .......................................................................... 1,059 1998 .......................................................................... 1,066 1999 .......................................................................... 1,928 2000 .......................................................................... 3,922 F-8
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. Subsequent to fiscal 1995, the Company entered into sale and leaseback transactions for the real estate of sixteen store locations. The future minimum lease payments related to these properties (see Note 13) are not included in the following summary. A summary of future minimum lease payments and sublease receipts as of January 28, 1995 is as follows:
Net Capital Operating Operating Operating Payable/Receivable in Fiscal Year Ending Leases Leases Subleases Leases (in thousands) 1996........................................................................ $452 $13,913 $2,758 $11,155 1997........................................................................ 417 11,273 1,911 9,362 1998........................................................................ 364 8,487 1,373 7,114 1999........................................................................ 261 5,978 746 5,232 2000........................................................................ 226 4,008 168 3,840 Thereafter.................................................................. 583 9,403 129 9,274 Total minimum............................................................... 2,303 $53,062 $7,085 $45,977 Less amounts representing interest and executory costs...................... 644 Present value of minimum lease payments..................................... $1,659 Rental expense for all operating leases was as follows: 1995 1994 1993 (in thousands) Leases...................................................................... $15,321 $14,803 $15,573 Less subleases.............................................................. 4,631 4,396 4,659 Net......................................................................... $10,690 $10,407 $10,914 F-9
6. Federal and State Income Taxes: The Company adopted the provisions of SFAS No. 109 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 (benefit from) provision for income taxes for the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 was as follows:
1995 1994 1993 (in thousands) Current (benefit) provision Federal................................................................................... $ (2,015) $ 188 $ 1,309 State and local........................................................................... 346 447 440 Total current (benefit) provision....................................................... (1,669) 635 1,749 Deferred (benefit) provision Federal................................................................................... (3,423) (115) (3,118) State and local........................................................................... (1,737) 111 (529) Total deferred (benefit) provision...................................................... (5,160) (4) (3,647) Total (benefit) provision .................................................................. $ (6,829) $ 631 $ (1,898) 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 current provision for state and local 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: Percent of Pretax Income 1995 1994 1993 Statutory federal income tax rate........................................................... (34)% 34 % (34)% Increase (decrease) from: State income tax (benefit) provision, net of federal tax effect........................... (5) 24 (1) Nondeductible depreciation and amortization of acquired assets............................ 1 8 2 Targeted jobs credit...................................................................... (2) (27) (7) Regulatory audit settlement............................................................... 2 - - Other..................................................................................... - 3 - Effective income tax rate................................................................... (38)% 42 % (40)% F-10 In November 1994, the Company reached agreement with the Internal Revenue Service to settle certain disputed items, primarily related to the deductibility of certain intangible assets associated with prior acquisitions. As a result of the settlement, the Company was required to pay $906,000 of federal and state income taxes and $681,000 of related pre-tax interest charges, and to reduce the deductibility of the remaining basis of certain intangible assets by $3,300,000. The Company has reflected the income tax impact of this settlement through the current year tax provision and adjusted deferred tax assets and liabilities accordingly. 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 28, 1995 and January 29, 1994 were as follows: 1995 1994 (in thousands) Capitalized leases.................................................................................. $ 182 $ 269 Depreciation and amortization....................................................................... (13,337) (12,142) Vacation accrual.................................................................................... 310 314 Inventory (LIFO).................................................................................... (1,582) (1,622) Reserve for asset valuations........................................................................ 744 982 Insurance reserves not deductible for tax purposes.................................................. 2,091 1,245 Income deferred for financial statement purposes.................................................... 127 955 Reserve for closed stores and renovations........................................................... 1,649 613 Accrued restructuring and severance reserves........................................................ 607 149 Loss on extinguishment of debt...................................................................... -- 677 Financial statement expenses deferred for tax purposes.............................................. 477 -- Writedown of non-operating properties............................................................... 1,455 -- Divestiture of dairy manufacturing and distribution operations...................................... 997 -- Tax credits and net operating loss carryforwards.................................................... 6,272 3,581 Other............................................................................................... 447 258 Net deferred tax asset (liability).................................................................. $ 439 $ (4,721) As of January 28, 1995, the Company had alternative minimum tax credits aggregating $1,292,000 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 $1,794,000 of targeted jobs credit carryforwards that expire from fiscal 2007 to 2010 and $411,000 of foreign tax credit carryforwards that expire in fiscal 1997 to 2000. The Company and its subsidiaries file a consolidated federal income tax return but generally file separate state income tax returns. As of January 28, 1995, the Company had regular federal income tax net operating loss carryforwards of $5,057,000 which expire, if unused, from fiscal 2009 to 2010 and net operating loss carryforwards for state income tax purposes of $15,994,000 which expire, if unused, from fiscal 1997 to 2010. No valuation allowance for deferred tax assets was provided as of January 28, 1995 and January 29, 1994. F-11
7. Capital Stock: An analysis of the capital stock accounts is as follows:
Common Stock Class A shares Class B shares Paid-in capital issued at $.01 issued at $.01 in excess of par value par value Amount par value Balance February 1, 1992....................................... 3,085,459 2,973,693 $60,593 $26,730,616 Employee stock options exercised............................... 70,313 -- 703 389,518 Employee stock purchase plan................................... 15,655 -- 157 91,672 Exchange of Class B shares for Class A shares.................. 2,375 (2,375) - -- Balance January 30, 1993....................................... 3,173,802 2,971,318 61,453 27,211,806 Employee stock options exercised............................... 2,812 49,697 525 149,053 Employee stock purchase plan................................... 27,115 -- 271 122,190 Exchange of Class B shares for Class A shares.................. 65,000 (65,000) - -- Balance January 29, 1994....................................... 3,268,729 2,956,015 62,249 27,483,049 Employee stock options exercised............................... 750 6,000 68 27,870 Employee stock purchase plan................................... 20,919 -- 209 68,797 Exchange of Class B shares for Class A shares.................. 62 (62) - -- Balance January 28, 1995....................................... 3,290,460 2,961,953 $62,526 $27,579,716 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, 1,068,886 shares remained available for issuance as of January 28, 1995. As of January 28, 1995, January 29, 1994 and January 30, 1993, the Company held 521,625 shares of Class A Common Stock and 175,957 shares of Class B Common Stock as treasury shares. F-12
8. Stock Option Plans: The Company adopted Stock Option Plans in 1983, 1985 and 1990 providing for the granting of options to employees of up to an aggregate of 226,875 shares of Class B Common Stock and 750,000 shares of Class A Common Stock. The Company granted incentive stock options pursuant to these Plans totalling 158,363, 100,500 and 10,000 in fiscal 1995, 1994 and 1993, respectively. At January 28, 1995, the Company had available for grant under these Plans options to purchase 174,875 shares of Class A Common Stock, after considering the lapse of options previously granted and the expiration of the 1983 Plan. In addition to the incentive stock options granted under the above Plans, the Company has granted non-qualified stock options, including 160,500 in fiscal 1995, which are not part of a specific plan. A summary of activity for all stock options during the fiscal year ended January 28, 1995 is as follows:
Options Net Options Options Options Outstanding Options Exercised Outstanding Exercisable Plan or Fiscal Stock Option January 29, Granted During January 28, January 28, Year Type Price 1994 (Lapsed) Fiscal 1995 1995 1995 Incentive Stock Options: 1983 Plan ....... Class B $5.50 37,800 (32,550) -- 5,250 5,250 1985 Plan ....... Class A $2.75 to $2.88 359,750 25,125 (750) 384,125 185,113 1990 Plan ....... Class A $2.75 to $2.88 213,125 (79,062) -- 134,063 101,875 Total Incentive Stock Options 610,675 (86,487) (750) 523,438 292,238 Non-qualified Stock Options: 1986 ............ Class B $ 4.00 12,750 -- (6,000) 6,750 6,750 1987 ............ Class A $ 8.80 10,000 -- -- 10,000 10,000 1991 ............ Class A $ 4.60 5,000 -- -- 5,000 5,000 1995 ............ Class B $ 5.50 -- 10,000 -- 10,000 10,000 1995 ............ Class A $4.00 to $7.25 -- 150,500 -- 150,500 140,000 Total Non-qualified Stock Options 27,750 160,500 (6,000) 182,250 171,750 Total Stock Options 638,425 74,013 (6,750) 705,688 463,988
9. Gasoline Operations: A summary of gasoline operations for the years ended January 28, 1995, January 29, 1994 and January 30, 1993 is as follows:
1995 1994 1993 (in thousands) Gasoline gallons sold.......................................................... 206,441 206,365 196,703 Gasoline revenues.............................................................. $210,541 $206,155 $202,751 Cost of gasoline sold.......................................................... 186,462 180,835 182,774 Depreciation................................................................... 2,091 2,025 1,916 Capital expenditures........................................................... 3,702 952 2,128 Net book value of gasoline equipment........................................... 13,068 11,300 12,373 10. Employee Benefit Plans: The Company provides benefits to qualified employees through a defined contribution profit sharing plan. Contributions under 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 $-0-, $100,000 and $100,000 for fiscal 1995, 1994 and 1993, 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 1995 and fiscal 1994 were $163,000 and $181,000, respectively. The Company does not offer any additional postretirement and postemployment benefits to its employees. F-13 11. Commitments & Contingencies: As of January 28, 1995, the Company is contingently liable for outstanding letters of credit amounting to $13,074,000. The 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 $470,000 as of January 28, 1995. 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 regulating substances from existing and previously operated retail gasoline facilities. The Company accrues its estimate 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. As of January 28, 1995, the Company had recorded an accrual of $2,302,000 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. As of January 28, 1995, the Company had recorded a reimbursement receivable of $1,031,000. 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 $12.0 to $16.0 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 estimate 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 seven 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, the Chairman receives an annual salary of $500,000, payable in installments according to the Company's normal compensation policy, plus customary fringe benefits. Certain of the Company's officers have agreements with the Company that provide for severance payments under certain circumstances. The Company is party to a number of lawsuits which have arisen in the ordinary course of business. Management, based upon consultation with legal counsel, does not believe the outcome of this litigation will have a material impact on the Company's future results of operations or financial position. F-14
12. Nonrecurring Charges: A summary of nonrecurring charges for fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 is as follows:
1995 1994 1993 (in thousands) Regulatory and financing fees and expenses.............................................. $ 1,216 $ - $ - Administrative severance, settlement and related costs.................................. 2,800 - 5,200 Costs to divest of dairy manufacturing and distribution operations...................... 2,500 - - Writedown of non-operating properties to net realizable value........................... 3,584 - - Costs of store closings................................................................. 3,900 - - Total nonrecurring charges......................................................... $ 14,000 $ - $ 5,200 During fiscal 1995, the Company incurred $535,000 in nonrecurring duplicative interest expense and in financing fees associated with the Company's financing activities. Interest expense, net of interest income, and fees were increased due to the issuance of the Company's 10.25% senior subordinated notes on March 3, 1994, the retirement of the Company's 14.25% subordinated debentures on April 4, 1994 and a subsequent amendment of the Company's senior revolving credit facility (see Note 4). In addition, the Company reached agreement with the Internal Revenue Service to settle certain disputed items. The terms of the settlement required the Company to pay $681,000 of interest charges (see Note 6). During fiscal 1995, the Company recorded nonrecurring charges of $2,800,000 for costs, including legal expenses, associated with the removal of the Company's former President and Chief Executive Officer by the Board of Directors, and the settlement of legal disputes arising therefrom and severance and other personnel related costs associated with a reduction in other administrative support positions by the Company. During fiscal 1993, the Company recorded a nonrecurring charge of $5,200,000 relating to severance, relocation and other personnel related costs associated with the downsizing and consolidation of the Company's three administrative offices into its Corporate headquarters facility in Enfield, Connecticut. During fiscal 1995, the Company recorded a nonrecurring charge of $2,500,000 for severance and other disposal related costs associated with the sale and subsequent closing of its dairy manufacturing and distribution operations (see Note 13). During fiscal 1995, the Company recorded a nonrecurring charge of $3,584,000 for the writedown of non-operating office and plant facilities to net realizable value in conjunction with the anticipated sale of these properties. During fiscal 1995, the Company recorded a nonrecurring charge of $3,900,000 for costs associated with the sale or closing of 143 of its retail convenience stores and the closing of 81 of its retail gasoline facilities. The decision to close these stores resulted from a reevaluation of the Company's existing store base and exceeded the level of store closings normally incurred by the Company. Such costs relate, in part, to disposal of equipment, inventory and leases associated with closed stores, costs associated with the termination of certain franchise agreements and the removal of underground storage tanks associated with the closed gasoline facilities. 13. Subsequent Events: In March 1995, the Company entered into a sale and leaseback of the real estate at sixteen convenience store locations operated or franchised by the Company. The sale transaction generated net cash proceeds of approximately $7,800,000, net of closing costs, which approximates the net book value of the properties as held for sale as of January 28, 1995. The leaseback transaction requires monthly base rental payments of approximately $79,000, beginning in April 1995, for a fifteen year term. Over the lease term, the monthly base rental payment may be adjusted at the beginning of the fourth, eighth and twelfth year, based on increases in the Consumer Price Index, but limited to a maximum increase of 6%, 8% and 8% at each adjustment period, respectively. In addition, the lease agreement contains three five-year options, exercisable by the Company. The Company retired a $200,000 real estate mortgage note, included in long-term debt as of January 28, 1995, in order to complete the sale and leaseback transaction. Also, in March 1995, the Company finalized the sale of a former administrative office building located in Enfield, Connecticut, for $381,000. During fiscal 1995, the carrying value of the building was reduced by $665,000 to reflect the net realizable value of the property (See Note 12). In April 1995, the Company entered into agreements to sell its dairy manufacturing and distribution operations in Cuyahoga Falls, Ohio, and Enfield, Connecticut. In conjunction with these agreements, the Company has entered into long-term marketing and supply agreements to purchase milk and dairy products, using the Company's private label, at competitive prices. As part of the divestiture of the dairy manufacturing and distribution operations, the Company recorded nonrecurring charges in fiscal 1995 as follows: $2,500,000 for disposal of equipment and employee severance and other personnel related costs and $2,919,000 for the writedown of non-operating office and plant facilities to net realizable value (See Note 12). The Company will retire a $252,000 equipment financing note, of which $178,000 was included in long-term debt as of January 28, 1995, in order to complete the transaction. F-15
EXHIBITS TO FORM 10-K DAIRY MART CONVENIENCE STORES, INC. FOR THE FISCAL YEAR ENDED JANUARY 28, 1995 EXHIBITS INDEX Exhibit Number: (3) Articles of Incorporation and Bylaws. (3.1) 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. (3.2) The Company's Amended and Restated Bylaws are filed as Exhibit 3.2 attached hereto. (4) Instruments defining the rights of security holders, including indentures. (4.1) The instruments defining the rights of the holders of the Company's Common Stock include the Company's Restated Certificate of Incorporation and Amended and Restated Bylaws, filed as Exhibits 3.1 and 3.2 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. (4.2) 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 was filed as Exhibit 4.1 to the Company's Form 10-K for the fiscal year ended January 29, 1994, and is incorporated herein by reference. (10) Material Contracts. (10.1) Amended Credit Agreement dated as of May 12, 1995 among the Company, Fleet Bank, National Association and Society National Bank is filed as Exhibit 10.1 attached hereto. (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 herein 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. (10.6) 1995 Stock Option Plan for Outside Directors is filed as Exhibit 10.6 attached hereto. (10.7) Agreement regarding employment matters dated September 16, 1994 between the Company and Gregory G. Landry is filed as Exhibit 10.7 attached hereto. (10.8) Agreement regarding employment matters dated September 16, 1994 between the Company and Robert B. Stein, Jr. is filed as Exhibit 10.8 attached hereto. (10.9) Agreement regarding employment matters dated September 16, 1994 between the Company and Mitchell J. Kupperman is filed as Exhibit 10.9 attached hereto. (10.10) Settlement agreement dated January 27, 1995 between the Company and Frank Colaccino is filed as Exhibit 10.10 attached hereto. (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 field Registration Statements on Forms S-8, is attached hereto as Exhibit 23. (27) Financial Data Schedule is filed as Exhibit 27 attached hereto. EX-3.(II) 2 EXHIBIT (3.2) AMENDED AND RESTATED BYLAWS OF DAIRY MART CONVENIENCE STORES, INC. (A Delaware Corporation) ARTICLE I Offices Section 1. Principal Office in Connecticut. The principal office of DAIRY MART CONVENIENCE STORES, INC. (the "Corporation") in the State of Connecticut shall be in the Town of Enfield, County of Hartford. Section 2. Registered Office in Delaware. The Corporation shall have and maintain a registered office in the State of Delaware as required by Delaware law. Section 3. Other Offices. The Corporation may have a principal or other office at such other place or places, either within or without the State of Connecticut or Delaware, as the Board of Directors may from time to time determine or as shall be necessary or appropriate for the conduct of the business of the Corporation. ARTICLE II Meetings of Stockholders Section 1. Place of Meetings. All annual and special meetings of stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be called and fixed solely by the Board of Directors in accordance with these Bylaws, or as shall be specified in the respective notices or waivers of notice thereof. Section 2. Annual Meetings. Each annual meeting of stockholders for the election of directors and the transaction of other business shall be held on the second Thursday of June, in each year, and shall be called solely by order of the Board of Directors. If this date shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting the stockholders entitled to vote shall elect a Board of Directors and may transact such other corporate business as may be brought before the meeting. If the election of directors shall not be held on the day designated herein for the annual meeting, or at any adjournment thereof, the Board of Directors shall cause a special meeting of the stockholders for the election of directors to be held as soon thereafter as may be convenient. At such special meeting the stockholders may elect directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held. Section 3. Special Meetings. A special meeting of the stockholders (or of any class thereof entitled to vote at a special meeting) for any purpose or purposes may be called at any time solely by order of the Board of Directors. No stockholder, in its, his, or her capacity as a stockholder, may call a special meeting of the stockholders. The record date for any special meeting of the stockholders shall be set solely by order of the Board of Directors. Section 4. Notice of Meetings. Except as otherwise expressly required by law, notice of each meeting of stockholders, whether annual or special, shall be given at least ten (10) days before the date on which the meeting is to be held to each stockholder of record entitled to vote thereat by delivering a notice thereof to him personally or by mailing such notice in a postage prepaid envelope directed to him at his address as it appears on the stock ledger of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices intended for him be directed to another address, in which case such notice shall be directed to him at the address designated in such request. Every notice of a special meeting of the stockholders, besides stating the time and place of the meeting, shall state briefly the objects or purposes thereof. Notices of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy; and, if any stockholder shall, in person or by attorney thereunto authorized, in writing or by telegraph, cable or wireless, waive notice of any meeting of the stockholders, whether prior to or after such meeting, notice thereof need not be given to him. Notice of any adjourned meeting of the stockholders shall not be required to be given, except as expressly required by law. Section 5. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock ledger to prepare and make, at least ten (10) days' before every election of directors, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open for ten (10) days' at the place where said election is to be held or at some other specified place within the Town of Enfield, State of Connecticut to the examination of any stockholder during ordinary business hours and shall be produced and kept at the time and place of the election during the whole time thereof and subject to the inspection of any stockholder who may be present. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such election. Section 6. Quorum. At each meeting of the stockholders, the holders of record of (i) a majority of the voting power of the issued and outstanding stock of all classes of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, with respect to those matters as to which all classes of stock vote together, and (ii) one-third (1/3) of the issued and outstanding stock of any class of stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business with respect to those matters as to which such class is entitled (by law, the Certificate of Incorporation or these Bylaws) to vote separately from all other classes, except where otherwise provided by law, the Certificate of Incorporation or these Bylaws. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called, but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. Section 7. Voting. Except as otherwise provided in the Certificate of Incorporation, at every meeting of stockholders each holder of record of the issued and outstanding stock of the Corporation entitled to vote at such meeting shall be entitled to one vote in person or by proxy for each such share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three (3) years from its date unless the proxy provides for a longer period, and, except where the transfer books of the Corporation shall have been closed or a date shall have been fixed as the record date for the determination of stockholders entitled to vote, no share of stock shall be voted on at any election for directors which shall have been transferred on the books of the Corporation within twenty (20) days next preceding such election of directors. Shares of its own capital stock belonging to the Corporation directly or indirectly shall not be voted upon directly or indirectly. At all meetings of the stockholders, a quorum being present, all matters shall be decided by majority vote of the shares of stock entitled to vote held by stockholders present in person or by proxy, except as otherwise required by the laws of the State of Delaware. Unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat or so directed by the Chairman of the meeting or required by the laws of the State of Delaware, the vote thereat on any question need not be by ballot. Unless otherwise provided in the Certificate of Incorporation, all elections of directors shall be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or in his name by his proxy, if there be such proxy, and shall state the number of shares voted by him and the number of votes to which each share is entitled. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of the minimum number of shares of outstanding stock that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consent or consents shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 8. Advance Notice of Stockholder Business. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of record. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that if both (i) fewer than seventy (70) days Advance Notice of the meeting is given to stockholders, and (ii) such meeting is held more than thirty (30) days before or after the corresponding date of the annual meeting held in the preceding year, then such written notice shall be received not later than the close of the tenth day following the day on which notice of the meeting was mailed to stockholders. As used in this Section 8, "Advance Notice" to the stockholders shall be deemed to have been given on the date of any quarterly report of the Corporation, letter to stockholders, press release or other communication to stockholders disclosing the date of the next annual meeting and provided that the annual meeting is in fact held on such date or within thirty (30) days after such date. Any such Advance Notice would be in addition to, but not in substitution for, the Notice of Meeting provided for in Section 4 above. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of stock of the Corporation of which the stockholder is the Beneficial Owner (as that term is defined in the Certificate of Incorporation of the Corporation), and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 8. The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 8, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the provisions of this Section 8, notice of stockholder nominations of persons for election as directors shall be as set forth in the Certificate of Incorporation. ARTICLE III Board of Directors Section 1. General Powers. The property, business and affairs of the Corporation shall be managed by the Board of Directors. Section 2. Number and Term of Office. The number of directors shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three (3). Directors need not be stockholders. Each director shall hold office until the annual meeting of the stockholders next following his election and until his successors shall have been elected and shall qualify, or until his death, resignation or removal. Section 3. Quorum and Manner of Acting. Unless otherwise provided by law, the presence of one-third (1/3) of the whole Board of Directors, and in any case not less than two (2) directors, shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of the directors, a quorum being present, all matters shall be decided by the affirmative vote of a majority of the directors present, except as otherwise required by the laws of the State of Delaware, and except for the calling of any annual or special meeting of the stockholders by the Board of Directors which shall require the affirmative vote of a majority of the whole Board of Directors. Section 4. Place of Meetings, Books and Records. The Board of Directors may hold its meetings and keep the books and records of the Corporation, at such place or places within or without the State of Delaware, as the Board may from time to time determine. Section 5. Annual Meeting. As promptly as practicable after each annual meeting of stockholders for the election of directors, the Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given unless at such meeting the Board of Directors shall or may consider the calling of an annual or special meeting of the stockholders, in which case, notice of the meeting of the Board of Directors shall be given in accordance with Section 7 of this Article III. Such meeting of the Board of Directors may be held at any other time or place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors or in a waiver of notice thereof signed by all the directors. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held at such time and place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors. After there has been such determination, and notice thereof has been given to each member of the Board of Directors, regular meetings may be held without further notice being given, unless at any such meeting the Board of Directors shall or may consider the calling of an annual or special meeting of the stockholders, in which case, notice of the meeting of the Board of Directors shall be given in accordance with Section 7 of this Article III. Section 7. Special Meetings and Notice Thereof. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, the President or by a majority of the directors. Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least two (2) days before the date on which the meeting is to be held, or shall be sent to him at such place by telegraph, cable, radio or wireless, or be delivered personally or by telephone, not later than the day before the day on which such meeting is to be held; provided, however, that notice of any meeting shall be provided to each director as provided above not less than ten (10) days before any meeting at which the calling of any annual or special meeting of the stockholders shall or may be considered. Each such notice shall state the time and place of the meeting and the purpose thereof. In lieu of the notice to be given as set forth above, a waiver thereof in writing, signed by the director or directors entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto for purposes of this Section 7. No notice to or waiver by any director with respect to any special meeting shall be required if such director shall be present at said meeting. Section 8. Resignation. Any director of the Corporation may resign at any time by giving written notice thereof to the Chairman of the Board, the President or the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office including those who have so resigned shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective. Section 9. Vacancies. Vacancies and newly created directorships resulting form any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, unless otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. Section 10. Removal. As provided in the Certificate of Incorporation, any director, or the entire Board of Directors of the Corporation, may be removed at any time, with or without cause, only by the affirmative vote by the holders of two-thirds (2/3) or more of the voting shares of the class or classes of stock that elected the director to be removed; provided, however, that such vote shall be taken at a meeting of the shareholders called for the purpose of removing directors and such vote may not be taken by the written consent of shareholders in lieu of a meeting or otherwise than at a meeting. Section 11. Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board, a specific sum fixed by the Board plus experience may be allowed for attendance at each regular or special meeting of the Board or any committee thereof; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation or any subsidiary thereof in any other capacity and receiving compensation therefor. Section 12. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more directors of the Corporation, which, to the extent provided in the resolution or in these Bylaws, shall have and may exercise such powers of the Board in the management of the business and affairs of the Corporation (including the power to authorize the seal of the Corporation to be affixed to all papers which may require it), as the Board may by resolution determine and specify in the respective resolutions appointing them, subject to such restrictions as may be contained in the Certificate of Incorpor- ation. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. A majority of all the members of any such committee may fix its rules of procedure, determine its action and fix the time and place, whether within or without the State of Connecticut, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolu- tion provide. The Board of Directors shall have power to change the membership of any such committee at any time, to fill vacancies thereon and to discharge any such committee, either with or without cause, at any time. Each member of any such committee shall be paid such fee, if any, as shall be fixed by the Board of Directors for each meeting of such committee which he shall attend and, in addition, such transportation and other expenses actually incurred by him in going to the meeting of such committee and returning therefrom as the Board of Directors shall approve. Section 13. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if prior to such action a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes or proceedings of the Board or committee. ARTICLE IV Officers Section 1. Number. The principal officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer and a Secretary. The Corporation may also have, at the discretion of the Board of Directors, such other officers as may be appointed in accordance with the provisions of these Bylaws. One person may hold the offices and perform the duties of any two or more of said offices, except the offices and duties of President and Secretary. Section 2. Election or Appointment and Term of Office. The principal officers of the Corporation shall be chosen annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor shall have been duly chosen and shall qualify, or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Subordinate Officers. In addition to the principal officers enumerated in Section 1 of this Article IV, the Corporation may have one or more Assistant Treasurers, one or more Assistant Secretaries and such other officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period, have such authority, and perform such duties as the Chairman of the Board, the President, or the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees. Section 4. Removal. Any officer may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at any regular meeting of the Board or at any special meeting of the Board called for that purpose at which a quorum is present. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Chairman of the Board or to the Board of Directors or to the President or to the Secretary. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for election or appointment to such office for such term. Section 7. Chairman of the Board. The Chairman of the Board shall preside at all meetings of stockholders and at all meetings of the Board of Directors. He shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 8. President. The President shall be the chief executive officer of the Corporation and as such shall have general supervision of the affairs of the Corporation, subject to the control of the Board of Directors. He shall be ex officio a member of all standing committees. In the absence of the Chairman of the Board the President shall preside at all meetings of stockholders and at all meetings of the Board of Directors. Subject to the control and discretion of the Board of Directors, the President may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. In general, he shall perform all duties incident to the office of President, as herein defined, and all such other duties as from time to time may be assigned to him by the Board of Directors. Section 9. Vice Presidents. The Vice Presidents in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. They shall perform such other duties and have such other powers as the Chairman of the Board, the President or the Board of Directors may from time to time prescribe. Section 10. Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation and shall deposit all such funds in the name of the Corporation in such banks or other depositories as shall be selected by the Board of Directors. He shall exhibit at all reasonable times his books of account and records to any of the directors of the Corporation upon application during business hours at the office of the Corporation where such books and records shall be kept; when requested by the Board of Directors, he shall render a statement of the condition of the finances of the Corporation at any meeting of the Board or at the annual meeting of stockholders; he shall receive, and give receipt for, moneys due and payable to the Corporation from any source whatsoever; and in general, he shall perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board, the President or the Board of Directors. The Treasurer shall give such bond, if any, for the faithful discharge of his duties as the Board of Directors may require. Section 11. Secretary. The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he shall have charge of the stock records of the Corporation; he shall see that all reports, statements and other documents required by law are properly kept and filed; and in general, he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Chairman of the Board, the President or the Board of Directors. Section 12. Salaries. The salaries of the principal officers shall be fixed from time to time by the Board of Directors, and the salaries of any other officers may be fixed by the Chairman of the Board or the President. ARTICLE V Shares and Their Transfer Section 1. Certificate for Stock. Every stockholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors shall prescribe, certifying the number of shares of the capital stock of the Corporation owned by him. Section 2. Stock Certificates. Any stock certificate which certifies the number of shares owned by any holder of stock of the Corporation shall be numbered in the order in which it shall be issued and shall be signed by the Chairman of the Board or the President or any Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation and shall have the seal of the Corporation affixed thereto; provided, however, that, where any such certificate is signed (i) by a transfer agent or an assistant transfer agent or (ii) by a transfer clerk acting on behalf of the Corporation and a registrar, if the Board shall by resolution so authorize, the signature of such Chairman of the Board, President, Vice President, Treasurer, Secretary, Assistant Treasurer or Assistant Secretary and the seal of the Corporation may be facsimiles thereof. In case any officer or officers of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate shall cease to be such officer or officers, whether by reason of death, resignation or otherwise, before such certificate shall have been delivered by the Corporation, such certificate may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate, or whose facsimile signature or signatures shall have been affixed thereto, had not ceased to be such officer or officers. Section 3. Stock Ledger. A record shall be kept by the Secretary, transfer agent or by any other officer, employee or agent designated by the Board of Directors of the name of the person, firm or corporation holding the stock represented by such certificate, the number of shares represented by such certificate, and the date thereof, and in case of cancellation, the date of cancellation. Section 4. Cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchanged for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 7 of this Article V. Section 5. Transfers of Stock. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer clerk or a transfer agent appointed as in Section 6 of this Article V provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the Corporation, shall be so expressed in the entry of transfer. Section 6. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with the Certificate of Incorporation or these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any principal officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. Section 7. Lost, Stolen, Mutilated or Destroyed Certifi- cates. As a condition to the issue of a new certificate of stock in the place of any certificate theretofore issued and alleged to have been lost, stolen, mutilated or destroyed, the Board of Directors, in its discretion, may require the owner of any such certificate, or his legal representatives, to give the Corporation a bond in such sum and in such form as it may direct to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft, mutilation or destruction of any such certificate or the issuance of such new certificate. Proper evidence of such loss, theft, mutilation or destruction shall be procured for the Board of Directors, if required. The Board of Directors, in its discretion, may authorize the issuance of such new certificate without any bond when in its judgment it is proper to do so. Section 8. Record Date. The Board may fix a date in advance of not exceeding sixty (60) days' preceding, the date of any meeting of stockholders (nor less than ten (10) days' before the date of such meeting), or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect or a date in connection with obtaining any written consent to corporate action without a meeting, as a record date for the determination of the stockholders entitled to notice of, and to vote at, such meeting, and any adjournment thereof, or to receive payment of any dividend, or to receive any such allotment of rights, or to exercise the rights in respect of any such change, conversion, or exchange of capital stock or to give such written consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any record date so fixed. ARTICLE VI Miscellaneous Provisions Section 1. Corporate Seal. The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware. The Secretary shall be the custodian of the seal. The Board of Directors may authorize a duplicate seal to be kept and used by any other officer. Section 2. Fiscal Year. The fiscal year of the Corporation shall be as specified by the Board of Directors. Section 3. Voting of Stocks Owned by the Corporation. The Board of Directors may authorize any person in behalf of the Corporation to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. Section 4. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time in their discretion may deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors may deem conducive to the interests of the Corporation. ARTICLE VII Amendments Section 1. The Bylaws of the Corporation may be adopted, altered, amended or repealed or new bylaws may be adopted by the Board of Directors at any regular or special meeting upon the affirmative vote of both sixty-seven (67%) percent of the Whole Board of Directors and majority (but in any event not less than four) of the Continuing Directors as defined in the Certificate of Incorporation of the Corporation. The Bylaws of the Corporation may also be adopted, altered, amended or repealed or new bylaws may be adopted by the shareholders only upon the affirmative vote as to all stock held (1) by the holders of not less than sixty-seven (67%) percent of the Outstanding Voting Shares and (2) by an Independent Majority of Shareholders, as defined in the Certificate of Incorporation of the Corporation. Such a vote may be taken at any annual or special meeting of the shareholders if notice of such alteration, amendment, repeal or adoption of the new bylaws shall be contained in the notice of such annual or special meeting. No change of the time or place of the meeting for the election of directors shall be made within sixty (60) days' next before the day on which such a meeting is to be held, and, in case of any change of such time or place, notice thereof shall be given to each stockholder in person or by letter mailed to his last known post-office address at least twenty (20) days before the meeting is held. Bylaws, whether made or altered by the stockholders or by the Board of Directors, shall be subject to alteration or repeal by the stockholders as in this Article VII above provided. EX-10.1 3 EXHIBIT (10.1) SECOND AMENDMENT AGREEMENT Second Amendment Agreement, effective as of the 12th day of May, 1995, by and among DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation (the "Company"), the banks and other financial institutions listed on Schedule I attached hereto and made a part hereof (hereinafter sometimes collectively called the "Banks" and individually "Bank") and SOCIETY NATIONAL BANK, a national banking association organized under the laws of the United States of America, as successor agent for the Banks under the Credit Agreement, as hereinafter defined (in such capacity, the "Agent"). WHEREAS, the Company, the Agent and the Banks are parties to a certain credit agreement dated as of February 25, 1994, which provides, among other things, for a revolving credit aggregating Thirty Million Dollars until March 1, 1997, all upon certain terms and conditions (the "Credit Agreement"); WHEREAS, the Company, the Agent and the Banks desire to amend the Credit Agreement by temporarily decreasing the amount of the revolving credit and by making various other amendments thereto; WHEREAS, each term used herein shall be defined in accordance with the Credit Agreement, unless otherwise defined herein; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein and for other valuable considerations, the Company, the Agent and the Banks agree as follows: 1. The "Aggregate Outstanding Extensions of Credit" definition on page 1 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Aggregate Outstanding Extensions of Credit": as to any Bank at any time, an amount equal to the sum of (a) the aggregate principal amount of all Working Capital Loans made by such Bank then outstanding, and (b) the product of such Bank's L/C Commitment Percentage times the L/C Obligations then outstanding. 2. The "Available Revolving Credit Commitment" definition on page 2 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Available Revolving Credit Commitment": as to any Bank at any time, an amount equal to the excess, if any, of (a) the amount of such Bank's Revolving Credit Commitment over (b) such Bank's Aggregate Outstanding Extensions of Credit. 3. The "Business Day" definition on page 2 of the Credit Agreement is hereby amended to delete the words "Hartford, Connecticut" and insert in place thereof the words "Cleveland, Ohio". 4. The "Capital Expenditures" definition on page 2 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Capital Expenditures": the amount as determined in accordance with GAAP. 5. The "Change in Control" definition on page 3 of the Credit Agreement is hereby amended to add a new subpart (vi) as follows: or (vi) the senior management of the Company shall cease to be comprised of at least two of the following officers: Gregory Landry, Mitchell Kupperman, Robert Stein. 6. The "Collateral" definition on page 3 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Collateral": the collective reference to the Collateral, as such term is defined in each of the Company Security Agreement, the Company Pledge Agreement, the Subsidiary Pledge Agreement, the Company Security Agreement Regarding Inventory and Other Collateral (executed and delivered by the Company to the Agent as of May 12, 1995) and each Security Agreement of Subsidiary Guarantor Regarding Inventory and Other Collateral (executed and delivered by the Subsidiaries to the Agent as of May 12, 1995), as such documents may from time to time be amended, modified or supplemented. 7. The "Commitment Percentage" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Commitment Percentage": as to any Bank at any time, such Bank's percentage of the relevant commitment as set forth on Schedule I of this Agreement, provided that when such term is used in the "Required Banks" definition, such term shall refer to such Bank's percentage of the Revolving Credit Commitment. 8. The "Commitments" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Commitments": the Revolving Credit Commitments or the collective reference to the Working Capital Loan Commitments and the L/C Commitments. 9. The "Consolidated EBIRT" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Consolidated EBIRT": for any period, Consolidated Net Income for such period plus the aggregate amounts deducted in determining such Consolidated Net Income in respect of (a) income taxes for such period, (b) Consolidated Interest Expense for such period, (c) Consolidated Rent Expense for such period and (d) extraordinary or unusual gains or losses, gains or losses from discontinuance of operations, gains or losses arising from the sale or disposition by the Company or any Subsidiary of any asset (including, without limitation, the issuance of any debt or equity securities, but excluding the sale or disposition of any Franchise Asset or any inventory of the Company or any Subsidiary) and other non-recurring gains or losses during such period. 10. The "Consolidated EBITDA" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Consolidated EBITDA": for any period, Consolidated Net Income for such period plus the aggregate amounts deducted in determining such Consolidated Net Income in respect of (a) income taxes, (b) Consolidated Interest Expense, (c) depreciation expense, (d) the expense associated with amortization of intangible and other assets, and (e) extraordinary or unusual gains or losses, gains or losses from discontinuance of operations, gains or losses arising from the sale or disposition by the Company or any Subsidiary of any asset (including, without limitation, the issuance of any debt or equity securities, but excluding the sale or disposition of any Franchise Asset or any inventory of the Company or any Subsidiary) and other non-recurring gains or losses during such period. 11. The "Consolidated Interest Expense" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Consolidated Interest Expense": for any period, interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, excluding any non-recurring interest. 12. The "Consolidated Net Income" definition on page 4 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Consolidated Net Income": for any period, the consolidated net income (or loss) of the Company and its Subsidiaries for such period determined in accordance with GAAP. 13. The "Extension" definition on page 6 of the Credit Agreement is hereby amended to delete the reference to "subsection 2.15" and insert in place thereof the reference to "subsection 2.12". 14. The "L/C Commitment" definition on page 8 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "L/C Commitment": as to any Bank, the obligation of such Bank to participate in the issuance of Letters of Credit hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name in the L/C Commitment Amount column on Schedule I of this Agreement. 15. The "Letter of Credit Rate" definition on page 8 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Letter of Credit Rate": for each Letter of Credit, at any time, a rate per annum equal to 2-1/2 %. 16. The "Minimum Consolidated Net Worth" definition on page 9 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Minimum Consolidated Net Worth": commencing at FYED 1995, a Consolidated Net Worth equal to the current minimum amount required, which current minimum amount required shall be $21,633,000 from FYED 1995 through the end of the first FQED of FYED 1996, with such current minimum amount required to be increased by the Increase Amount on the first day of the second FQED of FYED 1996 and by an additional increase amount on the first day of each successive FQED thereafter. As used herein, "Increase Amount" shall mean an amount equal to fifty percent (50%) of positive Consolidated Net Income for the previous fiscal quarter. 17. The "Notes" definition on page 10 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Notes": the collective reference to the Working Capital Loan Notes. 18. The "Permitted Holders" definition on page 10 of the Credit Agreement is hereby deleted in its entirety with the following inserted in place thereof: "Permitted Holders": the collective reference to any of Charles Nirenberg, Gregory Landry, Mitchell Kupperman or Robert Stein, and their respective Related Parties. 19. The "Prime Rate" definition on page 11 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Prime Rate": the interest rate established from time to time by the Agent as Agent's prime rate, whether or not such rate is publicly announced; the Prime Rate may not be the lowest rate charged by the Agent for commercial or other extensions of credit. Any change in the Prime Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate. 20. The "Reimbursing Bank" definition on page 11 of the Credit Agreement is hereby amended to delete the reference to "subsection 2.14(a)" and insert in place thereof the reference to "subsection 2.11(a)". 21. The "Revolving Credit Commitment" definition on page 12 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Revolving Credit Commitment": the collective reference to the Working Capital Loan Commitments and the L/C Commitments. 22. The "Revolving Credit Note" definition on page 12 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Working Capital Loan Note": as defined in subsection 2.5. 23. The "Security Documents" definition on page 12 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Security Documents": the Pledge Agreements, the Company Security Agreement, the Company Security Agreement Regarding Inventory and Other Collateral (executed and delivered by the Company to the Agent as of May 12, 1995) and each Security Agreement of Subsidiary Guarantor Regarding Inventory and Other Collateral (executed and delivered by the Subsidiaries to the Agent as of May 12, 1995), as such documents may from time to time be amended, modified or supplemented. 24. The "Termination Date" definition on page 13 of the Credit Agreement is hereby deleted in its entirety with the following to be inserted in place thereof: "Termination Date": May 31, 1996, or such later date to which the Termination Date may be extended in accordance with subsection 2.12. 25. The following new definitions are added to Subsection 1.1 of the Credit Agreement: "Available L/C Commitment": as to any Bank at any time, an amount equal to the excess, if any, of (a) the amount of such Bank's L/C Commitment over (b) the product of such Bank's L/C Commitment Percentage times the L/C Obligations then outstanding. "Available Working Capital Loan Commitment": as to any Bank at any time, an amount equal to the excess, if any, of (a) the amount of such Bank's Working Capital Loan Commitment over (b) the aggregate principal amount of all Working Capital Loans made by such Bank then outstanding. "Compliance Certificate": a certificate of a Responsible Officer which shall certify that, to the best of such Officer's knowledge, each of the Company and its Subsidiaries during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement, the Notes and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate. "Consolidated EBIDA": for any period, Consolidated Net Income for such period plus the aggregate amounts deducted (in the cases of (d) and (e) below, whether or not so deducted) in determining such Consolidated Net Income in respect of (a) Consolidated Interest Expense, (b) depreciation expense, (c) the expense associated with amortization of intangible and other assets, (d) the proceeds from either the sale of assets or a Sale/Leaseback Transaction, as defined in subsection 7.12, (e) the net cash proceeds from the issuance of any equity security, and (f) that portion of the provision for income taxes, determined in accordance with GAAP, that has not been paid or received. "L/C Commitment Percentage": as to any Bank at any time, the percentage set forth opposite such Bank's name in the L/C Commitment Percentage column on Schedule I of this Agreement. "Revolving Credit Commitment": as to any Bank, the obligation of such Bank to extend credit to the Company hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name in the Revolving Credit Commitment Amount column on Schedule I of this Agreement. "Working Capital Loan Commitment": as to any Bank, the obligation of such Bank to make Working Capital Loans to the Company hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name in the Working Capital Loan Commitment Amount column on Schedule 1 of this Agreement. "Working Capital Loan Commitment Percentage": as to any Bank at any time, the percentage set forth opposite such Bank's name in the Working Capital Loan Commitment Percentage column on Schedule 1 of this Agreement. "Working Capital Loans": Any loans, advances or other disbursements by the Agent, or any or all of the Banks to or for the account of the Company under the Working Capital Loan Commitments or, in the discretion of the Agent, in respect of any amounts due and not paid by the Company in accordance with subsection 10.5. 26. The following definitions are deleted in their entirety from Subsection 1.1 of the Credit Agreement: "Clean-Down Period", "LIBOR Base Rate", "LIBOR Interest Period", "LIBOR Reserve Requirements", "LIBOR Loans", "LIBOR Rate", "Tranche", and "Type". 27. Section 2. of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. Subject to the terms and conditions hereof, and provided that no Default or Event of Default shall have occurred and be continuing, each Bank severally agrees to make Working Capital Loans to the Company and to participate in the issuance of Letters of Credit, from time to time on or after the date each of the conditions precedent set forth in subsection 5.1 has been satisfied or waived by the Required Banks (the "Initial Funding Date") and continuing throughout the Commitment Period, in an aggregate principal amount at any one time outstanding not to exceed the amount of such Bank's Available Revolving Credit Commitment. 2.2 Working Capital Loan Commitments. Subject to the terms and conditions hereof, and provided that no Default or Event of Default shall have occurred and be continuing, each Bank severally agrees to make Working Capital Loans to the Company, from time to time after the Initial Funding Date and continuing throughout the Commitment Period, in an aggregate principal amount at any one time outstanding not to exceed the amount of such Bank's Available Working Capital Loan Commitment. From and after the Initial Funding Date and continuing throughout the Commitment Period, the Company may use the Working Capital Loan Commitments by borrowing, prepaying the Working Capital Loans in whole or in part, and reborrowing in accordance with the terms and conditions hereof. 2.3 Interest Rate and Payment Dates. (a) Each Working Capital Loan shall bear interest for so long as it is outstanding and unpaid at a rate per annum equal to the Prime Rate from time to time in effect. (b) If all or a portion of the principal amount of any Loan, any interest payable thereon, any Reimbursement Obligation or any fee required to be paid under this Agreement shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum (the "Default Rate") which is equal to 3% in excess of the Prime Rate, from time to time in effect, from the date of such non-payment until such amount is paid in full (as well after as before judgment). (c) Interest shall be payable in arrears on each Interest Payment Date; provided that interest accruing at the Default Rate pursuant to subsection 2.3(b) shall be payable on demand. (d) In the event that the total amount of any payment of principal or interest or amounts due in respect of any Reimbursement Obligation or of any fee required to be paid under this Agreement is not received by the Agent or the Issuing Bank, as the case may be, within ten (10) days following the due date of such payment, the Company shall, in addition to and together with such payment, pay to Agent or Issuing Bank, as the case may be, a late charge equal to five percent (5%) of the total amount of such payment or amount due. 2.4 Procedure for Borrowing. The Company may borrow under the Working Capital Loan Commitments on or after the Initial Funding Date during the Commitment Period on any Business Day by giving the Agent irrevocable notice (which notice must be received by the Agent prior to 1:00 P.M., Eastern time, on the requested Borrowing Date), specifying (i) the amount to be borrowed, and (ii) the requested Borrowing Date. Each borrowing under the Working Capital Loan Commitments shall be in an amount equal to $100,000 or a whole multiple thereof (or, if the then Available Working Capital Loan Commitments are less than $100,000, such lesser amount). With each request for a borrowing hereunder, the Company shall deliver a Compliance Certificate to the Agent. Upon receipt of any such notice from the Company, the Agent shall promptly notify each Bank thereof. Each Bank will make the amount of its pro rata share (based on its Commitment Percentage) of each borrowing available to the Agent for the account of the Company at the office of the Agent specified in subsection 10.2 prior to 2:00 P.M., Eastern time, on the Borrowing Date requested by the Company in funds immediately available to the Agent. Such borrowing will then be made available to the Company by the Agent by crediting the account of the Company on the books of such office with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. 2.5 Working Capital Loan Notes. The Working Capital Loans made by each Bank shall be evidenced by a promissory note of the Company, substantially in the form of Exhibit A with appropriate insertions as to payee, date and principal amount (a "Revolving Credit Note"), payable to the order of such Bank and in a principal amount equal to the amount of the Working Capital Loan Commitment of such Bank. Each Bank is hereby authorized to record the date and amount of each Working Capital Loan made by such Bank, and the date and amount of each payment or prepayment of principal thereof on the Working Capital Loan Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. Each Working Capital Loan Note shall (i) be dated the Closing Date, (ii) be stated to mature on the Termination Date and (iii) provide for the payment of interest in accordance with subsection 2.3. 2.6 Fees. The Company agrees to pay to the Agent for the account of each Bank a commitment fee for the period from and including the date hereof to the termination Date, computed at the rate of 1/2 of 1% per annum on the average daily amount of the Available Revolving Credit Commitment of such Bank during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date or such earlier date as the Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. In addition, the Company shall pay such other fees as may from time to time be agreed to by the Company and the Agent or by the Company and any Bank, as the case may be. 2.7 Termination or Reduction of Commitments. (a) The Company shall have the right, upon not less than three Business Days notice to the Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments; provided that no such termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Working Capital Loans made on the effective date thereof, the aggregate principal amount of the Working Capital Loans then outstanding, when added to such Bank's Commitment Percentage of the L/C Obligations, would exceed the Commitments then in effect. Any such reduction shall be in an amount not less than $250,000 and shall reduce permanently the Commitments then in effect. (b) Simultaneously with any required prepayment of the Working Capital Loans pursuant to subsection 2.9(a) or (b), the Commitments shall automatically be reduced by an amount equal to the amount of such required prepayment. Simultaneously with the occurrence of any event requiring prepayment pursuant to subsection 2.9(c), the Commitments shall automatically terminate. 2.8 Optional Prepayments. The Company may at any time and from time to time, prepay the Working Capital Loans, in whole or in part, without premium or penalty, upon irrevocable notice (which notice must be received by 1:00 P.M., Eastern time, on or before the proposed date of prepayment) to the Agent, specifying the date and amount of prepayment. Upon receipt of any such notice the Agent shall promptly give notice thereof to each Bank. If any such notice is given by the Company, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments of the Working Capital Loans shall be in an aggregate principal amount of $100,000 or a whole multiple thereof. 2.9 Mandatory Payments; Cash Collateralization. (a) Immediately upon the occurrence of any public issuance or private placement of any debt securities of the Company or any Subsidiary (other than Indebtedness incurred pursuant to subsection 7.2(d) and other than renewals or refinancings of the indebtedness evidenced by the Senior Subordinated Notes or of Indebtedness evidenced by debt securities issued and outstanding as of the date hereof so long as the outstanding principal amount of such Indebtedness is not increased by such renewal or refinancing) the Company shall make or cause to be made a prepayment on the Working Capital Loans equal to 100% of the Net Cash Proceeds received therefor. (b) If, at any time or from time to time, the Company makes an "Asset Disposition" (as defined in the Senior Subordinated Indenture), the Company shall, within 210 days from the date of such Asset Disposition (or such longer period permitted under the Senior Subordinated Indenture), apply all of the Net Cash Proceeds from such Asset Disposition to either or both (in the sole discretion of the Company) of (i) the prepayment of the Loans or (ii) an investment in "fixed assets" (as defined under GAAP) in the same or substantially similar line of business as defined in the Indenture as the assets that were the subject of such Asset Disposition, provided that, notwithstanding the foregoing, (A) up to $1,000,000 of the Net Cash Proceeds received in any fiscal year from any such Asset Dispositions shall not be subject to this subsection 2.9(b) and (B) no application of the Net Cash Proceeds resulting from any such Asset Dispositions shall be subject to this paragraph until the aggregate amount of such Net Cash Proceeds received after the date hereof (above the aforesaid $1,000,000) equals or exceeds $5,000,000. Without limiting the generality of the foregoing, no repayments by the Company of outstanding Working Capital Loans shall be considered mandatory prepayments under this subsection unless and until the Company shall have designated such repayments as such. (c) Amounts prepaid on account of Working Capital Loans pursuant to this subsection 2.9 shall be allocated to the outstanding principal amount of the Working Capital Loans, together with a corresponding permanent reduction of the Working Capital Loan Commitments; provided that, if the amount of such prepayment (the "Prepayment Amount") exceeds the then outstanding Working Capital Loans or is made at a time when no Working Capital Loans are outstanding, then the Company shall deposit such Prepayment Amount as collateral for the then outstanding L/C Obligations in a cash collateral account maintained by the Agent pursuant to its customary documentation for such purposes, which deposit shall be made on the payment date specified in the notice of prepayment. 2.10 Computation of Interest and Fees. Interest on the Loans, Letter of Credit commissions and commitment fees shall each be calculated on the basis of a 360-day year for the actual number of days elapsed. Any change in the interest rate on a Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change becomes effective. The Agent shall notify the Company and the Banks as soon as practicable of the effective date and the amount of each such change in interest rate. Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.11 Pro Rata Treatment and Payments. (a) Unless the Agent shall have been notified in writing by any Bank prior to a Borrowing Date that such Bank will not make the amount that would constitute its Commitment Percentage of the borrowing on such date available to the Agent, the Agent may assume that such Bank (a "Reimbursing Bank") has made such amount available to the Agent on such Borrowing Date, and the Agent or any Bank may (but shall not be obligated), in reliance upon such assumption, make available to the Company a corresponding amount. If such amount is made available to the Agent on a date after such Borrowing Date, the Reimbursing Bank shall pay to the Agent on demand an amount equal to the product of (i) the daily average Federal Funds Effective Rate during such period a quoted by the Agent, times (ii) the amount of such Reimbursing Bank's Commitment Percentage of such borrowing, times (iii) a fraction (A) the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Reimbursing Bank's Commitment Percentage of such borrowing shall have become immediately available to the Agent and (B) the denominator of which is 360. A certificate of the Agent submitted to any Reimbursing Bank with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If a Reimbursing Bank's Commitment Percentage of such borrowing is not in fact made available to the Agent by such Reimbursing Bank within three Business Days of such Borrowing Date, the Agent shall be entitled to recover such amount, with interest thereon at the rate per annum applicable to Working Capital Loans hereunder, on demand, from such Reimbursing Bank or the Company in such order and manner as Agent may determine in its discretion. (b) Each borrowing of Working Capital Loans by the Company from the Banks hereunder shall be made by the Banks pro rata in accordance with the respective Working Capital Loan Commitment Percentage of such Banks. Each payment by the Company on account of the principal of and interest on the Working Capital Loans, any commitment fee hereunder and any reduction of the Commitments of the Banks shall be payable to the Banks pro rata in accordance with the respective Commitment Percentages of the Banks; provided that in the event the Agent or any Bank pursuant to subsection 2.11(a) makes available to the Company a Reimbursing Bank's Commitment Percentage of a requested borrowing, the Agent or such Bank providing such funding shall be entitled to receive all payments that would otherwise be payable to such Reimbursing Bank until such time as the Agent or such Bank, as the case may be, shall have received an amount equal to the amount so funded on behalf of such Reimbursing Bank, together with interest thereon as provided in subsection 2.11(a). All payments (including prepayments) to be made by the Company hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 1:00 P.M., Eastern time, on the due date thereof to the Agent, for the account of the Banks, at the Agent's office specified in subsection 10.2, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Banks promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.12 Extension of Termination Date. By the date which is 60 days prior to the initial Termination Date (and, if the initial Termination Date has been extended pursuant to this subsection, by the date which is one year and 60 days prior to the Termination Date as so extended by the first Extension), the Company may notify the Agent of its desire to extend the Termination Date, each such Extension consisting of one additional year (each, an "Extension"), and its request that the Banks approve such Extension, whereupon the Agent shall promptly notify the Banks of such request. The Agent shall notify the Company of the decision of the Banks (to be made in the Banks' sole discretion) with respect thereto not later than 30 days after the Agent's receipt of the request for such Extension. If all of the Banks agree to the requested Extension, the Termination Date shall be so extended. 2.13 Clean-Down of Working Capital Loans. For a period of at least five consecutive Business Days of each calendar month, the aggregate principal amount of Working Capital Loans outstanding shall be reduced to zero. In addition, after each Borrowing Period, the aggregate principal amount of Working Capital Loans outstanding shall be reduced to zero for at least two consecutive Business Days. As used herein, "Borrowing Period" shall mean a period of one or more days, not to exceed five consecutive Business Days, on which the Company requests a Working Capital Loan. 2.14 Requirements of Law. If any Bank shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Bank or any corporation controlling such Bank with any request or directive regarding capital adequacy (whether having the force of law or not) from any Governmental Authority made subsequent to the date hereof does or shall have the effect of reducing the rate of return on such Bank's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, after submission by such Bank to the Company (with a copy to the Agent) of a written request therefore, the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. 2.15 Taxes. (a) All payments made by the Company under this Agreement and the Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Agent or any Bank as a result of a present or former connection between the Agent or such Bank and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Agent or such Bank having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or the Notes). If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Agent or any Bank hereunder or under the Notes, the amounts so payable to the Agent or such Bank shall be increased to the extent necessary to yield to the Agent or such Bank (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes; provided, however, that the Company shall not be required to increase any such amounts payable to any Bank that is not organized under the laws of the United States of America or a state thereof if such Bank fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Company, as promptly as possible thereafter the Company shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by the Company showing payment thereof. If the Company fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Company shall indemnify the Agent and the Banks for any incremental taxes, interest or penalties that may become payable by the Agent or any Bank as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Bank that is not incorporated under the laws of the United States of America or a state thereof shall: (i) deliver to the Company and the Agent (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Company and the Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Company and the Agent. Such Bank shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Bank or a Participant pursuant to subsection 10.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that, in the case of a Participant, such Participant shall furnish all such required forms and statements to the Bank from which the related participation shall have been purchased. 28. Subsection 3.1 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 3.1 L/C Commitment. (a) Prior to the date hereof, the Issuing Bank issued various letters of credit on behalf of the Company. Subject to the terms and conditions hereof, the Issuing Bank, in reliance on the agreements of the other Banks set forth in subsection 3.5(a), agrees to issue standby letters of credit for the account of the Company and its Designated Subsidiaries on any Business Day on or after the Initial Funding Date until the date which is five Business Days prior to the end of the Commitment Period in such form as may be approved from time to time by the Issuing Bank (all such letters of credit outstanding on the date hereof and all letters of credit to be issued hereunder, together with all extensions, renewals and replacements thereof, are herein collectively referred to as the "Letters of Credit"); provided that the Issuing Bank shall have no obligation to issue any Letter of Credit if at the time of such issuance a Default exists or an Event of Default has occurred and is continuing or if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the Available Revolving Credit Commitment would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars, (ii) expire no later than the Termination Date and (iii) expire no later than a date one year after its issuance. Each Letter of Credit (except for previously issued Letters of Credit) shall be issued as credit support for (x) insurance and vendor financial obligations, (y) performance bonds issued on behalf of the Company or any Designated Subsidiary in its ordinary course of business or (z) other similar financial support for obligations of the Company. 29. Subsection 3.2 of the Credit Agreement is hereby amended to add the following sentence between the first and second sentences: With each request for the issuance of a Letter of Credit hereunder, the Company shall deliver a Compliance Certificate to the Issuing Bank. 30. Paragraph (a) of Subsection 3.3 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: (a) The Company shall pay to the Agent a letter of credit facility fee (the "L/C Fee"), upon issuance of a Letter of Credit, in an amount equal to the product of (i) the face amount of such Letter of Credit, times (ii) the applicable Letter of Credit Rate, times (iii) the term of such Letter of Credit, expressed as a fraction equal to the number of days of such term divided by three hundred sixty (360). In the event any Letter of Credit is terminated or the available credit thereunder is permanently reduced prior to the stated expiry date thereof, the Company shall be entitled to a rebate of that portion of the L/C Fee paid with respect to such Letter of Credit which is allocable pro rata to the portion of the Letter of Credit that has been terminated or reduced, as the case may be, as determined by the Issuing Bank. Each L/C Fee payable under this subsection 3.3 shall be shared ratably among the Banks in accordance with their respective L/C Commitment Percentages. 31. Subsection 3.4 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 3.4 Reimbursement Obligation of the Company. The Company agrees to reimburse the Issuing Bank on each date on which the Issuing Bank notifies the Company of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Bank for the amount of (a) such draft so paid and (b) any taxes (other than income taxes), fees, charges or other costs or expenses incurred by the Issuing Bank in connection with such payment. Each such payment shall be made to the Issuing Bank at its address for notices specified herein in Dollars and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Company under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the Default Rate, as defined in subsection 2.3. 32. Subsection 4.8 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 4.8 Ownership of Property; Liens. (a) Each of the Company and each Designated Subsidiary has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to all its other property except for any defect (other than with respect to the Collateral) in title thereto or leasehold interest therein which would not in the aggregate have a Material Adverse Effect; (b) none of the property (other than Collateral) owned or leased by the Company or any Designated Subsidiary is subject to any Lien except as permitted by subsection 7.3 or which, in the aggregate, would not have a Material Adverse Effect; and (c) none of the Collateral is subject to any Lien except as permitted by subsection 7.3 or any Lien granted in favor of the Agent. 33. The last sentence of Subsection 5.1 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: Each borrowing by and Letter of Credit issued on behalf of the Company or any of its Designated Subsidiaries hereunder shall constitute a representation and warranty by the Company as of the date of such Loan or Letter of Credit that the conditions contained in this subsection 5.2 have been satisfied. 34. Paragraph (b) of Subsection 6.2 of the Credit Agreement is hereby amended to delete the reference to "subsection 2.11" and insert in place thereof the reference to "subsection 2.9". 35. Subsection 6.9 is hereby amended to add the following at the end thereof: Furthermore, upon the request of the Required Banks, the Company shall deliver to the Agent for the benefit of the Banks, the guarantee of any Subsidiary whose guarantee is so requested, other than Financial Opportunities, Inc. Such guarantee shall be in the form and substance of the Subsidiary Guarantee, as it may be from time to time amended. 36. The introduction to and paragraph (a) of Subsection 7.1 of the Credit Agreement are hereby deleted in its entirety with the following being inserted in place thereof: 7.1 Financial Condition Covenants. Effective at FYED 1995 and thereafter, (a) EBIRT to Interest and Rent. For any period of four consecutive fiscal quarters ending on any FQED, permit the ratio of (i) Consolidated EBIRT for the applicable period to (ii) the sum of Consolidated Interest Expense and Consolidated Rent Expense for such period to be less than (a) .86 to 1.00 at FYED 1995, (b) .87 to 1.00 at first FQED 1996, (c) 1.00 to 1.00 at second FQED 1996, (d) 1.10 to 1.00 at third FQED 1996, and (e) 1.10 to 1.00 at each FQED thereafter. 37. Paragraph (b) of Subsection 7.1 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: (b) EBIDA to Interest, Capital Expenditures and Current Maturities. Commencing at the first FQED 1996, permit the ratio of (i) Consolidated EBIDA for the applicable period to (ii) the sum, for the Company and its Subsidiaries, for such period, of (a) Consolidated Interest Expense, (b) Capital Expenditures and (c) current maturities of long-term debt, to be less than 1.00 to 1.00 during any fiscal quarter, based upon the Company's financial statements for the fiscal year to date period at the end of such quarter; provided that, for fiscal quarters subsequent to FYED 1996, such ratio shall be tested based upon a period of four consecutive fiscal quarters ending on any FQED. 38. Paragraph (c) of Subsection 7.1 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: (c) Consolidated Indebtedness to Consolidated EBITDA. For any period of four consecutive fiscal quarters ending on any FQED to occur during any "Test Period" set forth below, permit the ratio of (i) Consolidated Indebtedness at the end of such period to (ii) Consolidated EBITDA for such period to be more than the ratio set forth opposite such period below: Test Period Ratio At FYED 1995 through 4.75 to 1.00 First FQED 1996 First day of Second FQED 4.00 to 1.00 1996 through the Fourth Fiscal Quarter of FYED 1996 First day of First FQED 1997 3.75 to 1.00 and during each Fiscal Quarter thereafter 39. Paragraph (g) of Subsection 7.1 of the Credit Agreement is hereby amended to add a new subpart (v) before the semi-colon before the last word of such paragraph: and (v) there shall be no Liens on any of the following types of collateral, as those terms are defined in Chapter 1309 of the Ohio Revised Code: inventory, accounts or general intangibles (except Liens on general intangibles that result from the granting of a mortgage, equipment lease financing or other equipment financing arrangement); and 40. Subpart (i) of paragraph (c) of Subsection 7.5 of the Credit Agreement is hereby deleted in its entirety, with the following to be inserted in place thereof: (i) may be merged or consolidated with or into any other Subsidiary (provided that if it is merged or consolidated with a Designated Subsidiary, the continuing or surviving entity must be the Designated Subsidiary) 41. Paragraph (c) of Subsection 7.6 of the Credit Agreement is hereby amended to delete the reference to "subsection 2.11(b)" and insert in place thereof the reference to "subsection 2.9(b)". 42. Subsection 7.7 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 7.7 Limitation on Dividends. Declare or pay any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Company or any Subsidiary or any warrants or options to purchase any such Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Company or any Subsidiary (other than (i) dividends payable solely in common stock of a Subsidiary so long as any such common stock dividend is pledged by the stockholder pursuant to the Pledge Agreement to which such stockholder is a party, (ii) dividends payable solely to the Company or a Subsidiary which has executed and delivered to the Agent a Subsidiary Guarantee, or (iii) dividends payable solely in the common stock of the Company to stockholders of the Company). 43. Subsection 7.8 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 7.8 Limitation on Capital Expenditures. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any Capital Expenditures more than an aggregate amount equal to $22,850,000, in the aggregate for the Company and its Subsidiaries, during any fiscal year of the Company. 44. Subsection 7.12 of the Credit Agreement is hereby amended to delete the references to "subsection 2.11" and insert in place thereof references to "subsection 2.9". 45. Subsection 7.13 of the Credit Agreement is hereby deleted in its entirety with the following being inserted in place thereof: 7.13 Corporate Documents/Corporate Names/Location of Assets. (a) Amend its Certificate of Incorporation (except to increase the number of authorized shares of common stock); or, (b) do any of the following, unless, in each case, it shall provide the Agent with at least 30 days prior written notice of such action: (i) change its corporate name; (ii) change the location of its inventory or equipment; (iii) change the location of the office where its maintains its records pertaining to its accounts; (iv) change the location of its existing places of business or open any new places of business; or (v) change the location of its chief executive office; provided, however, that anything herein to the contrary notwithstanding, (A) in the alternative, with respect to store openings and closings, the Company may satisfy the requirement of this subsection with respect to such stores, by submitting to the Agent, on a monthly basis, a list of all stores opened and closed, and (B) with respect to moving inventory from store to store, no notice need be provided pursuant to this subsection so long as the Company, or a Subsidiary, as the case may be, has executed and delivered to the Agent a UCC financing statement appropriate for filing to perfect the Agent's security interest in the inventory in its new location. As used herein, "inventory", "equipment" and "accounts" have the respective meanings ascribed to them in Chapter 1309 of the Ohio Revised Code. 46. Subsection 10.2 of the Credit Agreement is hereby amended to (i) delete the name, address and telecopy number of the Agent and insert in place thereof the following: Society National Bank, 127 Public Square, Cleveland, Ohio 44114, Attention: David A. Haverback, Vice President, Telecopy: (216)689-4981; and (ii) delete the reference to "subsections 2.4, 2.5, 2.9, 2.14 and 2.15" and insert in place thereof the reference to "subsections 2.4, 2.7, 2.11 and 2.12" . 47. Subsection 10.6 of the Credit Agreement is hereby amended to delete the words "Revolving Credit Note" wherever they appear and to insert in place thereof the words "Working Capital Loan Note". 48. Paragraph (b) of Subsection 10.6 of the Credit Agreement is hereby amended to delete the reference to "subsections 2.16, 2.17, 2.18 and 2.19" and insert in place thereof the reference to "subsections 2.13, 2.14 and 2.15". 49. Paragraph (a) of Subsection 10.7 of the Credit Agreement is hereby amended to delete the reference to "subsection 2.14(b)" and insert in place thereof the reference to "subsection 2.11". 50. Subsections 10.11, 10.12, 10.13, 10.14 and 10.15 of the Credit Agreement are hereby deleted in their entirety, with the following to be inserted in place thereof: 10.11 Governing Law. This Agreement and the Notes and the rights and obligations of the parties under this Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the laws of the state of Ohio. 10.12 Submission To Jurisdiction; Waivers. The Company hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of Ohio, the courts of the United States of America for the Northern District of Ohio, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Company at its address set forth in subsection 10.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 10.13 Acknowledgements. The Company hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Notes and the other Loan Documents; (b) neither the Agent nor any Bank has any fiduciary relationship to the Company, and the relationship between Agent and Banks, on one hand, and Company, on the other hand, is solely that of debtor and creditor; and (c) no joint venture exists among the Banks or among the Company and the Banks. 10.14 Warrant of Attorney. The Company authorizes any attorney at law at any time or times after the maturity hereof (whether maturity occurs by lapse of time or by acceleration) to appear in any state or federal court of record in the United States of America, to waive the issuance and service of process, to admit the maturity of this note and the nonpayment thereof when due, to confess judgment against the Company in favor of the holder of this note for the amount then appearing due, together with interest and costs of suit, and thereupon to release all errors and to waive all rights of appeal and stay of execution. The foregoing warrant of attorney shall survive any judgment, and if any judgment be vacated for any reason, the holder hereof nevertheless may thereafter use the foregoing warrant of attorney to obtain an additional judgment or judgments against the Company. The Company agrees that the Agent or the Banks' attorney may confess judgment pursuant to the foregoing warrant of attorney. The Company further agrees that the attorney confessing judgment pursuant to the foregoing warrant of attorney may receive a legal fee or other compensation from the Agent or the Banks. 10.15 JURY TRIAL WAIVER. THE COMPANY, THE AGENT AND EACH OF THE BANKS WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG THE COMPANY, THE AGENT AND THE BANKS, OR ANY THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS CREDIT AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY ANY BANK'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT AMONG THE COMPANY, THE AGENT AND THE BANKS, OR ANY THEREOF.WAIVERS OF JURY TRIAL. 51. The Company and each of the Banks hereby consent to the appointment of Society National Bank as Successor Agent. 52. The Credit Agreement is hereby amended by deleting Schedules I, II, III, IV, V, VI, VII, VIII, IX, X, XI and XII and Exhibits A and B in their entirety and by substituting in place thereof, Amended Schedules I, II, III, IV, V, VI, VII, VIII, IX, X, XI and XII, respectively, and new Exhibits A and B in the form of Amended Schedules I, II, III, IV, V, VI, VII, VIII, IX, X, XI and XII, and Exhibits A and B, respectively, attached hereto. 53. Concurrently with the execution of this Amendment Agreement, the Company shall execute and deliver to each Bank a Working Capital Loan Note dated May 12, 1995 and being in form and substance substantially in the form of Exhibit A attached hereto with the blanks appropriately filled. After receipt of such Working Capital Loan Note, Bank will mark the Revolving Credit Note being replaced hereby, "Replaced" and return the same to the Company. 54. With respect to the financial condition of the Company and its Subsidiaries, the Company hereby represents and warrants to the Agent and the Banks that: (a) The consolidated balance sheet of the Company and its consolidated Subsidiaries as at January 28, 1995 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year ended on such date, reported on, in draft form, by Arthur Andersen LLP, copies of which have heretofore been furnished by the Company to each Bank, are complete and correct and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). (b) Except a set forth on Schedule II, as amended, neither the Company nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to in subsection 4.1(a), any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the financial statements referred to in subsection 4.1(a) or in the notes thereto. (c) Except as set forth on Schedule III, as amended, during the period from January 28, 1995 to and including May 11, 1995, there has been no sale, transfer or other disposition by the Company or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Company and its consolidated Subsidiaries at January 28, 1995. 55. The Company hereby further represents and warrants to the Agent and the Banks that (a) the Company has the legal power and authority to execute and deliver this Amendment Agreement; (b) the officials executing this Amendment Agreement have been duly authorized to execute and deliver the same and bind the Company with respect to the provisions hereof; (c) the execution and delivery hereof by the Company and the performance and observance by the Company of the provisions hereof do not violate or conflict with the organizational agreements of the Company or any law applicable to the Company or result in a breach of any provision of or constitute a default under any other agreement, instrument or document binding upon or enforceable against the Company; (d) the assets owned by the Designated Subsidiaries on the date of this Amendment Agreement represent, in the aggregate, at least 90% of the total assets of the Company and it Subsidiaries; (e) the revenues of the Designated Subsidiaries represent in the aggregate at least 90% of the revenues of the Company and its Subsidiaries; (f) after giving effect to the transactions contemplated hereby, no Default exists under the Credit Agreement, nor will any occur immediately after the execution and delivery of this Amendment Agreement or by the performance or observance of any provision hereof; (g) the Company has no claims or offsets against, or defenses or counterclaims to, any of the Company's obligations or liabilities under the Credit Agreement, as amended, or any Loan Document and the Company hereby waives and releases the Agent and the Banks from any and all such claims, offsets, defenses and counterclaims of which the Company is aware, such waiver and release being with full knowledge and understanding of the circumstances and effect thereof and after having consulted legal counsel with respect thereto; and (h) this Amendment Agreement constitutes a valid and binding obligation of the Company in every respect, enforceable in accordance with its terms. 56. Each reference to the Credit Agreement that is made in the Credit Agreement or any other writing shall hereafter be construed as a reference to the Credit Agreement as amended hereby. Except as herein otherwise specifically provided, all provisions of the Credit Agreement shall remain in full force and effect and be unaffected hereby. 57. The rights and obligations of all parties hereto shall be governed by the laws of the State of Ohio. 58. The Company has requested, on behalf of itself and the Designated Subsidiaries, that Agent and the other Banks complete, approve and execute this Second Amendment Agreement as quickly as possible and in the shortest feasible time. Agent and Banks have agreed to this request and, accordingly, have exerted every effort to close on this Second Amendment Agreement in the shortest possible time, foregoing the careful and extensive (and therefore time-consuming) review of the documentation that is their normal practice in order to accommodate the needs of the Company and the Designated Subsidiaries. Further, this Second Amendment Agreement and the related Loan Documents have been the subject of extensive negotiations and numerous revisions at the request of all parties. Accordingly, the parties agree that any ambiguity in any of the Loan Documents shall be construed in favor of the Agent and the Banks, Further, the Company agrees that the Agent, notwithstanding that such document has already been executed by all the parties, may correct any obvious error and complete any blank in any Loan Document, and the Agent shall not be liable to the Company or any Designated Subsidiary for any such action unless in taking such action the Agent acts in bad faith or gross negligence or with a wilful disregard for the interests of the Company or such Designated Subsidiary. 59. JURY TRIAL WAIVER. TO THE EXTENT PERMITTED BY LAW, THE COMPANY, THE AGENT AND EACH OF THE BANKS WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG THE COMPANY, THE AGENT AND THE BANKS, OR ANY THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AMENDMENT AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY ANY BANK'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT AMONG THE COMPANY, THE AGENT AND THE BANKS, OR ANY THEREOF. DAIRY MART CONVENIENCE STORES, INC. By:/s/Gregory Wozniak Gregory Wozniak, Vice President and Corporate Counsel SOCIETY NATIONAL BANK, individually and as Agent By:/s/Robert A. Montgomery Robert A. Montgomery, Senior Vice President FLEET BANK, NATIONAL ASSOCIATION By:/s/William Theriault William Theriault, Vice President SCHEDULE 1 Commitments; Addresses
L/C L/C Working CapitalWorking CapitalRevolving Credit Commitment CommitmentLoan CommitmentLoan Commitment Commitment Percentage Amount Percentage Amount Amount Society National Bank 55% $ 8,300,000 100% $5,000,000$13,300,000 127 Public Square Cleveland, OH 44114 Attention: David A. Haverback Telecopy No: 216/689-4981 Fleet Bank, National Association 45%$ 6,700,000 0% $0 $ 6,700,000 40 Westminster Street P.O. Box 366, Mail Stop RI-OP-TO-5A Providence, RI 02901-0366 Attention: William Theriault Telecopy No: 401-459-4964 TOTAL 100% $15,000,000 100% $5,000,000 $20,000,000 The amount of the Working Capital Loan Commitment portion of the Revolving Credit Commitment has been temporarily reduced to $5,000,000 and shall be increased to $30,000,000 upon the occurrence of all of the following conditions described in (I) or the condition described in (II) and provided that the L/C Commitment shall then become, by further amendment of the Credit Agreement, a sublimit of the overall credit facility of $30,000,000: (I)(a) The Company shall have recorded a Consolidated Net Income (excluding any income from sale of capital assets and nonrecurring gains) of not less than $19,500,000 on a rolling four quarter basis at the end of any fiscal quarter, as confirmed (in the discretion of the Agent) by an audit report of the Company's independent public accountant; (b) the payment of fees satisfactory to the Agent; and (c) no Default shall exist; or (II) The Agent and the Banks otherwise agree to increase the Working Capital Loan Commitment.
EX-10.6 4 EXHIBIT (10.6) DAIRY MART CONVENIENCE STORES, INC. 1995 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS 1. Purpose. The purpose of this 1995 Stock Option Plan For Outside Directors (the "Plan") is to attract and retain the continued services of non-employee directors of Dairy Mart Convenience Stores, Inc. (the "Company") with the requisite qualifications and to encourage such directors to secure or increase on reasonable terms their stock ownership in the Company. The Board of Directors of the Company (the "Board") believes that the granting of options (the "Options") under the Plan will promote continuity of management and increased personal interest in the welfare of the Company by those who are responsible for shaping and carrying out the long-range plans of the Company and securing its continued growth and financial success. 2. Effective Date of the Plan. The Plan shall become effective upon its approval by the Board of Directors; provided, however, that if the Plan is not approved by the shareholders of the Company at the 1995 annual meeting of the shareholders of the Company, then the Plan shall terminate. 3. Stock Subject to Plan. 50,000 of the authorized but unissued shares, or treasury shares, of the Company's class A common stock, par value $.01 per share (the "Shares"), are hereby reserved for issuance upon the exercise of Options. If any Option expires or terminates for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the grant of Options hereunder. 4. Administration. The Plan shall be administered by the Board of Directors of the Company (the "Board"). Subject to the provisions of the Plan, the Board of Directors shall have complete authority in its discretion to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Board of Directors shall have no discretion to determine the non-employee directors who will receive Options, the number of Shares subject to Options, the terms upon which, the times at which, or the periods within which, Shares may be acquired or the Options may be acquired and exercised. 5. Eligibility. An Option may be granted only to members of the Board who are not otherwise employees of the Company or any of its subsidiaries on the date of grant and have not been employees of the Company or any of its subsidiaries at any time since the beginning of the one year period preceding service on the Board (the "Participants"). 6. Grant of Options and Option Price. (a) Initial Grant. On the date on which the Plan is approved by the Board of Directors, each Participant shall receive an automatic grant of an Option to purchase 3,500 Shares (the "Initial Option"). Individuals who become Participants after the date on which the Plan is approved by the Board of Directors shall not receive an Initial Option. Each grant of an Initial Option is conditioned upon (i) subsequent approval of the Plan by the shareholders of the Company at the 1995 annual meeting of shareholders, and (ii) the Participant not selling, transferring or otherwise disposing of the Shares underlying the Initial Option on or before the date which is six months after the date on which shareholder approval of the Plan is obtained (the "Six Month Date"). If the Plan is not approved by the shareholders of the Company at the 1995 annual meeting, then the Initial Options shall be void ab initio. Initial Options may not be exercised until after this Plan is approved by the Shareholders. (b) Annual Grants to Directors. On February 1 of each year, beginning on February 1, 1996, each Participant shall receive an automatic, annual grant of an Option to purchase 3,500 Shares (the "Annual Option"); provided, however that the number of Shares subject to future grant under the Plan is sufficient to make the automatic grants required to be made pursuant to the Plan on such date. (c) Exercise Price. The per Share price to be paid by a Participant upon the exercise of an Option shall be equal to the fair market value of a Share on the day preceding the date of grant. For the purposes hereof, the fair market value of a Share on any date shall be equal to the closing price per Share on such date (or if no such price was established on such date, then on the next preceding date on which a price was established), as shall be quoted on the National Association of Securities Dealers Automated Quotation System, or on such other securities quotation system or exchange as the Shares may be listed. 7. Option Period. Participants shall be granted Options which are exercisable from the date that they are granted for a period of ten years from the date of the granting thereof, provided, however, that the Initial Options may not be exercised until after the approval of this plan by the shareholders. 8. Exercise of Option. Subject to Section 10, an Option may be exercised in whole or in part at any time on or after the date it becomes exercisable by the Participant's delivering to the Company on any business day, at its principal executive offices, a written notice of exercise, which notice shall specify the number of Shares as to which the Option is being exercised, in whole or in part. Payment in full of the Option exercise price shall accompany such written notice as set forth below. After the exercise of an Option and payment in full of the exercise price, the Optionee shall be entitled to receive a stock certificate or certificates evidencing his or her ownership of Shares acquired upon such exercise. The purchase price shall be paid as follows: (i) in cash, certified or bank cashier's or teller's check; (ii) by surrender of Shares then owned by the Optionee; or (iii) partially in accordance with (i) and partially in accordance with (ii) of this Section. Shares surrendered in accordance with (ii) or (iii) shall be valued at their fair market value at the date of exercise. If the Shares are listed on a securities exchange or are quoted on the NASDAQ market the fair market value of the Shares shall be the closing price of the Shares as of the close of business on the date immediately preceding the date such shares are tendered to the Company for exercise of an Option. Surrender of such Shares shall be evidenced by the delivery of certificate(s) representing such Shares in such manner, and endorsed in such form, or accompanied by stock powers endorsed in such form, as the Board may determine. 9. Transferability. No Option shall be assignable or transferable, except by will and/or by the laws of descent and distribution. During the life of any Participant, each Option granted to the Participant may be exercised only by the Participant, or if he or she is disabled or incapacitated, by his or her legal representative. 10. Ceasing to be a Director. If a Participant terminates service as a director for any reason including termination by reason of death of a Participant, any outstanding Option held by the Participant shall terminate on the earlier of (i) the date on which such Option would otherwise expire, or (ii) nine (9) months after such termination. 11. Duration of Plan. Unless sooner terminated, the Plan shall remain in effect until all Shares have been issued upon the exercise of Options, and shall thereafter terminate. No Option may be granted after the termination of this Plan; provided, however, that, except for termination pursuant to Paragraph 2 above, termination of the Plan shall not affect any Option previously granted, and such Option shall remain in effect until exercised, surrendered or cancelled, or until it shall have expired, all in accordance with its terms. 12. Changes in Capital Structure, etc. In the event of changes in the outstanding common stock of the Company by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchange of shares, reorganizations, or liquidations, the number of Shares available under the Plan in the aggregate and the number of Shares as to which Options may be granted to any Participant shall be correspondingly adjusted by the Board. In addition, the Board shall make appropriate adjustments in the number of Shares as to which outstanding Options, or portions thereof then unexercised, shall relate, to the end that the Participant's proportionate interest shall be maintained as before the occurrence of such events (or, in the case of mergers and consolidations to the end that the Option shall be for the same number of Shares or other securities as a holder of the number of Shares underlying the Option prior to the merger or consolidation would have received as a result of the merger of consolidation); such adjustment shall be made without change in the total price applicable to the unexercised portion of Options and with a corresponding adjustment in the option price per Share. 13. Rights as Shareholder. A Participant entitled to Shares as a result of the exercise of an Option shall not be deemed for any purpose to be, or have rights as, a shareholder of the Company by virtue of such exercise, except to the extent a stock certificate is issued therefor and then only from the date such certificate is issued. No adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 14. Expenses. The expenses of this Plan shall be paid by the Company. 15. Compliance with Applicable Law. Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause to be issued or delivered any certificates evidencing Shares pursuant to the exercise of an Option, unless and until the Company is advised by its counsel that the issuance and delivery of such certificates is in compliance with all applicable laws and regulations of governmental authority. The Company shall in no event be obligated to register any securities pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended) or to take any other action in order to cause the issuance and delivery of such certificates to comply with any such law or regulation. The Board may require, as a condition of the issuance and delivery of such certificates and in order to ensure compliance with such laws and regulations, that the Participant make such covenants, agreements and representations as the Board, in its sole discretion, deems necessary or desirable. If any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Participant's salary, wages, renumeration or otherwise in connection with the exercise of an Option, the Participant shall advance in cash to the Company the amount of such withholdings unless a different withholding arrangement, including the use of Shares, is authorized by the Board (and permitted by law); provided, however, that with respect to persons subject to Section 16 of the Securities Exchange Act of 1934 (the "1934 Act), any such withholding arrangement shall be in compliance with any applicable provisions of Rule 16b-3 promulgated under Section 16 of the 1934 Act, or such other similar rules as may apply to such persons. For purposes hereof, the value of the Shares withheld for purposes of payroll withholding shall be the fair market value of the Shares, as set forth in Section 8. If the fair market value of the Shares withheld is less than the amount of withholdings required, the Participant may be required to advance the difference in cash to the Company. The Board in its discretion may condition the exercise of an Option on the Participant's payment of such additional withholding. 16. Acceleration and Termination of Options. Notwithstanding any other provision of this Plan, a dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with an affiliate of the Company), or a Change of Control of the Company (as defined below) shall cause any unexercised portion of an Option to terminate, except for any outstanding unexercised Option as to which the Company or another corporation makes appropriate provision for the protection of the value thereof and either assumes the Option, or substitutes another Option, with substantially similar terms; provided, however, a Participant shall have the right immediately prior to such dissolution, liquidation, merger, consolidation, or Change of Control, to exercise the unexercised portion of the Option, in whole or in part. The Participant shall have until the close of business on the day preceding the effective date of any such dissolution, merger consolidation, or Change of Control, or preceding the commencement of any such liquidation, to exercise the Option. Such effective date or commencement date shall be the date designated in a written notice from the Board to the Optionee, which notice shall be given not less than fourteen (14) days prior to such designated effective date or commencement date, provided that for the purposes of this Section, the effective date shall be the date designated, whether or not the dissolution, merger, consolidation or Change of Control actually becomes effective on such date. If such dissolution, liquidation, merger, consolidation, or Change of Control is not consummated within thirty (30) days after such effective date, and if the Participant has not exercised the Option in full, then the Option or (or any part of such Option which has not yet been exercised) shall continue in full force and effect as if no such notice had been given. For purposes hereof, a "Change of Control" shall mean the consummation of a transaction in which the beneficial ownership or control of the Company is or may be changed such that one or more persons or entities (other than persons or entities who beneficially owned more than ten percent (10%) of the Shares on the date the Option was granted and other than persons who are directors of the Company on the date the Option has granted (or entities controlled by such persons)) obtain beneficial ownership or control of more than fifty percent (50%) of the assets or outstanding voting securities or equity interests of the Company. Such transactions include, without limitation, sales of substantially all of the assets of the Company, acquisitions of ownership or control by tender offer, and acquisitions of such ownership or control through the issuance of authorized but unissued capital stock of the Company. 17. Application of Funds. Any cash proceeds received by the Company from the sale of Shares pursuant to Options will be used for general corporate purposes. 18. Amendment of the Plan. The Board may from time to time suspend or discontinue this Plan or revise or amend it in any respect whatsoever except that, without the approval of the shareholders, no such revision or amendment shall (a)increase the number of Shares subject to this Plan, (b) modify the requirements as to eligibility for a grant of an Option, (c) materially increase the benefits accruing to the Participants under this Plan, or (d) be of a nature that requires shareholder approval in order to ensure the compliance of the Plan with Rule 16b-3 promulgated under the 1934 Act, or such similar rule as may apply to the Plan. No such suspension, discontinuance, revision or amendment shall in any manner affect any Option theretofore granted without the consent of the Participant or the transferee of the Participant, unless necessary to comply with applicable law. 19. Governing Law. This Plan shall be construed and enforced in accordance with the law of the State of Connecticut. EX-10.7 5 EXHIBIT (10.7) September 16, 1994 Gregory G. Landry Dairy Mart Convenience Stores, Inc. One Vision Drive Enfield, CT 06082 Dear Mr. Landry: Dairy Mart Convenience Stores, Inc. (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. Accordingly, the Board of Directors of the Company believes that steps should be taken to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, yourself included, arising out of recent changes in the Company's senior management and shifts in the beneficial ownership of a significant number of shares of the Company's outstanding voting stock. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through the second anniversary of the date hereof. 2. Effect of Termination. You shall be entitled to the benefits provided in Section 3(iv) hereof upon the termination of your employment with the Company during the term of this Agreement, unless such termination is (A) a result of your death, or (B) by you for other than Good Reason, or (C) by the Company for Disability or for Cause. (i) Disability. For purposes of this Agreement, "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family or your legal representative), and approved by the Company, said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. (ii) Cause. For purposes of this Agreement, "Cause" shall mean your willful breach of duty in the course of your employment, or your habitual neglect of your employment duties. For purposes of this Section 2(ii), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company and its subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three- quarters (3/4) of the entire membership of the Company's Board of Directors (the "Board") at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in this Section 2(ii) and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances: (A) the assignment to you of any duties inconsistent with your status as Executive Vice President and Chief Financial Officer of the Company, your removal from that position, or a diminution in the nature or status of your responsibilities from those in effect immediately prior to the date hereof; (B) a reduction by the Company in your annual base salary, annual bonus or fringe benefits as in effect on the date hereof or as the same may be increased from time to time; or (C) any failure by the Board to renominate you for election as a director of the Company, except in connection with your death or the termination of your employment (x) by you for other than Good Reason or (y) by the Company for Disability or for Cause. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) Notice of Termination. Any purported termination of your employment by the Company and its subsidiaries or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 5 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (B) if your employment is terminated pursuant to Section 2(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 2(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 2(iii) above shall not be less than ninety (90) nor more than one hundred twenty (120) days, respectively, from the date such Notice of Termination is given). 3. Compensation Upon Termination or During Disability. Upon termination of your employment or during a period of Disability you shall be entitled to the following benefits, provided that such period of Disability or Notice of Termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company as a result of your Disability, you shall continue to receive an amount equal to your base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, your benefits shall be determined in accordance with the insurance programs of the Company and its subsidiaries then in effect. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary and bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to you pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment shall be terminated by reason of your death, your benefits shall be determined in accordance with the programs of the Company then in effect. (iv) If your employment by the Company shall be terminated by (a) the Company other than for Cause, your death, or Disability at any time during the term of this Agreement, or (b) you for Good Reason at any time between the first anniversary and the second anniversary of the date hereof, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary and annual bonus accrued through the Date of Termination at the rate in effect at the time the Notice of Termination is given, no later than the fifth day following the Date of Termination, plus all other amounts to which you are entitled under any compensation plan of the Company applicable to you, at the time such payments are due. For purposes of this Section 3(iv)(A) and the other provisions of this Agreement, your annual bonus "in effect at the time the Notice of Termination is given" shall mean the greater of the amount of the annual bonus paid to you in respect of any of the three years immediately prior to the year in which the Notice of Termination is given. (B) The Company shall pay you, on a date that is no later than the fifth day following the Date of Termination, as severance pay to you a severance payment equal to 2 times the sum of (x) your full base salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to you pursuant to this Section 3(iv)(B) shall not be reduced by the amount of any other payment or the value of any benefit received or to be received by you in connection with your termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an affiliate, predecessor or successor of the Company). (C) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement (the "Contract Payments") or in connection with your termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to you, at the time specified in Section 3(iv)(D) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 3(iv)(C), and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to you ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(i) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (D) The Gross-Up Payments provided for in Section 3(iv)(C) hereof shall be made upon the earlier of (i) the payment to you of any Contract Payment or Other Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (E) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax is less than the amount taken into account under Section 3(iv)(C) hereof, you shall repay to the Company within five days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (F) The Company shall also pay to you all legal fees and expenses reasonably incurred by you in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). (G) On the Date of Termination, the Company shall at its sole cost and expense transfer unrestricted ownership and legal title to the automobile made available by the Company for your use as of the Notice of Termination. (H) For the period of time from the Date of Termination through the earlier of two years thereafter or the date on which you and your dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide you and your eligible dependents with continued coverage under all health, medical, dental and hospitalization plans maintained by the Company during such time period on the same terms and conditions applicable to executive officers of the Company. (I) Upon the Date of Termination all options to purchase stock held by you that are not vested shall immediately vest and become exercisable and all options to purchase stock then held by you shall remain in effect and be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (J) Upon the Date of Termination, the Company shall assign and transfer to you, or your designee, all of its right, title and interest in and to the life insurance policies covering your life that were held by the Company as of the Termination Date. From and after the Termination Date, you shall, at your election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Termination Date. (K) You shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation or benefit earned by you as the result of employment by another employer after the Date of Termination or otherwise. 4. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of the Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had terminated your employment for Good Reason following a change in control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatees or other designee or, it there is no such designee, to your estate. 5. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the address set forth on the first page of this Agreement with respect to the Company and on the signature page with respect to you, provided that all notices to the Company shall be directed to the attention of the Chairman and President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 6, Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No wavier by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 3 shall survive the expiration of the term of this Agreement. 7. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, Dairy Mart Convenience Stores, Inc. By: /s/ Charles Nirenberg Name: Charles Nirenberg Title: Chairman of the Board Agreed to this 16th day of September, 1994. /s/ Gregory G. Landry Address for notices: 86 Ethan Road EX-10.8 6 EXHIBIT (10.8) September 16, 1994 Robert B. Stein, Jr. Dairy Mart Convenience Stores, Inc. One Vision Drive Enfield, CT 06082 Dear Mr. Stein: Dairy Mart Convenience Stores, Inc. (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. Accordingly, the Board of Directors of the Company believes that steps should be taken to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, yourself included, arising out of recent changes in the Company's senior management and shifts in the beneficial ownership of a significant number of shares of the Company's outstanding voting stock. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through the second anniversary of the date hereof. 2. Effect of Termination. You shall be entitled to the benefits provided in Section 3(iv) hereof upon the termination of your employment with the Company during the term of this Agreement, unless such termination is (A) a result of your death, or (B) by you for other than Good Reason, or (C) by the Company for Disability or for Cause. (i) Disability. For purposes of this Agreement, "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family or your legal representative), and approved by the Company, said approval not to e unreasonably withheld. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. (ii) Cause. For purposes of this Agreement, "Cause" shall mean your willful breach of duty in the course of your employment, or your habitual neglect of your employment duties. For purposes of this Section 2(ii), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company and its subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three- quarters (3/4) of the entire membership of the Company's Board of Directors (the "Board") at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in this Section 2(ii) and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances: (A) the assignment to you of any duties inconsistent with your status as President of the Company, your removal from that position, or a diminution in the nature or status of your responsibilities from those in effect immediately prior to the date hereof; (B) a reduction by the Company in your annual base salary, annual bonus or fringe benefits as in effect on the date hereof or as the same may be increased from time to time; or (C) any failure by the Board to renominate you for election as a director of the Company, except in connection with your death or the termination of your employment (x) by you for other than Good Reason or (y) by the Company for Disability or for Cause. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) Notice of Termination. Any purported termination of your employment by the Company and its subsidiaries or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 5 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (B) if your employment is terminated pursuant to Section 2(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 2(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 2(iii) above shall not be less than ninety (90) nor more than one hundred twenty (120) days, respectively, from the date such Notice of Termination is given). 3. Compensation Upon Termination or During Disability. Upon termination of your employment or during a period of Disability you shall be entitled to the following benefits, provided that such period of Disability or Notice of Termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company as a result of your Disability, you shall continue to receive an amount equal to your base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, your benefits shall be determined in accordance with the insurance programs of the Company and its subsidiaries then in effect. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary and bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to you pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to you under this Agreement. (iv) If your employment shall be terminated by reason of your death, your benefits shall be determined in accordance with the programs of the Company then in effect. (v) If your employment by the Company shall be terminated by (a) the Company other than for Cause, your death, or Disability at any time during the term of this Agreement, or (b) you for Good Reason at any time between the first anniversary and the second anniversary of the date hereof, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary and annual bonus accrued through the Date of Termination at the rate in effect at the time the Notice of Termination is given, no later than the fifth day following the Date of Termination, plus all other amounts to which you are entitled under any compensation plan of the Company applicable to you, at the time such payments are due. For purposes of this Section 3(iv)(A) and the other provisions of this Agreement, your annual bonus "in effect at the time the Notice of Termination is given" shall mean the greater of the amount of the annual bonus paid to you in respect of any of the three years immediately prior to the year in which the Notice of Termination is given. (B) The Company shall pay you, on a date that is no later than the fifth day following the Date of Termination, as severance pay to you a severance payment equal to 2 times the sum of (x) your full base salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to you pursuant to this Section 3(iv)(B) shall not be reduced by the amount of any other payment or the value of any benefit received or to be received by you in connection with your termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an affiliate, predecessor or successor of the Company). (C) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement (the "Contract Payments") or in connection with your termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to you, at the time specified in Section 3(iv)(D) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 3(iv)(C), and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to you ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(i) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (D) The Gross-Up Payments provided for in Section 3(iv)(C) hereof shall be made upon the earlier of (i) the payment to you of any Contract Payment or Other Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (E) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax is less than the amount taken into account under Section 3(iv)(C) hereof, you shall repay to the Company within five days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (F) The Company shall also pay to you all legal fees and expenses reasonably incurred by you in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). (G) On the Date of Termination, the Company shall at its sole cost and expense transfer unrestricted ownership and legal title to the automobile made available by the Company for your use as of the Notice of Termination. (H) For the period of time from the Date of Termination through the earlier of two years thereafter or the date on which you and your dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide you and your eligible dependents with continued coverage under all health, medical, dental and hospitalization plans maintained by the Company during such time period on the same terms and conditions applicable to executive officers of the Company. (I) Upon the Date of Termination all options to purchase stock held by you that are not vested shall immediately vest and become exercisable and all options to purchase stock then held by you shall remain in effect and be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (J) Upon the Date of Termination, the Company shall assign and transfer to you, or your designee, all of its right, title and interest in and to the life insurance policies covering your life that were held by the Company as of the Termination Date. From and after the Termination Date, you shall, at your election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Termination Date. (K) You shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation or benefit earned by you as the result of employment by another employer after the Date of Termination or otherwise. 4. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of the Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had terminated your employment for Good Reason following a change in control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatees or other designee or, it there is no such designee, to your estate. 5. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the address set forth on the first page of this Agreement with respect to the Company and on the signature page with respect to you, provided that all notices to the Company shall be directed to the attention of the Chairman and President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 6. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No wavier by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 3 shall survive the expiration of the term of this Agreement. 7. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, Dairy Mart Convenience Stores, Inc. By: /s/ Charles Nirenberg Name: Charles Nirenberg Title: Chairman of the Board Agreed to this 16th day of September, 1994. /s/ Robert B. Stein, Jr. Address for notices: 161 Great Pond Road So. Glastonbury, CT 06073 Windsor, CT 06095 EX-10.9 7 EXHIBIT (10.9) September 16, 1994 Mitchell J. Kupperman Dairy Mart Convenience Stores, Inc. One Vision Drive Enfield, CT 06082 Dear Dr. Kupperman: Dairy Mart Convenience Stores, Inc. (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. Accordingly, the Board of Directors of the Company believes that steps should be taken to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, yourself included, arising out of recent changes in the Company's senior management and shifts in the beneficial ownership of a significant number of shares of the Company's outstanding voting stock. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through the second anniversary of the date hereof. 2. Effect of Termination. You shall be entitled to the benefits provided in Section 3(iv) hereof upon the termination of your employment with the Company during the term of this Agreement, unless such termination is (A) a result of your death, or (B) by you for other than Good Reason, or (C) by the Company for Disability or for Cause. (i) Disability. For purposes of this Agreement, "Disability" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family or your legal representative), and approved by the Company, said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. (ii) Cause. For purposes of this Agreement, "Cause" shall mean your willful breach of duty in the course of your employment, or your habitual neglect of your employment duties. For purposes of this Section 2(ii), no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company and its subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three- quarters (3/4) of the entire membership of the Company's Board of Directors (the "Board") at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in this Section 2(ii) and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For the purpose of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, of any of the following circumstances: (A) the assignment to you of any duties inconsistent with your status as Executive Vice President-Human Resources of the Company, your removal from that position, or a diminution in the nature or status of your responsibilities from those in effect immediately prior to the date hereof; (B) a reduction by the Company in your annual base salary, annual bonus or fringe benefits as in effect on the date hereof or as the same may be increased from time to time; or (C) any failure by the Board to renominate you for election as a director of the Company, except in connection with your death or the termination of your employment (x) by you for other than Good Reason or (y) by the Company for Disability or for Cause. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (iv) Notice of Termination. Any purported termination of your employment by the Company and its subsidiaries or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 5 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (B) if your employment is terminated pursuant to Section 2(ii) or (iii) above or for any reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Section 2(ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Section 2(iii) above shall not be less than ninety (90) nor more than one hundred twenty (120) days, respectively, from the date such Notice of Termination is given). 3. Compensation Upon Termination or During Disability. Upon termination of your employment or during a period of Disability you shall be entitled to the following benefits, provided that such period of Disability or Notice of Termination occurs during the term of this Agreement: (i) During any period that you fail to perform your full-time duties with the Company as a result of your Disability, you shall continue to receive an amount equal to your base salary and bonus at the rate in effect at the commencement of any such period through the Date of Termination for Disability. Thereafter, your benefits shall be determined in accordance with the insurance programs of the Company and its subsidiaries then in effect. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary and bonus through the Date of Termination at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to you pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment shall be terminated by reason of your death, your benefits shall be determined in accordance with the programs of the Company then in effect. (iv) If your employment by the Company shall be terminated by (a) the Company other than for Cause, your death, or Disability at any time during the term of this Agreement, or (b) you for Good Reason at any time between the first anniversary and the second anniversary of the date hereof, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary and annual bonus accrued through the Date of Termination at the rate in effect at the time the Notice of Termination is given, no later than the fifth day following the Date of Termination, plus all other amounts to which you are entitled under any compensation plan of the Company applicable to you, at the time such payments are due. For purposes of this Section 3(iv)(A) and the other provisions of this Agreement, your annual bonus "in effect at the time the Notice of Termination is given" shall mean the greater of the amount of the annual bonus paid to you in respect of any of the three years immediately prior to the year in which the Notice of Termination is given. (B) The Company shall pay you, on a date that is no later than the fifth day following the Date of Termination, as severance pay to you a severance payment equal to 2 times the sum of (x) your full base salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to you pursuant to this Section 3(iv)(B) shall not be reduced by the amount of any other payment or the value of any benefit received or to be received by you in connection with your termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an affiliate, predecessor or successor of the Company). (C) In the event that any payment or benefit received or to be received by you pursuant to the terms of this Agreement (the "Contract Payments") or in connection with your termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined as provided below, the Company shall pay to you, at the time specified in Section 3(iv)(D) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 3(iv)(C), and any interest, penalties or additions to tax payable by you with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to you ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(i) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of your residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (D) The Gross-Up Payments provided for in Section 3(iv)(C) hereof shall be made upon the earlier of (i) the payment to you of any Contract Payment or Other Payment or (ii) the imposition upon you or payment by you of any Excise Tax. (E) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax is less than the amount taken into account under Section 3(iv)(C) hereof, you shall repay to the Company within five days of your receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by you on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (F) The Company shall also pay to you all legal fees and expenses reasonably incurred by you in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). (G) On the Date of Termination, the Company shall at its sole cost and expense transfer unrestricted ownership and legal title to the automobile made available by the Company for your use as of the Notice of Termination. (H) For the period of time from the Date of Termination through the earlier of two years thereafter or the date on which you and your dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide you and your eligible dependents with continued coverage under all health, medical, dental and hospitalization plans maintained by the Company during such time period on the same terms and conditions applicable to executive officers of the Company. (I) Upon the Date of Termination all options to purchase stock held by you that are not vested shall immediately vest and become exercisable and all options to purchase stock then held by you shall remain in effect and be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (J) Upon the Date of Termination, the Company shall assign and transfer to you, or your designee, all of its right, title and interest in and to the life insurance policies covering your life that were held by the Company as of the Termination Date. From and after the Termination Date, you shall, at your election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Termination Date. (K) You shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation or benefit earned by you as the result of employment by another employer after the Date of Termination or otherwise. 4. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of the Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had terminated your employment for Good Reason following a change in control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatees or other designee or, it there is no such designee, to your estate. 5. Notice. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the address set forth on the first page of this Agreement with respect to the Company and on the signature page with respect to you, provided that all notices to the Company shall be directed to the attention of the Chairman and President of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 6. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No wavier by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 3 shall survive the expiration of the term of this Agreement. 7. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sagn and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, Dairy Mart Convenience Stores, Inc. By: /s/ Charles Nirenberg Name: Charles Nirenberg Title: Chairman of the Board Agreed to this 16th day of September, 1994. /s/ Mitchell J. Kupperman Address for notices: 115 Quinnehtuk Road Longmeadow, MA 01106 EX-10.10 8 EXHIBIT (10.10) SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT is made this 27th day of January, 1995, by and between Dairy Mart Convenience Stores, Inc., a Delaware corporation (the "Company"), and Frank Colaccino ("Colaccino"). W I T N E S S E T H: WHEREAS, on August 25, 1994 (the "Termination Date"), Colaccino's employment with the Company as its President and Chief Executive Officer was terminated by the Company's Board of Directors; and WHEREAS, Colaccino believes that the meeting of the Company's Board of Directors at which such termination was effected was improperly called and noticed and that the Company's directors wrongfully terminated his employment; and WHEREAS, to settle any possible claims for wrongful termination of employment, the Company and Colaccino have determined that the interests of all concerned would be best served by settling their differences regarding the termination of Colaccino's employment on the terms hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements hereinafter set forth, the parties, intending to be legally bound hereby, hereby agree as follows: 1. Severance Payments and Benefits. In connection with the termination of Colaccino's employment as the President and Chief Executive Officer of the Company and in consideration of the other provisions of this Agreement, including, without limitation, those set forth in Section 7 hereof (but excluding Colaccino's agreements in Section 4, the consideration for which is set forth in Section 4(d) hereof), the Company hereby agrees to pay and make available to Colaccino the amounts and benefits set forth in this Section 1. (a) For the period of time from the Termination Date through August 25, 1997, the Company shall make severance payments to colaccino amounting to $245,000 for each 12-month period, such payments totalling $735,000. The severance payments provided for in this Section 1(a) shall be made in equal installments on a periodic basis in accordance with the Company's customary payroll practices applicable to its executive officers. (b) As promptly as practicable after the date hereof, the Company shall transfer to Colaccino unrestricted ownership and legal title, free and clear of all liens and encumbrances, to the automobile made available by the Company for Colaccino's use as of the Termination Date. Thereafter, all costs and expenses associated with the use and ownership of such automobile shall be borne by Colaccino. (c) The Company hereby assigns and transfers to Colaccino or his designee all of its right, title and interest in and to the life insurance policies (policy nos. 8912927 and 898540 issued by Massachusetts Mutual Insurance Company) covering the life of Colaccino that were held by it as of the Termination Date. Colaccino shall, at his election, assume and pay any and all premiums and other costs associated with the continuation of such policies as they become due after the Termination Date, and after such date the Company shall have no continuing payment obligations with respect to such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the date hereof. (d) The Company hereby assigns and transfers to Colaccino all of its right, title and interest in and to the computer hardware, software and related systems and assets that were installed by the Company at Colaccino's residence for his use on behalf of the Company, free and clear of all liens and encumbrances. The foregoing assets are assigned and transferred to Colaccino as they exist on the date hereof and the Company makes no representations or warranties whatsoever regarding such assets. (e) For the period of time from the Termination Date through the earlier of August 25, 1996 or the date on which Colaccino and his dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide Colaccino and his eligible dependents with continued coverage under all health, dental, medical and hospitalization plans maintained by the Company during such time period at the same cost and on the other terms and conditions applicable to executive officers of the Company. (f) Commencing in respect of September 30, 1994 and continuing thereafter until the earlier of September 30, 1996 or the date on which Colaccino first becomes employed on a full-time basis by a subsequent employer, the Company shall make a monthly payment to Colaccino on the 30th day of each such month (or, if such day is not a business day, on the next succeeding business day) in the amount of $2,000 to defray the costs and expenses of office space and secretarial services (representing a maximum of 25 payments), without the need for Colaccino to account for such expenses to the Company. (g) Colaccino represents to the Company that he has incurred at least $215,000 of out-of-pocket expenses in connection with various matters relating to the Company. The Company hereby agrees to promptly pay Colaccino $215,000 as reimbursement for such expenses. (h) Notwithstanding the terms of the Company's stock option plans or any agreements previously made by the parties pursuant thereto, the Company hereby agrees that the options currently held by Colaccino to purchase shares of the Company's common stock (or options issued in replacement thereof for the same number of shares at the same exercise price) shall, to the extent unvested, immediately vest as of the date hereof and all such options currently held by Colaccino (or options issued in replacement thereof for the same number of shares at the same exercise price) shall be exercisable for a period of time ending 18 months after the date hereof. Schedule A attached hereto sets forth certain information regarding the options currently held by Colaccino to purchase shares of the Company's common stock. 2. Resignation as a Director. Colaccino hereby resigns as a director of the Company and from the Board of Directors of any subsidiary or affiliate of the Company on which he serves as of the date hereof, effective with the execution of this Agreement. 3. Other Matters. (a) Colaccino hereby withdraws the notice and call of a special meeting of the Company's stockholders executed by him as President of the Company and delivered to the Company on August 25, 1994 and agrees that he will not challenge any withdrawal by the successor general partner of DM Associated Limited Partnership ("DM Associates") of the request for the call of a special meeting of stockholders previously executed by him on behalf of DM Associates. Colaccino and the Company acknowledge and agree that the stockholders meeting referred to in such notice and call and request will not be called by the Company or held. Colaccino further withdraws his request, dated August 30, 1994, to examine the Company's stockholder list and related materials. (b) Colaccino agrees that he will not challenge any withdrawal by the successor general partner of DM Associates of the written consent of stockholders, dated August 29, 1994, executed by him in his individual capacity and on behalf of DM Associates and agrees that such written consent of stockholders is null and void ab initio. (c) As promptly as practicable following the execution of this Agreement, but in no event later than ten days after the date hereof, the parties to the following lawsuits will take all steps necessary to dismiss with prejudice and without cost or expense to any opposing party, except as set forth in Section 1(g) hereof, all claims against the defendants in such lawsuits: Dairy Mart Convenience Stores, Inc., et. al. v. Colaccino, C.A. No. 13713 and Colaccino, et. al. v. Kupperman, et. al., C.A. No. 13718, each pending in the Delaware Chancery Court, and Colaccino v. Landry, et. al., Return Date Sept. 20, 1994, and Landry, et. al. v. Colaccino, Order to Show Cause No. 705347, Return Date Sept. 20, 1994, each pending in Superior Court of the State of Connecticut, Judicial District of Hartford at Hartford. 4. Non-Competition; Non-Solicitation. (a) Colaccino agrees and covenants that for the period of time beginning on September 15, 1994 and ending on June 15, 1995, he will not, directly or indirectly: (i) for his own account or as an employee, officer, director, partner, joint venturer, shareholder, investor, consultant or otherwise (except as an investor in a corporation whose stock is publicly traded and in which Colaccino holds less than 5% of the outstanding voting shares), engage in the business of owning, managing or operating convenience stores in Massachusetts, Connecticut, Hudson Valley in New York State, Rhode Island, Ohio, Southern and Middle Michigan, Kentucky, Southern Indiana or Western Pennsylvania (the "Covered Areas"), such geographical areas constituting places in which the company conducts business as of the date hereof; (ii) solicit the employment of any current employee of the Company or any employee who first enters the employ of the Company during the nine-month period beginning on September 15, 1994; (iii) induce or encourage any current employee of the Company or any employee who first enters the employ of the Company during the nine-month period beginning on September 15, 1994 to leave the employ of the Company; or (iv) interfere in a material manner with any material business relationship in any Covered Area between the Company and any third party. (b) The Company and Colaccino acknowledge and agree that the provisions of Section 4(a) hereof are reasonable because the scope thereof encompasses only the business of the Company as conducted on the date hereof and they are limited to the locations in which the Company does business as of the date hereof. (c) Notwithstanding anything contained in this Section 4 to the contrary, if the period of time or the geographical areas specified in Section 4(a) hereof is determined to be unreasonable in any proceeding before any court or agency legally empowered to enforce the provisions of this Section 4, then the period of time and area of the restriction shall be reduced so that this Agreement may be enforced in such area and during such period of time as shall be determined to be reasonable; provided, however, that such reduction shall not extend to any jurisdiction where such reduction is unnecessary to make the period of time or the geographical area specified in Section 4(a) enforceable therein. (d) In consideration of Colaccino's agreements in this Section 4, during the period of time from the Termination Date through August 25, 1997, the Company shall make payments to Colaccino amounting to $120,000 for each 12-month period, such payments totalling $360,000. The payments provided for in this Section 4(d) shall be made in equal installments on a periodic basis in accordance with the Company's customary payroll practices applicable to its executive officers. 5. Non-Disclosure. Colaccino shall not at any time use or disclose to any person, firm or corporation any trade secrets, confidential or proprietary information of the Company that is not publicly available, and which was acquired by him prior to the Termination Date. 6. Return of Property; Access to Former Office. (a) Except as provided in Sections 1(b) and 1(d) hereof, within five (5) business days after the date hereof, Colaccino will return to the Company all property of the Company in his possession or control (whether maintained at his former office, home or elsewhere), including, without limitation, all lists, books and records of the Company (and all copies thereof), all data or other information concerning the Company recorded, stored, maintained or operated by electronic, mechanical or photographic process, whether computerized or not, all copies of all management studies, business or strategic plans, budgets, notebooks and all other printed, typed or written materials, documents and data of or relating to the Company or any of its affiliates. Colaccino also shall within such time period direct his attorneys to certify in writing to the Company that they have destroyed all copies of any of the property of the Company described in this Section 6 previously in their possession. (b) The Company shall within ten days after the date hereof allow Colaccino to have access to his former office for the purpose of retrieving his personal property and documents. Colaccino shall have such access after business hours and with the accompaniment of a representative of the Company. 7. Release and Waiver. (a) Colaccino hereby accepts the consideration set forth in this Agreement and agrees to waive all claims against the Company, its subsidiaries and their respective former, current and future officers, directors, employees, stockholders, agents, attorneys, and other representatives (collectively, "Affiliates") and hereby releases and discharges the Company and its Affiliates from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, covenants, contracts, controversies, agreements, promises, judgments, demands, liabilities, claims and damages whatsoever, in law or equity, that Colaccino ever had, now has, or hereafter can, shall or may have, for, upon or by reason of his former employment with, service as a director of, or in any other capacity relating to the company, and the termination of the foregoing relationships, including, but not limited to, any claims arising under any federal, state or local law or ordinance, tort, employment contract (express or implied), public policy, or any other obligation, including, without limitation, any claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as amended, and all claims for wrongful discharge, workers' compensation, wages, monetary or equitable relief, vacation, compensation in lieu of vacation, disability, other employee fringe benefits, benefit plans, medical plans, or attorneys' fees; provided, however, that notwithstanding the foregoing, Colaccino reserves (i) any rights accrued through the Termination Date that he may have pursuant to the Company's 401(k) and profit sharing plans, (ii) his ability to seek and obtain indemnification by the Company to the extent he is entitled to be indemnified by the Company pursuant to this Agreement and the Company's Restated Certificate of Incorporation, (iii) all claims relating to the performance of the Company's obligations under this Agreement, including, without limitation, those set forth in Section 1 hereof, and (iv) his ability to assert claims for contribution or other appropriate relief against one or more of the Company's Affiliates in any action in which he is a defendant commenced by any third party, including but not limited to one or more stockholders of the Company seeking to act on behalf of the Company. (b) The Company hereby agrees to waive all claims against Colaccino and his affiliates and their respective former, current and future officers, directors, employees, stockholders, agents, attorneys and other representatives and hereby releases and discharges Colaccino, his affiliates and such other persons from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, covenants, contracts, controversies, agreements, promises, judgments, demands, liability, claims and damages whatsoever, in law or equity, that the Company ever had, now has, or hereafter can, shall or may have, for, upon or by reason of Colaccino's former employment with, service as a director of, or in any other capacity relating to the Company, including, but not limited to, any claims arising under any federal, state or local law or ordinance, tort, employment contract (express or implied), public policy, or any other obligation, other than (i) those relating to the performance of Colaccino's obligations under this Agreement and (ii) claims by one or more stockholders of the Company seeking to act on behalf of the Company. 8. Indemnification. (a) The Company agrees to indemnify and hold Colaccino harmless from and against any costs, expenses (including, without limitation, reasonable legal fees and expenses), judgments, fines, penalties and amounts paid in settlement which he may incur or to which he may become subject on or after the date hereof by reason of his prior service as a director and employee of the Company to the fullest extent permitted under, and in accordance with, the provisions of the Company's Restated Certificate of Incorporation and Delaware law. (b) Colaccino agrees to indemnify and hold the Company and its Affiliates harmless from and against any costs, expenses (including, without limitation, reasonable legal fees and expenses), judgments and amounts paid in settlement (but excluding any fines or penalties) that they may incur or to which they may become subject on or after the date hereof by reason of any failure on the part of the Company to withhold properly any amounts in accordance with the provisions of Section 14 hereof from the payments made to Colaccino pursuant to this Agreement. 9. Equitable Relief. Each of Colaccino, on the one hand, and the Company, on the other hand, hereby expressly covenants and agrees that the other party will suffer irreparable damage in the event any of the provisions of Sections 4, 5 and 6 hereof are not performed or are otherwise breached and that the other party shall be entitled as a matter of right (without the need to prove actual damages) to an injunction or injunctions and other relief to prevent a breach or violation by the other party and to secure its enforcement of such provisions. Resort to such equitable relief, however, shall not constitute a waiver of any other rights or remedies which the party seeking such relief may have. 10. Representations and Warranties. (a) Colaccino represents and warrants to the Company as follows: (i) he has full legal right, power and authority to enter into and perform all of his obligations under this Agreement; (ii) the execution and delivery of this Agreement by him will not violate any other agreement to which he is a party; (iii) no consent of any third party is required for the execution and performance of this Agreement by him; and (iv) this Agreement has been duly executed and delivered by him and constitutes a legal, valid and binding agreement of him, enforceable in accordance with the terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws, now or hereafter in effect, affecting creditors' rights and remedies generally and to general principals of equity. (b) The Company represents and warrants to Colaccino as follows: (i) the Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby; (ii) the execution, delivery and performance of this Agreement has been duly authorized and approved by all required corporate action on the part of the Company, including approval by its Board of Directors; (iii) this Agreement has been duly executed and delivered by the Company and is a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws, now or hereafter in effect, affecting creditors' rights and remedies generally and to general principals of equity; (iv) the execution and delivery of this Agreement by the Company will not constitute a breach under (with or without notice or the passage of time or both) or violate the Company's Restated Certificate of Incorporation or by-laws, any agreement to which the Company is a party or any law, regulation, rule or ordinance to which the Company is subject and (v) no consent of any third party is required for the execution and performance of this Agreement by the Company. 11. Notice. All notices, requests and other communications to any party hereunder shall be given or made in writing and mailed (by registered or certified mail or by overnight courier) or delivered by hand as follows: (a) if to the Company, to it at: One Vision Drive Enfield, CT 06082 Attention: Gregory G. Landry with a copy to: Weil, Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: Dennis J. Block, Esq. (b) if to Colaccino, to him at: 57 Thistledown Suffield, CT 06078 with a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1333 New Hampshire Avenue, N.W. Washington, D.C. 20036 Attention: Bruce S. Mendelsohn, P.C. or such address as such party may hereafter specify for the purpose of notice to the other party hereto. Each such notice, request or other communication shall be effective when, if delivered by hand, received by the party to which it is addressed or, if mailed in the manner described above, on the third business day after the date of mailing. 12. Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to the benefit and be binding upon its successors and assigns and any entity to which its assets and business may be transferred by operation of law or otherwise. This Agreement is personal to Colaccino, and Colaccino shall not, without the written consent of the Company, assign his rights or obligations hereunder other than by will or the laws of descent and distribution, but the provisions hereof shall inure to the benefit of and be enforceable by Colaccino's heirs and legal representatives. The parties agree that the Company's obligations pursuant to Sections 1(a), 1(e), 1(f) and 4(d) hereof shall survive Colaccino's death and shall be performed in accordance with the terms hereof (with payments to be made at the direction of the executor or executrix of Colaccino's estate or other appropriate representative). 13. Governing Law. This Agreement shall be construed in accordance with and governed by the substantive laws of the State of Connecticut, without regard to the choice of law rules thereof. 14. Withholding. The Company shall have the right to withhold from the payments to be made to Colaccino hereunder and account for amounts which it reasonably determines may be subject to applicable withholding taxes and social security. 15. Press Release. Colaccino and the Company shall agree on the text of a press release announcing the execution of this Agreement. 16. Attorneys' Fees for Enforcement. Each of Colaccino, on the one hand, and the Company, on the other hand, hereby expressly agrees to reimburse and indemnify the other party for any costs and expenses (including, without limitation, reasonable legal fees and expenses) incurred by the other party to the extent such other party successfully obtains relief from a court of competent jurisdiction to enforce the terms and provisions of this Agreement. 17. Complete Understanding. This Agreement supersedes any prior contracts, understandings, discussions and agreements between Colaccino and the Company and constitutes the complete understanding between the parties with respect to the subject matter hereof. No statement, representation, warranty or covenant has been made by either party with respect hereto except as expressly set forth therein. 18. Modification; Waiver. (a) This Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company and Colaccino or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and shall not be exclusive of any rights or remedies provided by law or at equity. 19. Headings. The section headings in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. 20. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by the other party hereto. 21. No Reductions. Except as otherwise provided for herein, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Colaccino as a result of employment by a subsequent employer or otherwise or any benefits received by him after the date hereof from a subsequent employer or otherwise. 22. Further Assurances. At any time or from time to time after the date hereof, either party shall, at the request of the other party, execute and deliver any further instruments or documents and take all such further action (including the execution by Colaccino of stock powers as requested by the Company in respect of any shares of capital stock of any subsidiary of the Company held of record as of the date hereof by Colaccino that were previously issued in his name to satisfy applicable local ownership rules and regulations) as such party reasonably may request in order to consummate and make effective the foregoing provisions of this Agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed in its corporate name by one of its officers duly authorized to enter into and execute this Agreement, and Colaccino has manually signed his name hereto, as of the date first written above. /s/ Frank Colaccino Frank Colaccino DAIRY MART CONVENIENCE STORES, INC. By /s/ Gregory G. Landry Name: Gregory G. Landry Title: Executive Vice President and Chief Financial Officer Schedule A Options Held By Colaccino Number of Shares Grant Exercise Price Original Subject to Option Date Per Share Expiration Date 10,000 (Class B) 07/15/85 $5.50 07/15/95 6,250 (Class A) 05/07/87 $6.60 05/07/97 48,750 (Class A) 11/01/89 $6.20 11/01/99 10,000 (Class A) 2/24/93 $5.25 02/24/03 15,000 (Class A) 09/12/90 $4.60 09/12/00 60,000 (Class A) 01/28/92 $7.25 01/28/02 EX-21 9 EXHIBIT 21 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Dairy Mart, Inc. (a Massachusetts corporation) Dairy Mart Farms, Inc. (a Connecticut corporation) Dairy Mart East, Inc. (a Rhode Island corporation) The Lawson Company (a Delaware corporation) CONNA Corporation (a Kentucky corporation) EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8, file No. 33-8209 and File No. 33-47893. ARTHUR ANDERSEN LLP Hartford, Connecticut May 15, 1995 EXHIBIT 27 EX-27.1 11
5 This schedule contains summary financial information extracted from Consolidated Statements of Operations and Consolidated Balance Sheets and is qualified in its entirety to such financial statements. 12-MOS JAN-28-1995 JAN-30-1994 JAN-28-1995 4,512,000 2,053,000 16,620,000 1,728,000 26,044,000 50,489,000 99,908,000 30,345,000 172,228,000 50,778,000 88,698,000 63,000 0 0 22,754,000 172,228,000 753,460,000 596,782,000 439,757,000 590,002,000 14,000,000 1,054,000 9,219,000 (17,319,000) 6,558,000 (10,761,000) 0 0 (389,000) (11,150,000) (2.01) (2.01)
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