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                                                              Filed Pursuant to
                                                                 Rule 424(b)(1)
                                                      Registration No. 33-70610 


   
PROSPECTUS                        $75,000,000
 
          [LOGO OF DAIRYMART CONVENIENCE STORES, INC. APPEARS HERE]
                   
                10 1/4% SENIOR SUBORDINATED NOTES DUE 2004     
                   
                INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15     
 
                                  -----------
   
  Dairy Mart Convenience Stores, Inc. (the "Company") is offering $75,000,000
aggregate principal amount of its 10 1/4% Senior Subordinated Notes due 2004
(the "Notes"). The Notes bear interest at the rate of 10 1/4% per annum,
payable semi-annually on March 15 and September 15 of each year, commencing
September 15, 1994. The Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after March 15, 1999 at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, the Company, at its option, may, for a period of
three years from the date of issuance of the Notes, use the Net Proceeds
received by the Company from a Public Equity Offering to redeem up to
$20,000,000 aggregate principal amount of the Notes at 110% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
redemption. Upon a Change of Control of the Company, each holder of Notes will
have the right to require the Company to repurchase all or any part of such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
    
  The Notes will be subordinated to all Senior Indebtedness of the Company. At
October 30, 1993, after giving effect to the sale of the Notes and the
application of the net proceeds therefrom, the outstanding amount of Senior
Indebtedness would have been approximately $8.3 million. The Notes will be
unconditionally guaranteed by substantially all of the subsidiaries of the
Company (the "Guarantors"), and the Guarantee of a Guarantor will be
subordinated to all senior indebtedness of such Guarantor. The Company may not
incur any indebtedness that is senior to the Notes and subordinated to Senior
Indebtedness, and no Guarantor may incur any indebtedness that is senior to its
Guarantee and subordinated to senior indebtedness of such Guarantor. See
"Description of the Notes."
 
  The Company's Class A and Class B Common Stock are traded on the NASDAQ
National Market System under the symbols DMCVA and DMCVB.
 
  SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
 
                                  -----------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

 
  
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
                                                 PRICE TO          UNDERWRITING         PROCEEDS TO
                                                 PUBLIC(1)          DISCOUNT(2)          COMPANY(3)
- ---------------------------------------------------------------------------------------------------
                                                                           
Per Note...................................       100.00%              3.00%              97.00%
- ---------------------------------------------------------------------------------------------------
Total......................................     $75,000,000         $2,250,000          $72,750,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
 
   
(1) Plus accrued interest, if any, from March 3, 1994.     
(2) The Company has agreed to indemnify the Underwriter against, and provide
    contribution with respect to, certain liabilities, including liabilities
    under the Securities Act of 1933, as amended. See "Underwriting."
   
(3) Before deducting expenses, payable by the Company, estimated at $350,000.
        
                                  -----------
   
  The Notes are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions as set forth in "Underwriting." It is expected that delivery
of the Notes will be made against payment therefor on or about March 3, 1994 at
the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.     
 
                            BEAR, STEARNS & CO. INC.
                
             THE DATE OF THIS PROSPECTUS IS FEBRUARY 24, 1994.     

 
                    {INSIDE FRONT COVER PAGE OF PROSPECTUS}
 
                                 {INSERT PHOTO}
 
 
 
 
PICTURED ABOVE IS A DAIRY MART SUPER PUMPER STORE LOCATED IN VERNON,
CONNECTICUT. DAIRY MART'S SUPER PUMPER STORES HAVE AN EXPANDED GASOLINE
PRESENCE AND A SIGNIFICANTLY LARGER STORE SIZE.
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
                         FOR CALIFORNIA RESIDENTS ONLY
 
  WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST
COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT SHARING TRUSTS, CORPORATIONS
OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S
AFFILIATES, HAVE A NET WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST
RECENT REGULARLY PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED,
BUT NOT NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN
$14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3) ANY CORPORATION, PARTNERSHIP
OR ORGANIZATION (OTHER THAN A CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED
FOR THE SOLE PURPOSE OF PURCHASING THE SECURITIES OFFERED HEREBY) WHO PURCHASES
AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED HEREBY, (4) ANY
NATURAL PERSON WHO (A) HAS INCOME OF $65,000 AND A NET WORTH OF $250,000, OR
(B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS
AND PERSONAL AUTOMOBILES), OR (5) ANY "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED UNDER RULE 144A OF THE SECURITIES ACT.
 
                                       2

 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus. As used in this Prospectus, except as the context
otherwise requires, the "Company" or "Dairy Mart" means Dairy Mart Convenience
Stores, Inc., a Delaware corporation, and its subsidiaries. Certain capitalized
terms used but not defined in this summary have the meanings ascribed to them
elsewhere in this Prospectus.
 
                                  THE COMPANY
   
  Dairy Mart Convenience Stores, Inc., through its subsidiaries, operates one
of the nation's largest convenience store chains. The Company operates or
franchises approximately 1,050 stores under the "Dairy Mart" name in 11 states
located in the Northeast, Midwest and Southeast. Dairy Mart is the largest
operator of traditional convenience stores in Ohio and Kentucky and is a
leading operator of convenience stores in New England. The Company also
manufactures, processes and distributes certain dairy and other products.     
 
  Dairy Mart stores offer a wide range of products and services which cater to
the convenience needs of its customers. 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. Approximately 420 Dairy Mart stores
sell gasoline.
 
                       RECENT DEVELOPMENTS AND STRATEGIES
 
  In March 1992, DM Associates Limited Partnership, which is controlled by the
Company's senior management, acquired control of the Company from its founder.
Subsequently, management implemented or accelerated the following actions and
strategies designed to improve profitability:
 
  . Opening Super Pumper Stores. The Company has focused its growth strategy
    on opening "super pumper" stores. A super pumper store has approximately
    four times the gasoline retailing capacity and a significantly larger in-
    store retail area than the Company's traditional convenience stores. This
    strategy is designed to capitalize on the growth in sales of gasoline by
    convenience stores which sales, as reported by the National Association
    of Convenience Stores, have grown at a 14.8% compounded annual rate since
    1988. The Company's average super pumper store in operation for at least
    one year generates approximately $165,000 in annual Store Cash Flow (as
    defined), which is approximately four times that of the Company's average
    non-super pumper store. The Company currently operates 34 super pumper
    stores, which accounted for over 10% of the Company's revenues and EBITDA
    (as defined) for the thirty-nine weeks ended October 30, 1993, and plans
    to open approximately 20 new super pumper stores in the fiscal year
    ending January 28, 1995 and approximately 30 new super pumper stores per
    year thereafter for the foreseeable future.
 
  . Upgrading Existing Store Base. Management has developed a plan to upgrade
    and remodel approximately 400 stores over the next four years in order to
    modernize the stores' look, upgrade their equipment and increase the
    space devoted to higher profit margin items, such as fountain drinks,
    fast food and deli items. The Company also intends to convert
    approximately 40 traditional gasoline convenience stores to super pumper
    status over the same period.
 
  . Closing Underperforming Stores. The Company continually evaluates the
    performance of all of its stores to identify actions aimed at improving
    the Company's overall profitability. Based upon these evaluations, the
    Company continues to sell or close certain underperforming stores. Sales
    or closures of stores, while reducing revenues, generally do not have an
    adverse effect on overall results since a majority of these stores
    operate at a loss.
 
  . Consolidating Regional Headquarters. In the fiscal year ended January 29,
    1994, the Company implemented a corporate consolidation designed to
    eliminate duplicative overhead, improve management oversight and
    streamline decision making. By consolidating certain regional
    headquarters, the Company expects to achieve approximately $2.0 million
    in annual savings, primarily through the reduction of personnel, travel
    and communications costs.
 
                                       3

 
 
  . Marketing Excess Dairy Capacity. In March 1992, the Company reversed a
    prior policy and began to actively market its excess manufacturing and
    processing capacity to third parties, such as wholesalers and
    supermarkets. These efforts have resulted in a wholesale arrangement with
    a regional brand name ice cream distributor, which has more than doubled
    the utilization of the Company's ice cream production capacity since
    March 1992.
 
  . Installing Point-of-Sale (POS) System. The Company has initiated a
    program to install a point-of-sale (POS) system in all stores within
    three years. The Company believes that the POS system will provide
    significant benefits and cost reductions, and that Dairy Mart will be
    among the first of the larger convenience store chains to implement a
    chain-wide POS system. Industry-wide, as reported by the National
    Association of Convenience Stores, only 3.5% of all convenience stores
    had POS systems at the end of 1992.
 
                                  THE OFFERING
 
                                 
Issue.......................  $75,000,000 principal amount of 10 1/4% Se-
                               nior Subordinated Notes due 2004 (the
                               "Notes"). See "Description of the Notes."
                                   
                                 
Interest Payment Dates......  March 15 and September 15 of each year, com-
                               mencing September 15, 1994.     
 
                                 
Optional Redemption.........  The Notes will be redeemable at the option of
                               the Company, in whole or in part, at any
                               time on or after March 15, 1999 at the re-
                               demption prices set forth herein, plus ac-
                               crued and unpaid interest, if any, to the
                               date of redemption. In addition, the Compa-
                               ny, at its option, may, for a period of
                               three years from the date of issuance of the
                               Notes, use the Net Proceeds (as defined) re-
                               ceived by the Company from a Public Equity
                               Offering (as defined) to redeem up to
                               $20,000,000 aggregate principal amount of
                               the Notes at 110% of the principal amount
                               thereof, plus accrued and unpaid interest,
                               if any, to the date of redemption. See "De-
                               scription of the Notes--Redemption."     
 
Ranking.....................  The Notes will be subordinated in right of
                               payment to all existing and future Senior
                               Indebtedness (as defined) (including indebt-
                               edness under the New Credit Agreement (as
                               defined)) and senior in right of payment to
                               all Subordinated Indebtedness (as defined)
                               of the Company. At October 30, 1993, on a
                               pro forma basis after giving effect to the
                               sale of the Notes and the application of the
                               net proceeds therefrom, the aggregate amount
                               of Senior Indebtedness would have been ap-
                               proximately $8.3 million. Subject to certain
                               restrictions, the indenture pursuant to
                               which the Notes will be issued (the "Inden-
                               ture") permits the Company to incur addi-
                               tional indebtedness, including Senior In-
                               debtedness. The Company may not, however,
                               incur any indebtedness that is senior to the
                               Notes and subordinated to any Senior Indebt-
                               edness. See "Description of the Notes--Sub-
                               ordination" and "Description of the Notes--
                               Certain Covenants--Limitation on Additional
                               Indebtedness and New Operating Leases."
 
                                       4

 
 
Guarantees..................  The Notes will be jointly, severally and un-
                               conditionally guaranteed (the "Guarantees")
                               by the Guarantors. Payments by each Guaran-
                               tor pursuant to its Guarantee are senior in
                               right of payment to all Guarantor Subordi-
                               nated Indebtedness (as defined) of such
                               Guarantor, and are subordinated in right of
                               payment to the prior payment in full of all
                               Guarantor Senior Indebtedness (as defined)
                               of such Guarantor to the same extent and
                               manner that all payments pursuant to the
                               Notes are subordinated in right of payment
                               to the prior payment in full of all Senior
                               Indebtedness. See "Description of the
                               Notes--Guarantees."
 
Change of Control...........  If a Change of Control (as defined) occurs,
                               each holder of Notes will have the right to
                               require the Company to repurchase such hold-
                               er's Notes at 101% of the principal amount
                               thereof, plus accrued and unpaid interest,
                               if any, to the date of repurchase. See "De-
                               scription of the Notes--Change of Control."
 
Certain Covenants...........  The Indenture restricts, among other things,
                               the payment of dividends and other distribu-
                               tions, investments, the repurchase of capi-
                               tal stock and the making of certain other
                               Restricted Payments (as defined) by the Com-
                               pany and its subsidiaries, the incurrence of
                               additional indebtedness and new operating
                               lease obligations by the Company or any of
                               its subsidiaries, the issuance of preferred
                               stock by the Company's subsidiaries, the
                               incurrence of indebtedness by the Company
                               that is senior to the Notes and subordinated
                               to Senior Indebtedness of the Company, the
                               incurrence of indebtedness by any Guarantor
                               that is senior to its Guarantee and subordi-
                               nated to its Guarantor Senior Indebtedness,
                               certain transactions with affiliates, the
                               creation of certain liens, and certain merg-
                               ers, consolidations and dispositions of as-
                               sets. Upon certain dispositions of assets,
                               the Company will be required first to apply,
                               subject to certain conditions, the Net Pro-
                               ceeds therefrom to repay Senior Indebtedness
                               or to invest in Fixed Assets (as defined) in
                               the same or substantially similar line of
                               business as the properties and assets that
                               were the subject of such asset disposition,
                               and then to offer to purchase, at 100% of
                               their principal amount, plus accrued and un-
                               paid interest, if any, Notes in principal
                               amount equal to any remaining balance of
                               such Net Proceeds. See "Description of the
                               Notes--Certain Covenants."
 
Use of Proceeds.............  The net proceeds received from the sale of
                               the Notes will be used to repay the entire
                               outstanding indebtedness under the Existing
                               Credit Agreement (as defined) and to redeem
                               in full the Company's outstanding 14.25%
                               Subordinated Debentures due 2000 (the "Ex-
                               isting Debentures"). The remaining net pro-
                               ceeds of approximately $11.0 million will be
                               used for working capital and general corpo-
                               rate purposes. See "Use of Proceeds."
 
                                       5

 
 
                             SUMMARY FINANCIAL DATA
 
  The following table sets forth summary consolidated financial data and
operating data for the Company for the periods indicated. The Company's summary
consolidated financial data is derived from the Consolidated Financial
Statements of the Company contained elsewhere in this Prospectus. The data as
of and for the thirty-nine weeks ended October 31, 1992 and October 30, 1993 is
not audited; however, in management's opinion, all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
results of such period, have been reflected therein. The results of operations
for the thirty-nine weeks ended October 30, 1993 are not necessarily indicative
of the results to be expected for the entire fiscal year or any other interim
period. The information set forth in this table is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus.
 


                                FISCAL YEARS ENDED(1)                THIRTY-NINE WEEKS ENDED
                         -------------------------------------       --------------------------
                         FEBRUARY 2,   FEBRUARY 1, JANUARY 30,       OCTOBER 31,    OCTOBER 30,
                            1991          1992        1993              1992           1993
                         -----------   ----------- -----------       -----------    -----------
                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND ALL
                          STORE DATA, OTHER THAN SUPER PUMPER TOTAL SALES AND SUPER
                                        PUMPER TOTAL STORE CASH FLOW)
                                                                     
STATEMENT OF OPERATIONS
 DATA:
 Net sales of the
  Company, its
  subsidiaries and
  franchises(2).........  $807,586      $794,758    $773,766          $587,390       $581,850
 Revenues ..............   586,984       571,980     578,767           435,623        450,379
 Nonrecurring item......       --            --       (5,200)(3)           --             --
 Income from
  operations(4).........    14,723        14,660       1,719 (3)         9,123         10,856
 Net income (loss) .....     3,813         4,092      (6,850)(3)(5)     (1,442)(5)      3,443
 Earnings (loss) per
  share.................      0.72          0.75       (1.26)            (0.27)          0.62
 Ratio of earnings to
  fixed charges ........      1.51x         1.51x        --  (6)          1.41x          1.58x
OTHER OPERATING DATA:
 Interest expense(7)....  $  8,366      $  8,260    $  7,456          $  5,541       $  5,751
 Capital expenditures ..    14,307(8)     12,521      17,992            14,237         10,905
 Depreciation and
  amortization .........    13,358        13,571      13,664            10,529          9,577
 EBITDA(9)..............    28,526        28,852      16,323 (3)        20,251         21,067
 EBITDA ratio(10).......      3.41x         3.49x       2.19x             3.65x          3.66x
STORE DATA:
 Average weekly inside
  sales per store.......  $  9,008      $  9,144    $  9,133          $  9,253       $  9,368
 Average inside store
  sales growth..........      0.24%         1.51%      (0.12)%           (0.76)%         1.24%
 Total number of stores
  at end of period......     1,190         1,134       1,079             1,092          1,053
 Average weekly gallons
  sold per gas location.     8,128         8,176       8,818             8,769          9,504
 Average gasoline
  gallonage growth......     (2.88)%        0.59%       7.85%             7.45%          8.38%
 Gasoline gross profit
  per gallon (in cents).     11.06          9.92       10.16              9.43          11.34
 Super pumper total
  sales(11).............    11,521        24,277      47,675            33,531         50,460
 Super pumper total
  store cash flow(12)...       953         1,839       3,504             2,296          4,049
 Super pumper stores at
  period end............         6            16          29                28             34



                                                         OCTOBER 30, 1993
                                                    ---------------------------
                                                      ACTUAL    AS ADJUSTED(13)
                                                    ----------- ---------------
                                                          
BALANCE SHEET DATA:
 Net property and equipment........................  $ 92,403      $ 92,403
 Total assets......................................   172,821       185,582
 Total debt including capital lease obliga-
  tions(14)........................................    76,823        91,240
 Stockholders' equity..............................    36,420        35,427(15)

                                                    FISCAL YEAR   THIRTY-NINE
                                                       ENDED      WEEKS ENDED
                                                    JANUARY 30,  OCTOBER  30,
                                                       1993          1993
                                                    ----------- ---------------
                                                          
PRO FORMA FINANCIAL DATA(16):
 Adjusted interest expense.........................  $  8,481      $  6,689
 Adjusted EBITDA ratio ............................      1.88x         3.13x

 
                                       6

 
                        NOTES TO SUMMARY FINANCIAL DATA
 
 (1) The Company's fiscal year ends on the Saturday closest to January 31.
 (2) 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.
 (3) The nonrecurring item for the fiscal year ended January 30, 1993
     represents a nonrecurring pretax charge for restructuring (see Note 12 to
     the Consolidated Financial Statements). Income from operations and EBITDA
     include such nonrecurring charge, and net income (loss) includes the
     after-tax effect of this charge. EBITDA would have been $21,523,000
     without the nonrecurring charge.
 (4) Income from operations excludes gain (loss) on disposition of assets,
     interest expense and interest income.
 (5) Net loss for the fiscal year ended January 30, 1993 and for the thirty-
     nine weeks ended October 31, 1992 includes a net charge for the cumulative
     effect of the change in accounting for income taxes of $3,951,000 (see
     Note 6 to the Consolidated Financial Statements).
 (6) The Company's earnings were inadequate to cover fixed charges by
     $5,051,000 for the fiscal year ended January 30, 1993.
 (7) Interest expense excludes amortization of deferred financing costs and
     includes fees for outstanding letters of credit and unused availability
     under the Company's previous and existing revolving credit facilities.
 (8) Capital expenditures for the fiscal year ended February 2, 1991 exclude
     the acquisition of Stop-N-Go store assets.
 (9) EBITDA represents income (loss) before depreciation and amortization,
     interest expense and provision for (benefit from) income taxes. EBITDA is
     commonly used to analyze companies on the basis of operating performance,
     leverage and liquidity. The Company anticipates that EBITDA will be used
     to measure the Company's compliance with certain provisions of the New
     Credit Agreement (see "Description of the New Credit Agreement--
     Covenants"). EBITDA is not intended to represent cash flow for the period
     nor has it been prescribed as an alternative to net income as an indicator
     of operating performance.
(10) The EBITDA ratio is calculated by dividing EBITDA by interest expense.
(11) Super pumper total sales includes both inside store and gasoline sales for
     all super pumper locations.
(12) Super pumper total store cash flow represents both inside store and
     gasoline contribution margins before depreciation, amortization, interest,
     income taxes and allocation of corporate overhead, for all super pumper
     locations.
(13) The as adjusted data assumes that the following had occurred at October
     30, 1993: (i) the issuance of $75.0 million aggregate principal amount of
     the Notes; (ii) the retirement of $27.2 million aggregate principal amount
     of Existing Debentures at 102.8% of such principal amount; (iii) the
     repayment of the outstanding term loan of $22.0 million under the Existing
     Credit Agreement; (iv) the repayment of outstanding revolving loan
     borrowings of $11.4 million under the Existing Credit Agreement; (v) the
     write-off of certain previously deferred financing costs associated with
     the Existing Debentures and the term and revolving loans under the
     Existing Credit Agreement; and (vi) the payment of estimated fees and
     expenses related to the offering and sale of the Notes of approximately
     $2.6 million.
(14) Includes the current portion of both long-term debt and capital lease
     obligations.
(15) Stockholders' equity is adjusted to reflect the write-off of $537,000 of
     deferred financing costs (net of related income tax benefit) as a result
     of the retirement of the Existing Debentures and the repayment of
     outstanding borrowings under the Existing Credit Agreement and a charge of
     $456,000 (net of related income tax benefit) for the premium to be paid
     related to the retirement of the Existing Debentures.
   
(16) The pro forma financial data assumes that the actions described in note
     (13) above had occurred at the beginning of the fiscal year ended January
     30, 1993. Adjusted EBITDA has been increased for interest income (computed
     at an assumed rate equal to the effective yield on short-term U.S.
     government securities (3.61% per annum as of January 31, 1994)) on the
     excess of the estimated net proceeds to the Company from the sale of the
     Notes over the average outstanding borrowings under the Existing Credit
     Agreement and the Existing Debentures for such periods. Additionally, both
     pro forma EBITDA and adjusted interest expense exclude the applicable
     components from the Non-Recourse Subsidiary (as defined). Pro forma
     interest expense on a consolidated basis (including interest expense of
     the Non-Recourse Subsidiary) would have been $8,853,000 and $6,971,000 for
     the fiscal year ended January 30, 1993 and the thirty-nine weeks ended
     October 30, 1993, respectively.     
 
                                       7

 
                                  THE COMPANY
   
  Dairy Mart Convenience Stores, Inc., through its subsidiaries, operates one
of the nation's largest convenience store chains. Founded in 1957, the Company
operates or franchises approximately 1,050 stores under the "Dairy Mart" name
in 11 states located in the Northeast, Midwest and Southeast. Dairy Mart is the
largest operator of traditional convenience stores in Ohio and Kentucky and is
a leading operator of convenience stores in New England. Approximately 420
stores sell gasoline and approximately 340 stores are franchised. The Company
also manufactures, processes and distributes certain dairy and other products.
    
  Dairy Mart stores offer a wide range of products and services which cater to
the convenience needs of its customers, including milk, ice cream, groceries,
beverages, snack foods, candy, deli products, publications, health and beauty
aids, tobacco products, lottery tickets and money orders. The stores are
typically located in densely populated, suburban areas on sites which are
easily accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli
items, coffee, fountain drinks and other fast food items.
 
  The Company's facilities in Enfield, Connecticut and Cuyahoga Falls, Ohio
manufacture and process milk, fruit juices, and other non-carbonated beverages
which are distributed to stores in the Northeast and the Midwest regions. The
dairy plant in Ohio manufactures and distributes ice cream to most stores. In
the Southeast region, the Company distributes dairy products, tobacco products,
candy and certain other merchandise to stores in Kentucky and Indiana.
 
  The Company 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.
 
RECENT DEVELOPMENTS AND STRATEGIES
 
 Super Pumper Stores
 
  The Company's primary growth strategy is to increase its retail gasoline
presence. This strategy is designed to capitalize on the growth in sales of
gasoline by convenience stores, which sales, as reported by the National
Association of Convenience Stores, have grown at a 14.8% compounded annual rate
since 1988. Almost all of the stores recently opened by the Company are retail
units, known as "super pumper" stores, which have approximately four times the
gasoline retailing capacity and a significantly larger in-store retail area
than the Company's traditional convenience stores. The average super pumper
store inside store sales volume is more than one and one-half times greater
than the average non-super pumper store, and the average gasoline sales volume
of super pumper stores is nearly three times greater than Dairy Mart's
traditional gasoline convenience stores. For the last four fiscal quarters, the
average super pumper store in operation for at least one year generated
approximately $165,000 in annual earnings before depreciation, amortization,
interest, income taxes, and allocation of corporate overhead ("Store Cash
Flow"), compared to approximately $40,000 for the Company's average non-super
pumper store. The Company currently operates 34 super pumper stores which
accounted for over 10% of the Company's revenues and EBITDA for the thirty-nine
weeks ended October 30, 1993. As part of its growth strategy, the Company plans
to open approximately 20 new super pumper stores in the fiscal year ending
January 28, 1995 and approximately 30 new super pumper stores per year
thereafter for the foreseeable future. The Company believes that there are
numerous available sites within its operating regions that have the appropriate
demographics and characteristics to support successful super pumper stores.
 
 Upgrading Existing Store Base
 
  Management has developed a plan to upgrade and remodel approximately 400
stores over the next four years in order to modernize the stores' look, upgrade
their equipment and increase the space devoted to higher
 
                                       8

 
profit margin items, such as fountain drinks, fast food and deli items. The
Company also intends to convert approximately 40 traditional gasoline
convenience stores to super pumper status over the same period.
 
 Closing Underperforming Stores
   
  In addition to its strategy of opening super pumper stores, the Company
continually evaluates the performance of each of its stores in order to
identify actions aimed at improving the Company's overall profitability. Based
upon these evaluations, the Company continues to sell or close certain
underperforming stores. The Company considers various factors in deciding to
sell or close stores, including store location, lease term, rental and other
obligations and store performance. Sales or closures of stores, while reducing
revenues, generally do not have an adverse effect on overall results, since a
majority of such stores operate at a loss. Since March 1992, the Company sold
or closed approximately 115 stores.     
 
 Consolidating Regional Headquarters
 
  In the fiscal year ended January 29, 1994, the Company implemented a
corporate consolidation designed to eliminate duplicative overhead, improve
management oversight and streamline decision making. The Company had previously
maintained three separate regional administrative facilities, its Midwest and
Southeast facilities having been separately maintained since the acquisition of
two regional convenience store chains in the mid-1980's. By consolidating these
regional headquarters into a modern facility in Enfield, Connecticut, the
Company expects to achieve approximately $2.0 million in annual savings,
primarily through the reduction of personnel, travel and communications costs.
 
 Marketing Excess Dairy Capacity
 
  In March 1992, the Company reversed a prior policy and began to actively
market its excess manufacturing and processing capacity to third parties, such
as wholesalers and supermarkets. These efforts have resulted in a wholesale
arrangement with a regional brand name ice cream distributor, which has more
than doubled the utilization of the Company's ice cream production capacity
since March of 1992. To accommodate additional growth in the sale of ice cream
to third party purchasers, the Company is investing $1.4 million to further
enhance product quality and to improve the efficiency and capacity of its ice
cream production. The Company also intends to continue to pursue sales to third
parties of other products produced at its manufacturing and processing
facilities.
 
 Point-of-Sale (POS) System
 
  The Company has initiated a program to install a point-of-sale (POS) system
in all stores within three years. The Company believes that the POS system
will: (i) provide more accurate and timely information regarding store
operations, including sales and merchandising, and inventory levels and
composition; (ii) reduce paperwork for store managers, thereby allowing them to
spend more time interacting with customers and improving operations; (iii)
decrease administrative overhead, since the input and verification of data will
be automated at both the store and office level; and (iv) improve verification
of product costs and retail pricing. The cost of the POS system, including new
cash registers and personal computers, is currently estimated to be
approximately $7.0 million to $9.0 million, and is anticipated to be funded by
third-party equipment financing. The Company believes it will be among the
first of the larger convenience store chains to implement a chain-wide POS
system. Industry-wide, as reported by the National Association of Convenience
Stores, only 3.5% of all convenience stores had POS systems at the end of 1992.
 
 Purchase of Control by Senior Management
 
  In March 1992, DM Associates Limited Partnership ("DM Associates") acquired
control of the Company from its founder. DM Associates is managed and
controlled by a general partnership, DM Management Associates ("DM
Management"), consisting of four senior officers of the Company, including
Frank Colaccino, the Company's President and Chief Executive Officer, who is
the managing general partner of DM Management. Collectively, these officers
have over 45 years of experience in the convenience store industry.
 
                                       9

 
                           INVESTMENT CONSIDERATIONS
 
  IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH BELOW BEFORE MAKING AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
 
LEVERAGE; DEBT SERVICE
 
  At October 30, 1993, on a pro forma basis, after giving effect to the
issuance and sale of the Notes and the application of the net proceeds
therefrom, the Company would have had consolidated long-term indebtedness of
approximately $89.1 million and a ratio of consolidated indebtedness to total
stockholders' equity of 2.5 to 1. See "Capitalization." This substantial degree
of leverage may have adverse consequences on the Company including: (i)
impairment of the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, debt service or other
purposes; (ii) required use of a substantial portion of the Company's cash flow
from operations to make interest and principal payments; (iii) an adverse
effect on the Company's ability to compete with other businesses which may be
less leveraged; and (iv) the Company's increased vulnerability in the event of
a downturn in its businesses.
 
  It is anticipated that the New Credit Agreement will contain numerous
financial and operating covenants and will require periodic repayments of
amounts borrowed thereunder, and all indebtedness thereunder will mature prior
to the maturity of the Notes. See "Description of the New Credit Agreement."
There can be no assurance that the Company will be able to maintain compliance
with the financial covenants that will be contained in the New Credit
Agreement. Failure to meet such financial tests or other covenants would result
in a default thereunder. See "Description of the New Credit Agreement." The
Company expects to generate sufficient cash flow from operations to meet all of
its principal and interest obligations on its and its subsidiaries'
indebtedness, including indebtedness under the Notes and the New Credit
Agreement. However, the Company's ability to satisfy such principal and
interest obligations will depend upon dividends and other intercompany
transfers from its subsidiaries, and will be subject to the successful
implementation of the Company's business strategy and financial, business and
other factors affecting the business and operations of the Company and its
subsidiaries, including factors beyond their control, such as prevailing
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
SUBORDINATION; ENFORCEABILITY OF GUARANTEES
 
  As the Notes are subordinated in right of payment to the prior payment in
full of all Senior Indebtedness, payment of the principal of, premium, if any,
and interest on the Notes will be subordinated, to the extent and in the manner
set forth in the Indenture, to the prior payment in full of all Senior
Indebtedness, including any interest accruing on such Senior Indebtedness
subsequent to the commencement of a bankruptcy, insolvency or similar
proceeding. See "Description of the Notes--Subordination." As of October 30,
1993, on a pro forma basis, after giving effect to the issuance of the Notes
and the consummation of the other transactions described herein, the aggregate
amount of Senior Indebtedness outstanding would have been approximately $8.3
million. It is anticipated that holders of Senior Indebtedness under the New
Credit Agreement will be granted security interests in and liens upon all of
the issued and outstanding shares of capital stock of substantially all of the
subsidiaries of the Company, each of which is a Guarantor. See "Description of
the New Credit Agreement."
 
  All payments pursuant to the Guarantees are subordinated in right of payment
to the prior payment in full of all Guarantor Senior Indebtedness (including
the guarantees by the Guarantors of the obligations of the Company under the
New Credit Agreement) to the same extent and manner that all payments pursuant
to the Notes are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness of the Company. As of October 30, 1993, on a pro
forma basis after giving effect to the issuance of the Notes and the
consummation of the other transactions described herein, the aggregate amount
of Guarantor Senior Indebtedness would have been approximately $8.5 million.
See "Description of the Notes--Subordination--Guarantees." The Guarantees may
be limited or eliminated entirely if creditors seek to have the Guarantees
declared invalid and unenforceable and the payments thereunder declared
voidable. These creditors could attempt to assert, among other things, that the
Guarantees constitute a fraudulent conveyance under state law and/or the
federal Bankruptcy Code. In the event that the Guarantees are not enforceable,
the holders of the Notes would have no right to participate as creditors in the
assets of the Guarantors upon their
 
                                       10

 
liquidation or reorganization, except to the extent that the Company may itself
be a creditor with recognized claims against the Guarantors. In addition,
holders of certain outstanding Guarantor Senior Indebtedness and certain other
creditors have been granted security interests in and liens upon certain
equipment, real property and fixtures of subsidiaries of the Company, including
certain Guarantors. In addition, the Company's ability to effect any required
repurchases of Notes upon the occurrence of a Change of Control or with Excess
Proceeds (as defined) from certain asset dispositions may be limited by the
terms and conditions of instruments governing Senior Indebtedness and by the
subordination provisions of the Indenture.
 
MANAGEMENT CONTROL OF THE COMPANY
 
  DM Associates, through its ownership of a majority of the Company's Class B
Common Stock, currently controls the voting power to elect five of the seven
members of the Company's Board of Directors. Two directors are currently
elected by the holders of the Company's Class A Common Stock. DM Associates
also controls the voting power to approve any other matter presented for action
by the Company's stockholders, except for matters which by law or by the
Company's certificate of incorporation require approval by the holders of each
class of the Company's Common Stock, or matters which would require approval by
the stockholders voting as a single class and require a vote exceeding the
total voting power of the Company's Common Stock controlled by DM Associates.
DM Associates' acquisition of its controlling interest in the Company was
financed in part with a $7.1 million loan (the "CDA Loan") from the Connecticut
Development Authority ("CDA"), which loan matures on July 31, 1997 and is
secured by a collateral pledge of 1,220,000 shares of the Company's Class B
Common Stock owned by DM Associates (the "CDA Pledged Shares"). If a default
occurs under the loan agreement between DM Associates and CDA, CDA has the
right to sell or otherwise dispose of the CDA Pledged Shares. The sale or
disposition of the CDA Pledged Shares to an unaffiliated third party may result
in a Change of Control. In addition, pursuant to DM Associates' limited
partnership agreement, the limited partners have the right, commencing after
September 12, 1997, to require either a sale or distribution to such limited
partners, of the Company's Common Stock owned by DM Associates if certain
conditions are not satisfied, which sale or distribution could also result in a
Change of Control. See "Certain Transactions--Management Control of the
Company."
 
ENVIRONMENTAL COMPLIANCE
 
  The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, particularly the comprehensive regulatory
programs governing underground storage tanks ("USTs") used in the Company's
gasoline operations. In addition, in the ordinary course of business, the
Company periodically detects releases of gasoline or other regulated substances
from USTs it owns or operates. In the past three fiscal years ended January 30,
1993, the Company recorded expenses which averaged approximately $1.0 million
annually, net of reimbursements from state trust fund programs, for assessment
and remediation activities in connection with releases into the environment of
regulated substances from USTs at the Company's current or former gasoline
facilities. The Company accrues its estimates of all costs to be incurred for
assessment and remediation for releases at the time they become known. These
accruals are adjusted if and when new information becomes known. Due to the
nature of such releases, the actual costs incurred may vary from these
estimates, and the ongoing costs of assessment and remediation activities may
vary significantly from year to year.
 
  In addition, federal and state regulatory programs mandate that all existing
USTs be upgraded or replaced by December 22, 1998 to meet certain environmental
protection requirements. The Company presently estimates that in addition to
the Company's assessment and remediation costs discussed above, it will make
aggregate capital expenditures ranging from approximately $16.0 million to
$20.0 million over the next five fiscal years to comply with upgrading and
other UST regulatory requirements. The actual costs incurred may vary
substantially from these estimates. See "Business--Environmental Compliance."
 
STORE EXPANSION
 
  As described herein, the Company currently plans to open approximately 20 new
super pumper stores in the fiscal year ending January 28, 1995 and
approximately 30 new super pumper stores per year thereafter for the
foreseeable future. See "The Company--Recent Developments and Strategies." The
opening of super pumper stores will be dependent upon a number of factors,
including general economic conditions, anticipated
 
                                       11

 
competition in the Company's markets, the availability of desirable locations,
the ability to negotiate and enter into lease, development or acquisition
agreements on acceptable terms and the availability of financing. The
Company's experience has been that super pumper stores contribute positively
to operating income after their first year of operation. There can be no
assurance that the Company will be able to open, operate or acquire super
pumper stores on a timely or profitable basis in accordance with the Company's
current plans.
 
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. See
"Business--Competition."
 
  Gasoline sales are very competitive. The Company competes with both
independent and national brand gasoline stations. Gasoline profit margins have
a significant impact on the Company's earnings. These profit margins are often
influenced by factors beyond the Company's control, such as volatility in the
wholesale gasoline market, and are continually influenced by competition in
each local market area.
 
EFFECT OF WEATHER ON BUSINESS
 
  The Company believes that weather conditions have a significant effect on
its 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 significantly higher revenues and profit margins during the warmer
weather months, which fall within the Company's second and third fiscal
quarters. If weather conditions are not favorable in the second and third
fiscal quarters, the Company's performance may be adversely affected.
 
GOVERNMENT REGULATION AND POTENTIAL LEGISLATION
 
  The Company is subject to numerous federal, state and local laws,
regulations and ordinances. In addition, various federal, state and local
legislative and regulatory proposals are made from time to time to, among
other things, increase the minimum wage payable to employees, and increase
taxes on the retail sale of certain products, such as tobacco products and
alcoholic beverages. Changes to such laws, regulations or ordinances may
adversely affect the Company's performance by increasing the Company's costs
or affecting its sales of certain products. In addition, recent proposed
federal legislation regarding health care reform may increase the Company's
employee health care costs and adversely affect the Company's profitability.
 
NO PRIOR MARKET FOR THE NOTES
 
  Prior to the offering made hereby, there has been no public market for the
Notes. The Underwriter has advised the Company that, subject to applicable
laws and regulations, it currently intends to make a market in the Notes;
however, the Underwriter is not obligated to do so, and any market making with
respect to the Notes may be discontinued at any time without notice. See
"Underwriting." The Company does not intend to apply for the listing of the
Notes on any securities exchange or on the National Association of Securities
Dealers Automated Quotation System.
 
                                USE OF PROCEEDS
 
  The net proceeds from the sale of the Notes are estimated to be
approximately $72.4 million and will be used: (i) to repay all of the amounts
under the Existing Credit Agreement outstanding on the date of the closing of
the sale of the Notes in an aggregate principal amount currently estimated to
be approximately $34.0 million ($33.4 million was outstanding at October 30,
1993); (ii) to redeem all of the approximately $27.9 million aggregate
principal amount of the outstanding Existing Debentures, including the premium
for prepayment thereof; and (iii) for working capital and general corporate
purposes. The amounts owed under the Existing Credit Agreement accrue interest
at the agent bank's prime rate plus 0.25% and mature on February 28, 1996. The
amounts owed under the Existing Debentures accrue interest at 14.25% and
mature in full on November 15, 2000.
 
                                      12

 
                                 CAPITALIZATION
 
  The following table sets forth the unaudited capitalization of the Company
and its subsidiaries as of October 30, 1993 and as adjusted to give effect to
the sale of the Notes and the application of the net proceeds therefrom as
described under "Use of Proceeds". This table is qualified in its entirety by,
and should be read in conjunction with, the Consolidated Financial Statements
of the Company and the related notes thereto included elsewhere in this
Prospectus.
 


                                        OCTOBER 30, 1993
                            ---------------------------------------------
                                 ACTUAL               AS ADJUSTED(1)
                            --------------------  -----------------------
                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                          (UNAUDITED)
                                            
Cash on hand..............  $              6,315    $             17,346
                            ====================    ====================
Current portion of long-
 term debt and capital
 lease obligations:
  Current maturities of
   bank term loan.........  $              7,000    $                --
  Current maturities of
   equipment financing....                   772                     772
  Current maturities of
   real estate mortgage
   notes payable..........                   275                     275
  Current maturities of
   capital lease obliga-
   tions..................                 1,128                   1,128
                            --------------------    --------------------
    Total current portion
     of long-term debt and
     capital lease
     obligations..........  $              9,175    $              2,175
                            ====================    ====================
Long-term debt and capital
 lease obligations:
  Bank term loan .........  $             15,000    $                --
  Bank revolving loan ....                11,400                     --
  New revolving credit fa-
   cility.................                   --                        0
  10 1/4% Senior Subordi-
   nated Notes due 2004...                   --                   75,000
  14.25% Subordinated De-
   bentures due 2000......                27,183                     --
  Small Business Adminis-
   tration debentures(2)..                 4,220                   4,220
  Real estate mortgage
   notes payable .........                 5,560                   5,560
  Equipment financing.....                 2,446                   2,446
  Capital lease obliga-
   tions..................                 1,839                   1,839
                            --------------------    --------------------
    Total long-term debt
     and capital lease ob-
     ligations............                67,648                  89,065
                            --------------------    --------------------
Stockholders' equity:
  Class A Common Stock,
   par value $0.01 per
   share, 20,000,000
   shares authorized,
   3,264,236 issued.......                    32                      32
  Class B Common Stock,
   par value $0.01 per
   share, 10,000,000
   shares authorized,
   2,955,107 issued.......                    30                      30
  Paid-in capital in ex-
   cess of par value......                27,457                  27,457
  Retained earnings.......                13,906                  12,913 (3)
  Treasury stock, at cost.                (5,005)                 (5,005)
                            --------------------    --------------------
    Total stockholders'
     equity...............                36,420                  35,427
                            --------------------    --------------------
    Total capitalization..  $            104,068    $            124,492
                            ====================    ====================

- --------

(1) The as adjusted data assumes that the following had occurred at October 30,
    1993: (i) the issuance of $75.0 million aggregate principal amount of the
    Notes; (ii) the retirement of $27.2 million aggregate principal amount of
    Existing Debentures at 102.8% of such principal amount; (iii) the repayment
    of the outstanding term loan of $22.0 million under the Existing Credit
    Agreement; (iv) the repayment of outstanding revolving credit loan
    borrowings of $11.4 million under the Existing Credit Agreement; (v) the
    write-off of certain previously deferred financing costs associated with
    the Existing Debentures and the term and revolving credit loans under the
    Existing Credit Agreement; (vi) the payment of approximately $2.6 million
    in fees and expenses associated with the offering and sale of the Notes;
    and (vii) an increase in cash on hand of approximately $11.0 million from
    the excess cash proceeds of the offering and sale of the Notes.
 
                                       13

 
   
(2) The Small Business Administration debentures have been issued by Financial
    Opportunities, Inc., a wholly-owned subsidiary of the Company (the "Non-
    Recourse Subsidiary"). These debentures are without recourse to the Company
    and the Guarantors and are the obligation solely of the Non-Recourse
    Subsidiary.     
(3) Adjusted to reflect the write-off of $537,000 of deferred financing costs
    (net of related income tax benefit) as a result of the retirement of the
    Existing Debentures and the repayment of outstanding borrowings under the
    Existing Credit Agreement and a charge of $456,000 (net of related income
    tax benefit) for the premium to be paid relating to the retirement of the
    Existing Debentures.
 
                                       14

 
                            SELECTED FINANCIAL DATA
 
  The following table sets forth selected historical consolidated financial
data and operating data for the Company for the periods indicated. The
Company's selected historical consolidated financial data is derived from, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company, including those contained elsewhere in this Prospectus. The data as of
and for the thirty-nine weeks ended October 31, 1992 and October 30, 1993 is
unaudited; however, in management's opinion, all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
results of such periods, have been reflected therein. The results of operations
for the thirty-nine weeks ended October 30, 1993 are not necessarily indicative
of the results to be expected for the entire fiscal year or any other interim
period. The information set forth in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.


                                           FISCAL YEARS ENDED (1)                                 THIRTY-NINE WEEKS ENDED
                         ------------------------------------------------------------------       --------------------------
                         JANUARY 28,   FEBRUARY 3,    FEBRUARY 2,   FEBRUARY 1, JANUARY 30,       OCTOBER 31,    OCTOBER 30,
                            1989          1990           1991          1992        1993              1992           1993
                         -----------   -----------    -----------   ----------- -----------       -----------    -----------
                                                                                            
STATEMENT OF OPERATIONS           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND ALL STORE DATA, OTHER THAN
 DATA:                                  SUPER PUMPER TOTAL SALES AND SUPER PUMPER TOTAL STORE CASH FLOW)
 Net sales of the Compa-
  ny, its subsidiaries
  and franchises (2)....  $716,859      $741,183       $807,586      $794,758    $773,766          $587,390       $581,850
 Revenues ..............   519,876       535,640        586,984       571,980     578,767           435,623        450,379
 Nonrecurring items.....       --         (2,631)(3)        --            --       (5,200)(3)           --             --
 Income from operations
  (4)...................    12,119         8,825 (3)     14,723        14,660       1,719 (3)         9,123         10,856
 Net income (loss) .....     4,106(5)        682 (3)      3,813         4,092      (6,850)(3)(6)     (1,442)(6)      3,443
 Earnings (loss) per
  share.................      0.75          0.13           0.72          0.75       (1.26)            (0.27)          0.62
 Cash dividends paid per
  share.................      0.07          0.02            --            --          --                --             --
 Ratio of earnings
  to fixed charges (7)..      1.63x         1.10x          1.51x         1.51x        --  (7)          1.41x          1.58x
OTHER OPERATING DATA:
 Interest expense (8)...  $  7,755      $  8,220       $  8,366      $  8,260    $  7,456          $  5,541       $  5,751
 Capital expenditures ..    14,613         8,712         14,307(9)     12,521      17,992            14,237         10,905
 Depreciation and amor-
  tization .............    11,098        12,054         13,358        13,571      13,664            10,529          9,577
 EBITDA (10)............    26,611        21,533 (3)     28,526        28,852      16,323 (3)        20,251         21,067
 EBITDA ratio (11)......      3.43x         2.62x          3.41x         3.49x       2.19x             3.65x          3.66x
STORE DATA:
 Average weekly inside
  sales per store.......  $  8,784      $  8,986       $  9,008      $  9,144    $  9,133          $  9,253       $  9,368
 Average inside store
  sales growth..........      0.40%         2.30%          0.24%         1.51%      (0.12)%           (0.76)%         1.24%
 Total number of stores
  at end of period......     1,133         1,105          1,190         1,134       1,079             1,092          1,053
 Average weekly gallons
  sold per gas location.     8,178         8,369          8,128         8,176       8,818             8,769          9,504
 Average gasoline gal-
  lonage growth.........     (1.02)%        2.34%         (2.88)%        0.59%       7.85%             7.45%          8.38%
 Gasoline gross profit
  per gallon (in cents).     10.30         11.08          11.06          9.92       10.16              9.43          11.34
 Super pumper total
  sales (12)............         0         1,984         11,521        24,277      47,675            33,531         50,460
 Super pumper total
  store cash flow (13)..         0           195            953         1,839       3,504             2,296          4,049
 Super pumper total
  stores at period end..         0             1              6            16          29                28             34
BALANCE SHEET DATA (AS
 OF PERIOD END):
 Net property and equip-
  ment..................  $ 70,284      $ 68,227       $ 81,399      $ 82,974    $ 90,643          $ 89,995       $ 92,403
 Total assets...........   140,518       149,109        165,068       165,555     174,547           174,654        172,821
 Total debt including
  capital lease
  obligations (14)......    67,462        66,703         78,576        79,119      81,035            77,531         76,823
 Stockholders' equity...    30,049        30,966         34,842        39,100      32,732            38,139         36,420

 


                                                FISCAL YEAR    THIRTY-NINE WEEKS
                                                   ENDED             ENDED
                                              JANUARY 30, 1993 OCTOBER 30, 1993
PRO FORMA FINANCIAL DATA (15):                ---------------- -----------------
                                                         
 Adjusted interest expense...................      $8,481           $6,689
 Adjusted EBITDA ratio ......................        1.88x            3.13x

 
                                       15

 
                       NOTES TO SELECTED FINANCIAL DATA

 (1) The Company's fiscal year ends on the Saturday closest to January 31. The
     fiscal year ended February 3, 1990 included 53 weeks.
 (2) 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.
 (3) Nonrecurring items represents the following: (i) for the fiscal year
     ended January 30, 1993, a $5,200,000 nonrecurring pretax charge for
     restructuring (see Note 12 to the Consolidated Financial Statements); and
     (ii) for the fiscal year ended February 3, 1990, a $2,500,000 charge
     relating to fees and expenses incurred in connection with a proposed
     merger agreement which was terminated, an $800,000 charge for severance
     and relocation costs associated with the restructuring and consolidation
     of certain administrative functions, and a credit of $669,000 resulting
     from the settlement of a union pension withdrawal liability. Income from
     operations and EBITDA include the net nonrecurring charges for these
     fiscal years, and net income (loss) includes the after-tax effect of
     these charges. EBITDA would have been $24,164,000 and $21,523,000 for the
     fiscal years ended February 3, 1990 and January 30, 1993, respectively,
     without the net nonrecurring charges.
 (4) Income from operations excludes gain (loss) on disposition of assets,
     interest expense and interest income.
 (5) Net income for the fiscal year ended January 28, 1989 includes a
     nonrecurring gain relating to the sale of warehouse assets and equipment
     of $1,539,000 (net of related income tax provision).
 (6) Net loss for the fiscal year ended January 30, 1993 and for the thirty-
     nine weeks ended October 31, 1992 includes a net charge for the
     cumulative effect of the change in accounting for income taxes of
     $3,951,000 (see Note 6 to the Consolidated Financial Statements).
 (7) For the purpose of determining the ratio of earnings to fixed charges:
     (i) earnings consist of income (loss) before income taxes plus fixed
     charges, excluding capitalized interest; and (ii) fixed charges consist
     of interest expense, capitalized interest and the portion of rental
     expense that management deems to be representative of the interest
     factor. The Company's earnings were inadequate to cover fixed charges by
     $5,051,000 for the fiscal year ended January 30, 1993.
 (8) Interest expense excludes amortization of deferred financing costs and
     includes fees for outstanding letters of credit and unused availability
     under the Company's previous and existing revolving credit facilities.
 (9) Capital expenditures for the fiscal year ended February 2, 1991 exclude
     the acquisition of Stop-N-Go store assets.
(10) EBITDA represents income (loss) before depreciation and amortization,
     interest expense and provision for (benefit from) income taxes. EBITDA is
     commonly used to analyze companies on the basis of operating performance,
     leverage and liquidity. The Company anticipates that EBITDA will be used
     to measure the Company's compliance with certain provisions of the New
     Credit Agreement (see "Description of the New Credit Agreement--
     Covenants"). EBITDA is not intended to represent cash flow for the period
     nor has it been prescribed as an alternative to net income as an
     indicator of operating performance.
(11) The EBITDA ratio is calculated by dividing EBITDA by interest expense.
(12) Super pumper total sales includes both inside store and gasoline sales
     for all super pumper locations.
(13) Super pumper total store cash flow represents both inside store and
     gasoline contribution margins before depreciation, amortization,
     interest, income taxes and allocation of corporate overhead, for all
     super pumper locations.
(14) Includes the current portion of both long-term debt and capital lease
     obligations.
   
(15) The pro forma financial data assumes that the following had occurred at
     the beginning of the fiscal year ended January 30, 1993: (i) the issuance
     of $75.0 million aggregate principal amount of the Notes; (ii) the
     retirement of $27.2 million aggregate principal amount of Existing
     Debentures at 102.8% of such principal amount; (iii) the repayment of the
     outstanding term loan of $22.0 million under the Existing Credit
     Agreement; and (iv) the repayment of outstanding revolving loan
     borrowings of $11.4 million under the Existing Credit Agreement. Adjusted
     EBITDA has been increased for interest income (computed at an assumed
     rate equal to the effective yield on short-term U.S. government
     securities (3.61% per annum as of January 31, 1994)) on the excess of the
     estimated net proceeds to the Company from the sale of the Notes over the
     average outstanding borrowings under the Existing Credit Agreement and
     the Existing Debentures for such periods. Additionally, both pro forma
     EBITDA and adjusted interest expense exclude the applicable components
     from the Non-Recourse Subsidiary. Pro forma interest expense on a
     consolidated basis (including interest expense of the Non-Recourse
     Subsidiary) would have been $8,853,000 and $6,971,000 for the fiscal year
     ended January 30, 1993 and the thirty-nine weeks ended October 30, 1993,
     respectively.     
 
                                      16

 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
 Three fiscal quarters ended October 30, 1993 compared to three fiscal quarters
ended October 31, 1992
 
  Revenues for the three fiscal quarters ended October 30, 1993 increased by
$14.8 million or 3.4% from the three fiscal quarters ended October 31, 1992.
This revenue increase was due to higher revenues from the convenience store,
gasoline and manufacturing and distribution areas of the Company. Convenience
store revenues increased to $271.0 million in the first three quarters of the
current fiscal year from $264.3 million in the corresponding period of the
prior fiscal year. This increase was due in part to an average inside store
sales increase of 1.2% for the current fiscal year's first three quarters as
compared to the corresponding period of the prior fiscal year. This increase in
average inside store sales in the current fiscal year's first three quarters
was achieved despite the adverse effect of the tobacco industry's significant
cigarette price reductions, substantially all of which were passed on to the
Company's customers. These cigarette price reductions lowered average inside
store sales by approximately 1.4% for the current fiscal year's first three
quarters. Overall convenience store revenues were also higher due to a change
in the mix of stores in the current fiscal year's first three quarters to
include more Company operated stores and fewer franchise stores, since the
Company records as revenue the gross sales of company operated stores compared
with franchise fees which are a percentage of franchise store sales. This
change in store mix was a result of the Company's ongoing review and evaluation
of its store base to determine whether its stores are best suited as either a
Company operated or franchise location, using economic and non-economic
criteria. Such transfers between Company operated and franchise stores have
occurred and will continue in the ordinary course of business, and generally
result in minimal transfer costs to the Company. The overall increase in the
Company's convenience store revenues was partially offset by decreased revenues
resulting from the closing of forty-three underperforming stores since the end
of the prior year third fiscal quarter. Although such closures had a negative
impact on revenues, they did not have a material adverse effect on the results
of operations, since the majority of stores closed had been operating at a
loss.
 
  The higher gasoline revenues in the first three quarters of the current
fiscal year resulted from an increase in total gasoline gallons sold of 8.9
million gallons. On a per location basis, average gallonage increased by
approximately 8.4% in the current fiscal year's first three quarters. These
gallonage increases were due primarily to the further development of the
Company's new super pumper stores as well as the remodeling and expansion of
gasoline facilities at a number of existing locations. Partially offsetting the
impact of the higher gallonage on total gasoline revenues was a decrease in the
average selling price of gasoline of 3.0 cents per gallon for the current
fiscal year's first three quarters as compared to the corresponding period of
the prior fiscal year.
 
  Manufacturing and distribution revenues increased in the first three quarters
of the current fiscal year due to the introduction of new business, which began
during the second quarter of fiscal 1993. The new business includes the sale of
ice cream to an external distributor as well as the distribution of new product
lines, including cigarettes and candy, to stores in certain marketing areas of
the Company.
 
  Income from operations increased by $1,733,000 for the first three quarters
of the current fiscal year as compared to the corresponding period of the prior
fiscal year. This increase was attributable, in large part, to increased income
from gasoline operations, which was favorably impacted by the higher gasoline
gallons described above, combined with an increase in gasoline gross margins as
compared to the corresponding period of the prior fiscal year. Additionally,
for the current fiscal year's first three quarters the Company incurred lower
operating costs related to compliance with environmental regulations,
reflecting a reduction in the expenses associated with the remediation of the
Company's gasoline locations. Such remediation costs are incurred in the
ordinary course of business and can fluctuate from year to year.
 
  Income from convenience store operations was also higher for the first three
quarters of the current fiscal year due to the increase in average inside store
sales combined with improved product gross margins, partially offset by higher
store operating expenses. The increased product gross margins resulted in part
from a reduction in costs associated with the Company's last-in, first-out
(LIFO) inventory valuation method. This
 
                                       17

 
reduction in the LIFO provision resulted from a current year decrease in
cigarette prices as discussed above, which constitutes one of the Company's
major product categories. The overall increase in product margins for the
current fiscal year's first three quarters was partially offset by a lower
level of marketing allowances, related to monies received from vendors for
specific product promotions, as compared to the prior fiscal year's first three
quarters. The higher store operating expenses in the current fiscal year's
first three quarters were attributable primarily to increased store labor
costs.
 
  The overall increase in income from operations for the current fiscal year's
first three quarters was partially offset by decreased income from foreign
consulting and manufacturing and distribution operations as well as higher
general and administrative costs. Income from foreign consulting operations
decreased primarily due to the recognition of a one-time license fee in the
prior fiscal year's third quarter which was earned upon the start up of the
Company's Mexican joint venture operation. Income from operations in the
Company's manufacturing and distribution operation decreased for the current
fiscal year's first three quarters due primarily to reduced product margins
resulting from an increase in raw product costs without a corresponding
increase in retail dairy prices. This decrease was partially offset by
increased profits realized from the new business described above. General and
administrative expenses increased in the current fiscal year's first three
quarters due in part to increased accruals for management bonuses and profit
sharing, due to the increased earnings in the current fiscal year's first three
quarters as well as the implementation of a new 401(k) employee benefit program
in fiscal 1994. Additionally, the Company increased its provision for bad debt
expense in the current fiscal year. Partially offsetting the above increases,
as well as normal inflationary increases for other general and administrative
expenses, was decreased salaries resulting from the consolidation of the
Company's administrative offices discussed below. Additionally, the Company
incurred reduced costs in the current fiscal year related to legal and
professional fees.
 
  The effective tax rate for the Company was 40% for the first three quarters
of both the current and the prior fiscal years. The Company provides for income
taxes at the effective rate expected to be incurred for the entire year.
 
  Net income for the first three quarters of the current fiscal year was
$3,443,000 or $.62 per share, as compared to a net loss of $1,442,000 or $.27
per share for the same period of the prior year. Included in the net loss for
the prior year's three fiscal quarters was a $3,951,000 charge for the
cumulative effect of a change in accounting for income taxes. (See Note 2 to
the Interim Consolidated Financial Statements.) This one-time cumulative charge
related to the adoption of SFAS No. 109, "Accounting for Income Taxes."
 
 Fiscal 1993 Compared to Fiscal 1992
 
  Revenues for the fiscal year ended January 30, 1993 increased by $6.8 million
or 1.2% from the prior fiscal year ended February 1, 1992. The higher revenues
in fiscal 1993 were due to increased revenues from the Company's convenience
store group as well as its gasoline and international operations, partially
offset by decreased revenues from the Company's manufacturing and distribution
operations.
 
  Convenience store revenues increased from $343.0 million in fiscal 1992 to
$345.4 million in fiscal 1993. This increase was due to a change in the mix of
stores in fiscal 1993 to include more Company operated stores and fewer
franchise stores since the Company records as revenue the gross sales of
Company operated stores compared with recording the lower franchise fees earned
from franchise stores. The overall increase in the Company's convenience store
revenues was partially offset by decreased revenues resulting from the closing
of underperforming stores. Although such closures had a negative impact on
revenues, they did not have a material adverse effect on the results of
operations since the majority of stores closed had been operating at a loss.
Average inside store sales decreased by 0.2% in fiscal 1993 as compared to
fiscal 1992, due in large part to a continuing weak economy as well as adverse
weather conditions, especially in the fiscal 1993 second fiscal quarter, in all
of the Company's major market areas.
 
  The higher gasoline revenues in fiscal 1993 were attributable to an increase
in total gasoline gallons sold. On a per location basis, average gallonage
increased by approximately 8% in fiscal 1993 as compared to fiscal 1992. These
gallonage increases were due primarily to the further development of the
Company's new stores as well as the remodeling and expansion of gasoline
facilities at a number of existing locations. The increased
 
                                       18

 
gallonage was partially offset by a decrease in the average selling price of
gasoline of approximately 2.6 cents per gallon in fiscal 1993.
 
  Revenues from international operations were higher in fiscal 1993 due
primarily to the recognition of a $450,000 one-time license fee earned upon the
start up of the Company's Mexican joint venture operation. The Company will
record its appropriate share of future profit and loss based upon the sales and
performance of this one-third owned Mexican joint venture. However, any future
earnings potential cannot be quantified at this time.
 
  The Company's manufacturing and distribution revenues decreased in fiscal
1993 due to reduced volume resulting from the lower number of stores as well as
the overall decrease in average inside store sales, both of which are discussed
above. This was partially offset by increased revenues resulting from the
introduction of new business, which included the sale of ice cream to an
external distributor as well as the distribution of new product lines,
including cigarettes and candy, to stores in certain marketing areas of the
Company.
 
  Income from operations decreased by $12.9 million for fiscal 1993 as compared
to fiscal 1992. $5.2 million of this decrease was due to a nonrecurring charge
in fiscal 1993 for restructuring expenses related to the downsizing and
consolidation of the Company's administrative offices (see Note 12 to the
Consolidated Financial Statements). The Company anticipates that expense
reductions, including reduced salaries and benefits, travel, telecommunication
costs and other office overhead costs, realized from this restructuring will
approximate $2.0 million annually which should favorably impact income from
operations in future fiscal years once this restructuring is completed.
 
  In addition to the nonrecurring charge, income from operations was also lower
in fiscal 1993 due to decreases from the convenience store and manufacturing
and distribution groups as well as higher general and administrative expenses.
The decrease from the convenience store group resulted primarily from
relatively flat average inside store sales combined with improved product gross
margins which were not sufficient to offset an increase in store operating
expenses. The store operating expense increase resulted primarily from
increased labor expense, higher medical insurance costs and certain
individually large claims incurred in the Company's commercial liability and
worker's compensation insurance programs. Income from operations in the
Company's manufacturing and distribution operations decreased in fiscal 1993
due to reduced volume resulting from the fewer number of stores as well as
reduced product margins resulting from an increase in raw product costs without
a corresponding increase in retail dairy prices. This was partially offset by
profits realized from the introduction of new business described above. The
increase in general and administrative expenses was caused by increases in
group health and commercial liability insurance expense, based on specific
claims experience, as well as normal increases in administrative salaries.
 
  Partially offsetting the decreases in income from operations discussed above
was an increase in income from international operations, resulting primarily
from the recognition of the Mexican joint venture license fee discussed above.
Additionally, income from operations in the Company's gasoline operations was
essentially the same in fiscal 1993 as compared to fiscal 1992. The positive
impact of increased gasoline gallonage described above combined with a slight
increase in gasoline margins of .2 cents per gallon was offset by an increase
in the cost of compliance with environmental regulations due primarily to
remediation requirements at gasoline sites closed by the Company.
 
  Inflation has had little effect on the Company's revenues and income from
operations in fiscal years 1993 and 1992.
 
  Interest expense (net of interest income) decreased by $1,258,000 in fiscal
1993 primarily due to a decrease in average interest rates related to the
Company's variable rate term and revolving loans under the Existing Credit
Agreement.
 
  The Company recorded a net loss on disposition of properties of $433,000 in
fiscal 1993 compared to a net loss of $298,000 in fiscal 1992. The majority of
these losses resulted from the closing of underperforming stores and the
resulting write-off of abandoned fixtures, equipment and leasehold
improvements.
 
  The effective tax rate for the Company was a benefit of 40% for fiscal 1993
as compared to a provision of 42% for fiscal 1992 (See Note 6 to the
Consolidated Financial Statements).
 
                                       19

 
  The Company recorded a net loss of $6,850,000, or $1.26 per share, for fiscal
1993 as compared to net income of $4,092,000 or $.75 per share, in fiscal 1992.
In addition to the items discussed above, the net loss in fiscal 1993 was also
partially attributable to a $3,951,000 charge for the cumulative effect of a
change in accounting for income taxes (see Note 6 to the Consolidated Financial
Statements). This one-time cumulative charge related to the adoption of SFAS
No. 109, "Accounting for Income Taxes".
 
 Fiscal 1992 Compared to Fiscal 1991
 
  Revenues for the fiscal year ended February 1, 1992 decreased by $15.0
million or 2.6% from the fiscal year ended February 2, 1991. This decrease was
due to a reduction in revenues from the Company's convenience store group as
well as its gasoline operations, caused primarily by the closing of
underperforming locations during fiscal 1992 and a decrease in the average
selling price of gasoline from $1.15 per gallon in fiscal 1991 to $1.11 per
gallon in fiscal 1992. Partially offsetting these reductions in revenues were
increases resulting from: (1) the inclusion of the acquired Stop-N-Go locations
for the entire fiscal 1992 since these locations were acquired in March and
June of fiscal 1991; (2) the positive store and gasoline revenue impact
resulting from the opening of 6 new stores during fiscal 1992; and (3) an
average inside store sales increase of 1.5% for fiscal 1992 as compared to
fiscal 1991.
 
  Income from operations for the Company decreased by $63,000 in fiscal 1992 as
compared to fiscal 1991. This slight decrease was caused primarily by: (1) a
reduction in gasoline profit margins of 1.1 cents per gallon in fiscal 1992,
mostly resulting from the negative effect of the Gulf War on the Company's
fiscal 1992 first quarter gasoline margins; (2) normal increases in
administrative salaries as well as increased store labor costs resulting from
an April, 1991 adjustment to the national minimum wage; and (3) higher legal
fees incurred in the ordinary course of business. The above decreases were
almost entirely offset by: (1) an increased profit contribution from the
Company's manufacturing and distribution operations, due to a decrease in the
price of raw product, expansion of the Company's ice cream line to most of the
store locations, and the positive impact of increased promotional activity; (2)
decreased group health and commercial liability insurance expense, since fiscal
1991 included higher provisions attributable to specific claims experience; (3)
decreased costs of compliance with environmental regulations related to the
Company's gasoline business; and (4) the positive effect of tight control over
other general and administrative expenses.
 
  Income from operations from the Company's convenience store group and
international operations remained relatively stable in fiscal 1992 as compared
to fiscal 1991. Inflation has had little effect on the Company's revenues and
income from operations in fiscal 1992 and 1991.
 
  Interest expense (net of interest income) decreased by $182,000 in fiscal
1992, primarily due to a decrease in average interest rates related to the
Company's variable rate term and revolving loans under the Existing Credit
Agreement. This decrease was partially offset by an overall increase in the
Company's average revolving and term loan balances thereunder in fiscal 1992 as
compared to fiscal 1991, resulting primarily from the acquisition of Stop-N-Go
assets in March and June of fiscal 1991.
 
  The effective tax rate for the Company was 42% for fiscal 1992, as compared
to 44% for fiscal 1991 (see Note 6 to the Consolidated Financial Statements).
 
  Net income for fiscal 1992 was $4,092,000, as compared to $3,813,000 for
fiscal 1991. On a per share basis, earnings rose from $.72 per share in fiscal
1991 to $.75 per share in fiscal 1992.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company generates substantial operating cash flow since most of its
revenues are received in cash. Currently, the amount of cash generated from
operations significantly exceeds all of the current debt service requirements
of the Company's long-term debt and capital lease obligations. The capital
expenditures of the Company are primarily funded by the excess cash flow
available after debt service, but have also been funded using mortgage and
equipment financing and/or the revolving line of credit under the Existing
Credit Agreement. Additionally, the Company utilizes its revolving line of
credit to address the seasonality of operations and the timing of certain
working capital disbursements. For the first three fiscal quarters ended
October 30, 1993, the cash flow from operations available after meeting all of
the Company's debt service requirements was insufficient to fund total capital
expenditures due in large part to payments made related to nonrecurring
restructuring expenses (as described below). As a result, the Company obtained
new mortgage and equipment financing.
 
                                       20

 
  During both the first three fiscal quarters ended October 30, 1993 and
October 31, 1992, the Company paid its trade payables in an average of 25 days,
which compares to 23 days for the entire fiscal year ended January 30, 1993.
The cash flow of the Company is also favorably impacted by the Company's use of
funds from the sale of money orders, pending weekly remittance of such funds to
the issuer of the money orders. The amount due the issuer each week varies,
depending on the volume and dollar values of money orders issued. At October
30, 1993 and January 30, 1993, $5.9 million and $6.0 million, respectively,
were due the issuer. The Company's remittance obligation to the issuer of the
money orders is primarily secured by an outstanding letter of credit in the
amount of $6.5 million.
 
  During the first three quarters of fiscal 1994, cash generated by operations
was $3.9 million lower than the corresponding period of the prior fiscal year.
This decrease resulted from the payment in the current year of $4.5 million in
expenditures (which were accrued in fiscal 1993) related to severance,
relocation and other personnel related costs associated with the Company's
restructuring, which involved the downsizing and consolidation of three
administrative offices into a new corporate headquarters facility in Enfield,
Connecticut. The majority of these nonrecurring payments have been made in
fiscal 1994. Partially offsetting the effect of the nonrecurring restructuring
payments was the increase in earnings in the current fiscal year. See "Results
of Operations."
 
  Cash used by the Company's investing activities was $5.2 million lower in the
first three fiscal quarters of 1994 as compared to the first three fiscal
quarters of 1993, primarily as a result of the fiscal 1993 purchase of the new
corporate headquarters facility. The Company continues to develop new stores
and remodel existing locations, and the Company is currently expanding its
dairy and ice cream production facilities, capital expenditures for which are
being financed primarily by cash generated from operations and mortgage and
equipment financing. In addition, in order to accelerate the development of new
super pumper stores, the Company may sell and leaseback certain of its existing
super pumper locations and may in the future lease, or sell and leaseback, the
real estate of new super pumper locations. Additionally, the Company estimates
that future capital expenditure requirements to comply with federal and state
underground gasoline storage tank regulations will be approximately $16.0
million to $20.0 million in the aggregate through December, 1998, which cost
could be reduced for locations (especially low volume locations) which may be
closed in lieu of the capital costs of compliance. The Company has also
initiated a program to install in all stores within three years a point-of-sale
(POS) system designed to provide more accurate and timely information regarding
store operations and to decrease administrative overhead. The cost of the POS
system, including new cash registers and personal computers, is currently
estimated to be approximately $7.0 million to $9.0 million, and is anticipated
to be funded by third-party equipment financing. The ultimate amount of
discretionary capital expenditures that the Company will incur in the future
will be determined by the available sources of funds, including, but not
limited to, those described above.
 
  In order to facilitate future growth and to improve the Company's financial
and operating flexibility, the Company is effecting the sale of the Notes,
which will provide funds for general corporate and working capital purposes as
well as reduce the Company's near-term debt amortization requirements. The
Company's maturities on long-term debt for the next five fiscal years, based on
its current debt structure, as well as on a pro forma basis after giving effect
to the sale of the Notes and the application of the proceeds therefrom (see
"Use of Proceeds" and "Capitalization"), are as follows:
 


                                   AS OF 10-30-93
                               ----------------------
                                           PRO FORMA
             FISCAL                            AS
             YEAR                ACTUAL     ADJUSTED
             ------            ----------- ----------
                                     
             1995............. $ 8,108,000 $1,108,000
             1996.............  17,986,000  1,736,000
             1997.............  21,448,000    798,000
             1998.............   6,026,000    776,000
             1999.............   6,855,000  1,605,000
                               ----------- ----------
             Total............ $60,423,000 $6,023,000
                               =========== ==========

 
                                       21

 
  In addition to cash flow from operations, potential mortgage, equipment and
other financing and the available net proceeds from the sale of the Notes, the
Company's sources of liquidity will include borrowing availability under the
New Credit Agreement, pursuant to which $30.0 million will be available for
revolving loans (including up to $15.0 million for letters of credit). The New
Credit Agreement will replace the Existing Credit Agreement. At October 30,
1993, the Existing Credit Agreement included a term loan with an outstanding
balance of $22.0 million and a $15.0 million revolving credit facility with an
outstanding balance of $11.4 million, leaving $3.6 million available for
borrowing thereunder. All outstanding borrowings under the Existing Credit
Agreement mature on February 28, 1996.
   
  As of the date of the issuance of the Notes, the Company does not anticipate
having outstanding borrowings under the New Credit Agreement, but anticipates
that letters of credit will be outstanding thereunder, including, as discussed
above, the letter of credit issued to secure the Company's remittance
obligation to the issuer of money orders. The Company intends to utilize the
New Credit Agreement as needed for working capital and general corporate
purposes, especially to address the seasonality of operations and timing of
certain working capital disbursements. It is anticipated that the loans under
the New Credit Agreement will generally bear interest, at the Company's option,
at the per annum rate of either: (i) 0.25% above the lender's prime rate, as
set from time to time; and/or (ii) from 2.00% to 2.50% above LIBOR. Loans (or
portions thereof) which the Company has elected to bear interest based upon
LIBOR will bear interest at the rate of: (A) 2.00% per annum above LIBOR, if
the Company's ratio of total indebtedness (as to be defined in the New Credit
Agreement) to EBITDA for the preceding four fiscal quarters was less than 3.25
to 1.0; (B) 2.25% per annum above LIBOR, if such ratio was between 3.25 to 1.0
and 3.49 to 1.0; and (C) 2.50% per annum above LIBOR, if such ratio was 3.50 to
1.0 or more. At October 30, 1993, and for the four fiscal quarters then ended,
as adjusted for the transactions described under "Use of Proceeds," such loans
would have borne interest at the rate of 2.50% per annum above LIBOR. In
addition, it is anticipated that all outstanding indebtedness under the New
Credit Agreement will be due and payable in full on the third anniversary of
the execution date of the New Credit Agreement, and that, provided no default
exists under the New Credit Agreement, such period may be extended for up to
two additional one-year periods at the request of the Company and with the
consent of the lenders thereunder. See "Description of the New Credit
Agreement."     
 
                                    BUSINESS
 
GENERAL
   
  Dairy Mart operates one of the nation's largest convenience store chains. The
Company operates or franchises approximately 1,050 stores under the "Dairy
Mart" name in 11 states located in the Northeast, Midwest and Southeast. Dairy
Mart is the largest operator of traditional convenience stores in Ohio and
Kentucky and is a leading operator of convenience stores in New England.
Approximately 420 stores sell gasoline and approximately 340 stores are
franchised. The Company also manufactures, processes and distributes certain
dairy and other products.     
 
  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 Midwest regions. The dairy
plant in Ohio manufactures and distributes ice cream to most stores. In the
Southeast region, the Company distributes dairy products, tobacco products,
candy and certain other merchandise to stores in Kentucky and Indiana.
 
  The Company's primary growth strategy is to increase its retail gasoline
presence. This strategy is designed to capitalize on the growth in sales of
gasoline by convenience stores which sales, as reported by the National
Association of Convenience Stores, have grown at a 14.8% compounded annual rate
since 1988. As a result, almost all of the stores recently opened by the
Company are retail units, known as "super pumper" stores, which have
approximately four times the gasoline retailing capacity and a significantly
larger in-store size than the Company's traditional convenience stores. The
average super pumper store in operation for at least one year contributes
approximately four times as much in Store Cash Flow as the Company's average
non-super pumper store. The Company plans to open approximately 20 new super
pumper stores in the fiscal year ending January 28, 1995 and approximately 30
new super pumper stores per year thereafter for the foreseeable future.
 
                                       22

 
STORES
 
  The Company's stores are generally located in densely populated suburban
areas, and are situated close to single-family homes and apartments to attract
neighborhood shoppers. Store location, design, lighting and layout are intended
to cater to customers' desire for fast and convenient access. Approximately 420
locations also sell gasoline, which the Company believes is an important
convenience for customers. Shelving and displays, including refrigeration
units, deli and other fast food counters and displays, are designed to
encourage customers to purchase high profit margin products including impulse
purchase items such as candy, fountain drinks and ice cream novelties. Stores
are located on sites which are well-lit, easily accessible by customers and
provide ample parking. All of the Company's stores also offer extended hours
for additional convenience, with over one-half of the stores open 24 hours per
day. A traditional Dairy Mart store is typically 2,400 square feet and most are
free standing structures.
 
  As of October 30, 1993, the Company operated and franchised retail
convenience stores in the following three regions of the United States:
 

                                                                       NUMBER OF
      NORTHEAST REGION                                                  STORES
                                                                       ---------
                                                                    
       Massachusetts..................................................        77
       Connecticut....................................................        67
       New York.......................................................        37
       Rhode Island...................................................        26
                                                                       ---------
        Total Northeast Stores........................................       207
                                                                       ---------
      MIDWEST REGION
       Ohio...........................................................       539
       Michigan.......................................................        52
       Pennsylvania...................................................        42
                                                                       ---------
        Total Midwest Stores..........................................       633
                                                                       ---------
      SOUTHEAST REGION
       Kentucky.......................................................       170
       Indiana........................................................        18
       Tennessee......................................................        14
       North Carolina.................................................        11
                                                                       ---------
        Total Southeast Stores........................................       213
                                                                       ---------
          Total Stores................................................     1,053
                                                                       =========

 
 Super Pumper Stores
   
  Super pumper stores are an important part of the Company's strategy to expand
and increase its profitability. Super pumper stores have approximately four
times the gasoline retailing capacity of traditional gasoline convenience
stores. Generally 2,700 square feet, super pumper stores are significantly
larger than the Company's traditional convenience stores. The stores are
designed to devote a greater amount of space to fast food counters, deli areas
and refrigeration display units which attract customers to high profit margin
products such as fountain drinks and fresh made sandwiches. Super pumper stores
are generally located at high-traffic intersections to provide convenient
access to customers, and all have canopies to shield gasoline customers from
inclement weather. As of October 30, 1993, the Company had 34 super pumper
stores, a majority of which have been opened since February, 1992 and all of
which have been opened since the beginning of fiscal 1990. Super pumper store
sales and Store Cash Flow for the four quarters ended October 30, 1993 were
more than double the amounts for fiscal 1992, and the Company's super pumper
stores accounted for over 10% of the revenues and EBITDA of the Company for the
thirty-nine weeks ended October 30, 1993.     
 
                                       23

 
  The following table presents summary operating data of super pumper stores
since fiscal 1989:
 


                                                                           FOUR
                                                                         QUARTERS
                                       FISCAL YEARS                       ENDED
                         --------------------------------------------- OCTOBER 30,
SUPER PUMPER STORES      1989    1990      1991      1992      1993       1993
- -------------------      --------------- --------- --------- --------- -----------
                           (IN THOUSANDS, EXCEPT TOTAL STORES AT PERIOD END)
                                                     
Total Sales............. $   0    $1,984   $11,521   $24,277   $47,675     $64,604
Total Inside Store
 Sales.................. $   0  $    942 $   3,564 $   7,967   $17,613     $23,514
Total Gallons Sold......     0     1,042     6,918    14,466    27,462      38,158
Total Store Cash Flow... $   0  $    195 $     953    $1,839 $   3,504   $   5,257
Stores at Period End....     0         1         6        16        29          34

 
 Upgrading Existing Store Base
 
  Over the next four years, the Company plans to upgrade and remodel up to 400
stores in order to modernize the stores' look, upgrade their equipment and
increase the space devoted to higher profit margin items, such as fountain
drinks and fast food and deli items. Management expects that this remodeling
program will favorably impact the amount of maintenance capital expenditures
required on its existing store base due to the installation of newer, more
reliable equipment. The Company also intends to convert approximately 40
traditional gasoline convenience stores to super pumper status over the same
period. Stores recently upgraded to super pumper status have shown
significantly higher inside store and gasoline sales.
 
 Closing Underperforming Stores
   
  The Company continually evaluates the performance of each of its stores in
order to identify actions aimed at improving the Company's overall
profitability. Based upon these evaluations, the Company continues to sell or
close certain underperforming stores. The Company considers various factors in
deciding to sell or close stores, including store location, lease term, rental
and other obligations and store performance. Sales or closures of stores, while
reducing revenues, generally do not have an adverse effect on overall results,
since a majority of such stores operate at a loss. Since March 1992, the
Company has sold or closed approximately 115 stores.     
 
GASOLINE OPERATIONS
 
  A major part of the Company's growth strategy is to continue to increase its
level of gasoline sales. This strategy enables the Company to significantly
increase a store's total level of sales without a commensurate increase in
overhead. The Company believes that the sale of gasoline at its stores offers a
significant competitive advantage and that customers value this additional
convenience, as supported by a five-year compounded annual growth rate of 14.8%
in gasoline sales by convenience stores, as reported by the National
Association of Convenience Stores. The sales volume of gasoline by the
Company's super pumper stores for the four quarters ended October 30, 1993 was
more than five times the sales volume of gasoline for fiscal 1991. Gasoline
sales accounted for approximately 37% of total revenues of the Company in the
most recently completed fiscal year. As of October 30, 1993, 419 stores sold
gasoline.
 
  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.
 
                                       24

 
  The following table presents certain operating data for the Company's
gasoline operations:
 


                                      FISCAL YEARS                     FOUR QUARTERS
                         -------------------------------------------       ENDED
                          1989     1990     1991     1992     1993    OCTOBER 30, 1993
                         -------  -------  -------  -------  -------  ----------------
                                                    
Total Gallons Sold (in
 thousands)............. 179,424  185,701  188,930  189,625  196,703      205,684
% Change in Gallons
 Sold...................    0.80%    3.50%    1.74%    0.37%    3.73%        4.57%
Average Gasoline Gross
 Profit per Gallon (in
 cents).................   10.30    11.08    11.06     9.92    10.16        11.57

 
PRODUCT SELECTION
 
  All stores generally offer more than 3,000 food and non-food items limited to
a few, well-known brand names as well as the Company's private label products.
Most of these items would typically be offered in supermarkets. Food items
include a wide variety of products, including canned foods and groceries, dairy
products, beverages, snack items, candy, baked goods and food service items,
such as fountain soft drinks, coffee, hot dogs, deli meats and deli sandwiches
and similar foods. Non-food products and services include gasoline, cigarettes,
health and beauty aids, publications, lottery tickets and money orders. In
addition to selling well-known brand name products, the stores offer many
products that bear the "Dairy Mart" private label, including milk, bakery
products, juices and other non-carbonated beverages, ice cream and other dairy
products such as dips and cheeses.
 
  In recent years, the Company has been altering the mix of products to
emphasize the sale of items carrying higher profit margins. Central to these
efforts has been the Company's installation of fast food counters, hot dog
grills called "Hot Dog Central" and/or deli areas in approximately 500 stores
over the last three years. Fast food items not only carry higher profit margins
but also tend to lead to the purchase of other high profit margin products and
impulse items, including salty-snacks, candy and beverages. Dairy Mart has
introduced a number of new private label products, including ice cream products
and juices, which generally carry a higher gross profit margin than the
Company's average gross profit margin on comparable products. These private
label products include Dairy Mart's "Party Time" (R) and "Special Occasion" (R)
ice cream.
 
POS SYSTEM
 
  The Company has initiated a program to install a POS system in all stores
within three years. The Company anticipates that, upon completion of this
program, each store will be equipped with a scanner and with a dedicated
personal computer, into which sales, inventory and other data will be input at
scheduled daily intervals, and then automatically transmitted to the Company's
headquarters. The Company believes that the POS system will: (i) provide more
accurate and timely information regarding store operations, including sales and
merchandising, and inventory levels and composition; (ii) reduce paperwork for
store managers, thereby allowing them to spend more time interacting with
customers and improving operations; (iii) decrease administrative overhead,
since the input and verification of data will be automated at both the store
and office level; and (iv) improve verification of product costs and retail
pricing. The cost of the POS system, including new cash registers and personal
computers, is currently estimated to be approximately $7.0 million to $9.0
million, and is anticipated to be funded by third party equipment financing.
The Company believes it will be among the first of the larger convenience store
chains to implement a chain-wide POS system. Industry-wide, as reported by the
National Association of Convenience Stores, only 3.5% of all convenience stores
had POS systems at the end of 1992.
 
MANUFACTURING AND DISTRIBUTION OPERATIONS
 
  The Company supplies its stores and most franchised stores through a product
distribution system which includes the Company's own manufacturing,
distribution and processing facilities, and other distributors. Through its
manufacturing, processing and distribution facilities in Connecticut and Ohio,
the Company
 
                                       25

 
supplies all of the milk and a substantial portion of the ice cream, juices and
non-carbonated beverages for the stores in the Northeast and the Midwest. Many
other products which are not produced by the Company are supplied to the
Northeast and Midwest regions by one wholesale distributor under a ten-year
contract entered into in February 1988. The Company supplies the Southeast
region stores in large part through its 35,000 square foot distribution
facility located in Louisville, Kentucky.
 
  In fiscal 1993, the Company reversed a prior policy and began to actively
market its excess manufacturing and processing capacity to third parties, such
as wholesalers and supermarkets. These efforts have resulted in a wholesale
arrangement with a regional brand name ice cream distributor which has more
than doubled the utilization of the Company's ice cream production capacity
since March 1992. To accommodate additional growth in the sale of ice cream to
third party purchasers, the Company is investing $1.4 million to further
enhance product quality and to improve the efficiency and capacity of its ice
cream production. The Company also intends to continue to pursue sales to third
parties of other products produced at its manufacturing and processing
facilities.
 
FRANCHISE OPERATIONS
 
  The Company franchises approximately 340 stores throughout its three
geographic regions. Franchise stores generally follow the same operating
policies as Company stores, and are subject to Company supervision under
franchise agreements. Company operated and franchise stores are of the same
basic store design and sell substantially the same products. The Company
currently franchises only existing stores. Most franchisees purchase milk, ice
cream, dairy products, fruit juices and other non-carbonated beverages
distributed by the Company and generally purchase other products through the
same suppliers used by the Company.
 
  The Company offers two types of franchising arrangements--the "full"
franchise and the "limited" franchise. Under a full franchise agreement, the
franchisee purchases and owns both the merchandise inventory and the equipment
located in the store, and leases or subleases the store from the Company. Under
a limited franchise agreement, the franchisee owns only the merchandise
inventory while the Company retains ownership of the store equipment. Franchise
fees are higher for limited franchisees. As of October 30, 1993, there were 165
full franchise locations and 175 limited franchise locations.
 
  The Company has recently revised its franchising strategy in order to: (i)
improve the level of retail experience of its new franchisees; and (ii)
increase the level of financial commitment by new franchisees. As part of this
strategy, new franchisees are now required to undergo more rigorous and
thorough interviews and background checks, receive increased levels of
financial and retail training, and typically make larger initial cash payments.
 
  The following table sets forth the number of stores, on both a Company
operated and franchise operated basis, that were opened or acquired, closed or
sold, and transferred between Company operated and franchise operated, during
the last two fiscal years, and during the three fiscal quarters ended October
30, 1993:
 


                             FEBRUARY 2, 1992          JANUARY 30, 1993          OCTOBER 30, 1993
                         ------------------------  ------------------------  ------------------------
                         COMPANY  FRANCHISE        COMPANY  FRANCHISE        COMPANY  FRANCHISE
                         OPERATED OPERATED  TOTAL  OPERATED OPERATED  TOTAL  OPERATED OPERATED  TOTAL
                         -------- --------- -----  -------- --------- -----  -------- --------- -----
                                                                     
At beginning of period..   725       465    1,190    685       449    1,134    709       370    1,079
Opened or acquired......     6       --         6      6       --         6      3       --         3
Closed or sold..........   (48)      (14)     (62)   (34)      (27)     (61)   (21)       (8)     (29)
Transferred (net).......     2        (2)     --      52       (52)     --      22       (22)     --
                           ---       ---    -----    ---       ---    -----    ---       ---    -----
At end of period........   685       449    1,134    709       370    1,079    713       340    1,053
                           ===       ===    =====    ===       ===    =====    ===       ===    =====

 
                                       26

 
INTERNATIONAL OPERATIONS
 
  The Company conducts business outside the United States as a joint-venturer,
licensor or consultant. Currently, the Company is a party to two agreements
with convenience store operators in South Korea and Mexico, and continues to
pursue similar arrangements in other countries. As with the Company's prior
international arrangements, both such agreements require a specified commitment
of Company personnel, but do not require any significant commitment of capital.
 
ADVERTISING
 
  To promote a uniform image for all stores, the Company designs and
coordinates advertising for all stores to complement its marketing strategy,
which is derived, in part, from market surveys and research. Largely in
response to such research, the Company recently launched a new advertising
program entitled "Close to Home" which emphasizes the high percentage of
neighborhood locations throughout Dairy Mart's operating regions. In-store,
newspaper, and direct-mail advertising, special promotions and seasonal radio
and television advertising usually feature certain items which can be purchased
at the stores, and frequently include national brand items for which
advertising costs are often supplemented by the national brand suppliers. Sales
promotions are generally established and maintained on a bi-weekly or monthly
basis.
 
COMPETITION
 
  The convenience store and retail gasoline industries are highly competitive.
The number and type of competitors vary by location. The Company presently
competes with other convenience stores, large integrated gasoline service
station operators, 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. See "Investment
Considerations--Competition."
 
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. See "Investment
Considerations--Effect of Weather on Business."
 
EMPLOYEES
 
  As of October 30, 1993, exclusive of franchisees and franchisees' employees,
the Company employed, on a full-time or part-time basis, approximately 5,200
employees.
 
PROPERTIES
 
  Of the 1,053 stores in operation as of October 30, 1993, 123 store locations
were owned by the Company and 930 were leased. In addition, the Company owns 15
locations and is the primary lessee for 54 locations not currently operated as
Dairy Mart stores. The Company's policy is to endeavor to lease or sublease
such locations to third parties.
 
  The Company owns its corporate headquarters facility in Enfield, Connecticut.
This facility is approximately 77,000 square feet and is located on eighty-
eight acres of land. The Company also owns its Northeast region operating
office building and manufacturing and processing plant located in a 33,000
square
 
                                       27

 
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.
 
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. In the prior three fiscal years ended January 30, 1993, the Company
recorded expenses which averaged approximately $1.0 million annually for these
activities, which amounts were net of reimbursements from state trust fund
programs with provisions for sharing or reimbursing certain costs incurred by
UST owners or operators. The Company accrues its estimates of all costs to be
incurred for assessment and remediation for known releases. These accruals are
adjusted if and when new information becomes known. Due to the nature of such
releases, the actual costs of assessment and remediation 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 all existing USTs it owns
or operates to meet certain corrosion-, overfill- and spill-protection and
leak-detection requirements. The Company currently is evaluating each site on
an individual basis to determine the type of expenditures required to comply
with these and other requirements under the federal and state UST regulatory
programs.
 
  In addition to ongoing assessment and remediation costs, the Company
presently estimates that it will be required to make capital expenditures,
including those requiring upgrading or replacing of existing USTs, ranging from
approximately $16.0 million to $20.0 million in the aggregate over the next
five fiscal years to comply with current federal and state UST regulations,
which capital expenditures could be reduced for locations (especially low
volume locations) which may be closed in lieu of the capital costs of
compliance.
 
  The Company's estimates of costs to be incurred for environmental assessment
and remediation and for UST upgrading and other regulatory compliance are based
on factors and assumptions that could change due to modifications of regulatory
requirements, detection of unanticipated environmental conditions, or other
unexpected circumstances. As a result, the actual costs incurred may vary
significantly from the estimates noted above.
 
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.
 
 
                                       28

 
                                   MANAGEMENT
 
OFFICERS AND DIRECTORS
 
  Set forth below is certain information regarding the directors and certain
officers of the Company:
 


         NAME              AGE                          TITLE
         ----              ---                          -----
                               
Frank Colaccino             43       President, Chief Executive Officer and a
                                      Class B Director
Mitchell J. Kupperman       42       Executive Vice President--Human Resources,
                                      Secretary and a Class B Director
Gregory G. Landry           35       Executive Vice President, Chief Financial
                                      Officer and a Class B Director
Robert B. Stein, Jr.        36       Executive Vice President--Store Operations
                                      and a Class B Director
Charles Nirenberg           70       Chairman of the Company and a Class B Di-
                                      rector
Frank W. Barrett            54       Class A Director
Theodore W. Leed            66       Class A Director
Thomas A. Chicoine          44       Vice President--Manufacturing and Distribu-
                                      tion
Lawrence R. Pellegrini      52       Vice President--Real Estate and Construc-
                                      tion
Gregory Wozniak             46       Vice President--Corporate Counsel
Elizabeth A. Yopko          35       Vice President--Corporate Communications

 
BACKGROUND OF OFFICERS AND DIRECTORS
 
  Except as noted below, each of the officers of the Company named above has
been employed by the Company for more than the last five (5) years, in areas
similar to or encompassed by their current responsibilities. Each director of
the Company is elected by the shareholders to serve a term of one year and
until the election and qualification of his successor. Each officer is elected
annually by the Board of Directors and serves at the pleasure of the Board.
 
  Mr. Colaccino was elected Chief Executive Officer of the Company effective on
March 12, 1992, and has served as President of the Company since January 1,
1989. He joined the Company in 1976 and was elected Vice President--Real Estate
in 1979, and was elected Vice President--Corporate Development in 1985. During
fiscal year 1989, Mr. Colaccino served as President of CONNA Corporation
(Southeast division). Mr. Colaccino is a member of the National Association of
Convenience Stores (NACS) Board of Directors.
 
  Dr. Kupperman joined the Company in 1983 as Director of Human Resources and
was elected Vice President--Human Resources in January, 1985. He was elected
Executive Vice President--Human Resources and Secretary of the Company as of
January 1, 1989. From January, 1989 until April, 1990, Dr. Kupperman also
served as the General Manager of the Company's Northeast division. Dr.
Kupperman holds a doctoral degree in Educational Administration.
 
  Mr. Landry was elected Executive Vice President of the Company in April, 1992
and has served as Chief Financial Officer since August, 1990. Mr. Landry also
served as Treasurer of the Company from July, 1989 to April, 1991. He joined
the Company in October, 1985 and served as Assistant Treasurer of the Company
and Treasurer of the Northeast division until his appointment as Vice
President--Finance of the Southeast division in 1987. Mr. Landry is a certified
public accountant.
 
  Mr. Stein was elected Executive Vice President--Store Operations in April,
1992 and has also served as Executive Vice President of the Midwest division
since December 1989. Prior to this, Mr. Stein served as Treasurer of the
Company from January, 1989 to June, 1989. He joined the Company in 1983 and
served as Assistant Treasurer and Treasurer of the Northeast division until he
became Vice President--Finance of the Midwest division in 1986. He is a member
of the Ohio Association of Convenience Stores Board of Directors.
 
                                       29

 
  Mr. Nirenberg is the founder of the Company. He served as its Chief Executive
Officer and President since its formation in 1957 until January, 1989, when he
resigned as President of the Company, and until March 12, 1992 when he resigned
as Chief Executive Officer. Mr. Nirenberg continues to serve as the Chairman of
the Company.
 
  Mr. Barrett has served as Senior Vice President for Springfield Institution
for Savings since January, 1994. He previously served as Senior Vice President
for Bank of Ireland First Holdings, Inc. from September, 1990 to December,
1993, as Senior Vice President, Connecticut National Bank from May, 1990 to
September, 1990, and as Senior Vice President for Shawmut Bank, N.A. from
January, 1988 to May, 1990. Mr. Barrett also served as President and Chief
Executive Officer of Shawmut Home Bank in Hartford, Connecticut from April,
1987 to December, 1987 and prior to that was Executive Vice President for
Shawmut Worcester County Bank in Worcester, Massachusetts.
 
  Dr. Leed has been for more than five years a professor (and is currently a
professor emeritus) of food marketing at the University of Massachusetts and a
lecturer, author and consultant to numerous companies on the subject of food
merchandising. He holds a doctoral degree in agricultural economics. Dr. Leed
is a principal of Group 7, Inc., a management consulting company.
 
  Mr. Chicoine was elected Vice President--Manufacturing and Distribution in
July, 1989. He previously served the Company in the same capacity from 1985 to
1987. Mr. Chicoine also served in managerial capacities at Massachusetts-based
dairies prior to 1982 and during a period between 1987 and 1989 before
rejoining the Company. He was also Vice President--Manufacturing of The Lawson
Company (Midwest division) from 1982 to 1985. Mr. Chicoine is a member of the
Milk Industry Foundation, Connecticut Food Association and the Southern
Association of Dairy Food Manufacturers.
 
  Mr. Pellegrini joined the Company in December, 1992, and was elected Vice
President--Real Estate. In March, 1993, he was elected Vice President--Real
Estate and Construction. He was formerly a partner in the consulting firm of
Pellegrini and Blair in Springfield, Massachusetts, and Director of Real
Estate, Northeast Division, for the Friendly Ice Cream Corporation.
 
  Mr. Wozniak was elected as a Vice President in December, 1992. He is an
attorney and has served as counsel to the Company since 1985. From 1977 to 1985
he served as counsel to The Lawson Company, which was acquired by the Company
in 1985.
 
  Ms. Yopko joined the Company in 1988 as Vice President--Human Resources of
the Midwest division, which position also encompassed public relations
responsibilities; she was elected Vice President--Corporate Communications of
the Company in April, 1991.
 
                              CERTAIN TRANSACTIONS
 
MANAGEMENT CONTROL OF THE COMPANY
 
  On March 12, 1992, DM Associates acquired 1,858,743 shares of the Class B
Common Stock of the Company from Charles Nirenberg, Chairman of the Company,
his wife Janet Nirenberg, and certain trusts and a foundation controlled by
them. The Class B Common Stock owned directly by DM Associates represents
approximately 66.9% of the issued and outstanding shares of Class B Common
Stock, and 60.9% of the total voting power of both classes of the Company's
Common Stock. The Company has two Classes of Common Stock issued and
outstanding--Class A Common Stock and Class B Common Stock. Each share of Class
B Common Stock has one vote per share, and each share of Class A Common Stock
has one-tenth of a vote per share. With respect to the election of directors,
holders of Class A Common Stock are entitled to elect 25% of the Board of
Directors (rounded up to the nearest whole number) to be elected by the holders
of Common Stock. As a result, DM Associates currently controls a sufficient
number of shares of Class B Common Stock to elect five of the seven members of
the Company's Board of Directors.
 
                                       30

 
  DM Associates is controlled by its general partner, DM Management Associates
("DM Management"), which itself is a general partnership. The general partners
of DM Management are: (i) Frank Colaccino, President and Chief Executive
Officer of the Company, who is the managing general partner of DM Management;
(ii) Mitchell J. Kupperman, Executive Vice President--Human Resources of the
Company; (iii) Gregory G. Landry, Executive Vice President and Chief Financial
Officer of the Company; and (iv) Robert B. Stein, Jr., Executive Vice
President--Store Operations of the Company. All of the general partners are
currently directors of the Company.
 
  In addition to the 1,858,743 shares of Class B Common Stock owned by DM
Associates, the general partners of DM Management beneficially own in the
aggregate 100,486 shares of Class B Common Stock and 207,140 shares of Class A
Common Stock (which amounts include currently exercisable stock options), which
represent in the aggregate approximately 3.9% of the total voting power of the
Company's Common Stock.
 
  The source of funds for DM Associates' acquisition of the 1,858,743 shares of
Class B Common Stock included the CDA Loan, which is secured by the 1,220,000
CDA Pledged Shares; 638,743 of the shares of Class B Common Stock owned by DM
Associates have not been pledged to secure the CDA Loan, and represent
approximately 20.9% of the total voting power of the Company's outstanding
Common Stock.
 
  The CDA Loan documents require the consent of CDA before the CDA Pledged
Shares can be voted for certain events or transactions, including dissolution
of the Company, mergers or other acquisitions of the Company or sales of assets
in one fiscal year exceeding $10.0 million other than in the ordinary course of
business or which would cause the Company's tangible capital to fall below
$11.0 million, and certain amendments to the Company's charter in a manner that
would effect a change in the preference or priority of the shares of Class B
Common Stock or which would violate or result in a default under the CDA Loan
Agreement. The CDA Loan Agreement also provides that a default of the CDA Loan
will occur upon certain events occurring. If a default occurs under the CDA
Loan Agreement, CDA has the right to sell or otherwise dispose of the CDA
Pledged Shares, which could result in a Change of Control of the Company.
Unless such a default occurs, DM Associates has the right to vote the CDA
Pledged Shares, subject to having received the required consents of CDA with
respect to certain matters including all those described above. A default under
the CDA loan agreement could occur if, among others, any of the following
events occur: (i) DM Associates fails to pay the entire principal amount and
all accrued interest on the CDA Loan by its July 31, 1997 maturity date; (ii)
the occurrence of an event of default by the Company under the Existing Credit
Agreement, the New Credit Agreement, or any substitute credit agreement
evidencing the Company's principal credit facility, together with either the
termination of any lending commitment thereunder or the acceleration of the
indebtedness due thereunder; and (iii) without CDA's consent: (a) the taking of
certain extraordinary actions by the Company; (b) a dissolution or liquidation
of the Company; or (c) a merger, consolidation or other acquisition of the
Company.
 
  In addition, the limited partnership agreement of DM Associates provides that
if the term of the limited partnership is extended beyond September 12, 1997,
any limited partner whose percentage interest in DM Associates is greater than
30% may sell all or a portion of his or its interest, subject to DM Associates'
right of first refusal to purchase such interest. If DM Associates and such
limited partner do not agree on the terms of acquiring such limited partner's
interest, and there is not a third party purchaser, such limited partner has
the right to: (i) demand the dissolution of DM Associates and the distribution
of its assets to its partners; or (ii) cause such assets to be sold. As DM
Associates' principal asset is its 1,858,743 shares of the Class B Common
Stock, if such a dissolution or sale occurs, a Change of Control could result.
 
                                       31

 
                    DESCRIPTION OF THE NEW CREDIT AGREEMENT
 
  The Company is party to a credit agreement with Chemical Bank (as successor
to Manufacturers Hanover Trust Company), as agent and a lender, along with
other lenders party thereto dated as of January 9, 1991, as amended (the
"Existing Credit Agreement"), which provides for a $35.0 million term loan and
a $15.0 million revolving credit loan, both of which mature on February 28,
1996. As of October 30, 1993, the outstanding balances of the term loan and
the revolving credit loan were $22.0 million, and $11.4 million, respectively.
Part of the net proceeds from the offering and sale of the Notes will be used
to repay the entire indebtedness outstanding under the Existing Credit
Agreement.
   
  On or prior to the completion of the offering made hereby, the Company
intends to enter into a new credit agreement with Fleet Bank, National
Association ("Fleet") and Society National Bank ("Society") (the "New Credit
Agreement"), pursuant and subject to the terms and conditions of a commitment
letter offered to the Company by Fleet and Society.     
   
  The following is a summary of the anticipated terms of the New Credit
Agreement and does not purport to be complete.     
   
  It is anticipated that the New Credit Agreement will provide for $30.0
million for revolving credit loans (including up to $15.0 million for letters
of credit). It is also anticipated that outstanding amounts under the New
Credit Agreement will be jointly and severally guaranteed by all of the
Guarantors on a senior basis, and will be secured by the pledge of all of the
outstanding capital stock of substantially all of the Company's subsidiaries,
all of which are Guarantors, and by amounts payable to the Company which arise
by, from, or were created by, loans or other extensions of credit by the
Company to any of its subsidiaries, but will not be secured by any other
assets of the Company or any assets of any of its subsidiaries. The proceeds
of the revolving credit loan under the New Credit Agreement will be available
to finance the Company's working capital requirements and for other general
corporate purposes. Letters of credit under the New Credit Agreement will be
used for general corporate purposes.     
   
  It is anticipated that the loans under the New Credit Agreement will
generally bear interest, at the Company's option, at the per annum rate of
either: (i) 0.25% above Fleet's prime rate, as set from time to time; and/or
(ii) from 2.00% to 2.50% above LIBOR. Loans (or portions thereof) which the
Company has elected to bear interest based upon LIBOR will bear interest at
the rate of: (A) 2.00% per annum above LIBOR, if the Company's ratio of total
indebtedness (as to be defined in the New Credit Agreement) to EBITDA for the
preceding four fiscal quarters was less than 3.25 to 1.0; (B) 2.25% per annum
above LIBOR, if such ratio was between 3.25 to 1.0 and 3.49 to 1.0; and (C)
2.50% per annum above LIBOR, if such ratio was 3.50 to 1.0 or more. At October
30, 1993, and for the four fiscal quarters then ended, as adjusted for the
transactions described under "Use of Proceeds," such loans would have borne
interest at the rate of 2.50% per annum above LIBOR. It is also anticipated
that all outstanding indebtedness under the New Credit Agreement will be due
and payable in full on the third anniversary of the execution date of the New
Credit Agreement and that, provided no default exists under the New Credit
Agreement, such period may be extended for up to two additional one-year
periods at the request of the Company and with the consent of the lenders
thereunder.     
 
 Covenants
   
  It is anticipated that the New Credit Agreement will contain certain
restrictive covenants, including, but not limited to, those limiting or
prohibiting incurring other indebtedness, liens, dividends, fundamental
changes (such as mergers, consolidations and liquidations), amendments to the
certificate of incorporation of the Company (except to increase authorized
shares), investments, loans and advances, optional payments and modifications
of debt instruments, sales or leases of assets not in the ordinary course of
business, guarantees, capital expenditures, sale and leaseback transactions,
and transactions with affiliates.     
   
  It is also anticipated that the New Credit Agreement will require the
Company to satisfy certain financial tests, including the maintenance of the
following financial ratios: (i) a ratio of earnings before interest expense,
rent and taxes ("EBIRT") to interest expense and rent of not less than 1.0 to
1.0; (ii) a ratio of EBITDA less capital expenditures paid in cash to interest
expense of not less than 1.0 to 1.0; and (iii) a ratio of maximum total
indebtedness to EBITDA of not more than 4.25 to 1.0 through the end of the
third quarter of the Company's 1995 fiscal year; 4.0 to 1.0 thereafter through
the end of the Company's 1996 fiscal year; and 3.75 to 1.0 thereafter.
Additionally, the Company will be required to maintain a minimum net worth.
    
                                      32

 
   
  At October 30, 1993, and for the four fiscal quarters then ended, as
adjusted for the transactions described under "Use of Proceeds," the Company
would have been in compliance with all of the foregoing financial ratios and
would have been in compliance with the foregoing net worth maintenance
requirement.     
 
 Events of Default
   
  The following, among others, are expected to constitute events of default
under the New Credit Agreement: (i) the Company's nonpayment of any amount due
or payable under the New Credit Agreement or any related loan documents; (ii)
a breach, following any applicable cure periods, of any covenant or agreement
under the New Credit Agreement or any related loan documents by the Company or
any of its subsidiaries; (iii) the Company's or any of its subsidiaries'
nonpayment of any other indebtedness which has an aggregate principal amount
in excess of a specified aggregate principal amount; (iv) the occurrence of
certain events by which such other indebtedness becomes due and payable prior
to its expressed maturity or expiration date; (v) a change of control of the
Company; (vi) certain events of voluntary or involuntary bankruptcy,
insolvency, receivership or reorganization of the Company or any of its
subsidiaries; (vii) acceleration of the CDA Loan; and (viii) judgments or
decrees entered against the Company or any subsidiary of the Company involving
an aggregate liability of a specified aggregate principal amount.     
 
                           DESCRIPTION OF THE NOTES
   
  The Notes will be issued under the Indenture, dated as of March 3, 1994 (the
"Indenture"), among the Company, each of the Guarantors and Society National
Bank, as trustee (the "Trustee"), a copy of the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary, which describes certain provisions of the Indenture and the
Notes, does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and all of the provisions of the Indenture and the Notes, including
the definitions therein of terms not defined in this Prospectus and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. Certain capitalized terms used below and in the
Indenture are defined under "Certain Definitions" below, unless otherwise
noted. References below to Sections refer to Sections of the Indenture.     
 
  The Notes will be general unsecured senior subordinated obligations of the
Company, subordinate in right of payment to all Senior Indebtedness of the
Company, senior in right of payment to all Subordinated Indebtedness of the
Company and pari passu in right of payment to all senior subordinated
indebtedness of the Company. As described below under "Guarantees," the Notes
will be guaranteed, on a senior subordinated basis, by each of the Guarantors.
The Guarantee of each Guarantor will be general unsecured senior subordinated
obligations of such respective Guarantor, subordinate in right of payment to
all Guarantor Senior Indebtedness of such Guarantor, senior in right of
payment to all Guarantor Subordinated Indebtedness of such Guarantor and pari
passu in right of payment to all senior subordinated indebtedness of such
Guarantor.
 
GENERAL
   
  The Notes are limited in aggregate principal amount to $75,000,000 and will
mature on March 15, 2004. The Notes will bear interest at the rate per annum
stated on the cover page hereof from March 3, 1994, payable semi-annually in
arrears on March 15 and September 15 of each year, commencing September 15,
1994, to the persons who are registered holders thereof at the close of
business on the March 1 or September 1 immediately preceding such interest
payment date.     
 
  Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months. Principal of, premium, if any, and interest on the Notes
will be payable at the office of the Trustee, but, at the option of the
Company, interest may be paid by check mailed to the registered holders at
their registered addresses. The Notes will be transferable and exchangeable at
the office of the Trustee and will be issued in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple thereof.
 
                                      33

 
REDEMPTION
   
  Optional Redemption. Except as provided in the next succeeding paragraph in
connection with a Public Equity Offering, the Notes may not be redeemed at the
option of the Company prior to March 15, 1999. On or after such date, the Notes
may be redeemed at the option of the Company, in whole, or from time to time in
part, at the following redemption prices (expressed in percentages of the
principal amount), plus accrued interest to the date of redemption, if redeemed
during the twelve-month period beginning March 15 of the years indicated below.
(Section 3.01)     
 


             YEAR                           PERCENTAGE
             ----                           ----------
                                         
             1999..........................  104.750
             2000..........................  103.125
             2001..........................  101.500
             2002 and thereafter...........  100.000

   
  In addition to the optional redemption of the Notes in accordance with the
provisions of the preceding paragraph, up to $20 million aggregate principal
amount of the Notes will be redeemable, at the option of the Company in whole
or in part, with the Net Proceeds of a Public Equity Offering, at a redemption
price equal to 110% of the principal amount of the Notes to be redeemed, plus
accrued and unpaid interest to the date of redemption; provided, however, that
no such optional redemption may be effected on or after the third anniversary
of the Issue Date. (Section 3.02) The New Credit Agreement may restrict the
Company's ability to redeem the Notes as described above.     
 
CHANGE OF CONTROL
 
  At such time as any of the following events has occurred, each of which is
deemed to be a "Change of Control" under the Indenture, each holder of Notes
will have the right to require the Company to repurchase all or any part of
such holder's Notes at a repurchase price equal to 101% of the principal amount
thereof plus accrued interest to the date of repurchase: (i) any "person" or
"group" (as such terms are used in Section 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders or any Person or Persons
controlled by one or more Permitted Holders, is or becomes the "beneficial
owner", directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company; (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the shareholders of
the Company was approved by the Directors then still in office who either were
Directors at the beginning of such period or whose election or nomination for
Director was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; (iii) the
direct or indirect, sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company to any "person" (as such term is
used in Section 13(d) or 14(d) of the Exchange Act), provided that the
foregoing shall not apply to the granting of Liens on such assets to the extent
permitted by the Indenture; (iv) the Permitted Holders cease to control at
least 10% of the total voting power of the Voting Stock of the Company; (v) any
acceleration of any Indebtedness under the New Credit Agreement occurs as a
result of a change in the beneficial ownership of the Capital Stock of the
Company; or (vi) the Company consolidates with or merges into another
corporation or any Person consolidates with or merges into the Company, in
either event pursuant to a transaction in which either (A) the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property (other than any such transaction where the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving corporation which is neither Redeemable Stock nor Exchangeable Stock)
or (B) the holders of a majority of the voting power of the Voting Stock of the
Company immediately prior to such transaction own, directly or indirectly, less
than a majority of the voting power of the Voting Stock of the surviving
corporation immediately after such transaction. There is little case law
interpreting the phrase "all or substantially all" in the context of an
indenture. Because there is no precise established definition of this phrase,
the ability of a holder of Notes to require the Company to repurchase such
Notes as a result of a sale, lease, exchange or other transfer of all or
substantially all of the Company's assets may be uncertain. (Section 3.08)
 
                                       34

 
  Within 30 days following any Change of Control, the Company will mail a
notice to each holder of Notes stating: (i) that a Change of Control has
occurred and that such holder has the right to require the Company to
repurchase all or any part of such holder's Notes at 101% of the aggregate
principal amount thereof plus accrued interest to the date of repurchase; (ii)
the circumstances and relevant facts known to the Company regarding such Change
of Control (including, to the extent applicable, information with respect to
pro forma historical income, cash flow and capitalization after giving effect
to such Change of Control); (iii) the date of repurchase (which will be no
earlier than 30 days nor later than 60 days from the date such notice is mailed
in the event of a Change of Control); and (iv) the instructions, determined by
the Company consistent with the Indenture, that a holder must follow in order
to have its Notes repurchased. (Section 3.08(b))
 
  The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder which may
then be applicable in connection with the repurchase of the Notes as a result
of a Change of Control. The Change of Control repurchase feature of the Notes
may in certain circumstances make more difficult or discourage a takeover of
the Company and, thus, the removal of incumbent management. (Section 4.23)
 
  If a Change of Control were to occur, the Company's ability to pay cash to
the holders of Notes upon such repurchase may be limited by the Company's then
existing financial resources, and there can be no assurance that the Company
would have sufficient funds to pay the repurchase price for all Notes tendered
by the holders thereof. Failure of the Company to pay the repurchase price
would create an Event of Default (as defined below in "--Defaults") with
respect to the Notes. (Section 6.01(1)) The New Credit Agreement may restrict
the Company's ability to repurchase the Notes following a Change of Control.
(Section 3.08)
 
  The provisions contained in the Indenture relative to the Company's
obligation to make an offer to repurchase the Notes as a result of a Change of
Control may only be waived or modified with the written consent of the holders
of at least a majority in principal amount of the Notes. (Section 9.02)
 
SELECTION AND NOTICE
 
  In the event that less than all of the Notes are to be redeemed at any time,
selection of Notes for redemption will be made by the Trustee in compliance
with the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no Notes shall be redeemed in part in
amounts of less than $1,000. Notice of redemption shall be mailed by first
class mail by the Company or, at the request of the Company, the Trustee at
least 30 but not more than 60 days before the redemption date (which may, in
the case of a redemption in connection with a Public Equity Offering, be
adjusted to the extent necessary and appropriate under the circumstances and
based solely on the timing of the consummation of the Public Equity Offering)
to each holder of Notes to be redeemed at its registered address. If any Note
is to be redeemed in part, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption (unless the Company shall default in
the payment of the redemption price or accrued interest). (Section 3.03)
 
SUBORDINATION
 
  The Indebtedness evidenced by the Notes (including principal, premium, if
any, and interest) is subordinated in right of payment to the prior payment in
full of all Senior Indebtedness. (Section 10.01)
 
  Upon any payment or distribution of assets or securities of the Company in
any dissolution, winding up, total or partial liquidation or reorganization of
the Company, payment of the principal of, premium, if any, and interest on the
Notes will be subordinated, to the extent and in the manner set forth in the
Indenture, to
 
                                       35

 
the prior payment in full of all Senior Indebtedness, including any interest
accruing on such Senior Indebtedness subsequent to the commencement of a
bankruptcy, insolvency or similar proceeding. Upon any default by the Company
in the payment of the principal of, premium, if any, or interest on Senior
Indebtedness, when the same becomes due, no payment may be made on or in
respect of the Notes until such default has been cured or waived. The Indenture
also provides that no payment may be made by the Company upon or in respect of
the Notes for the period specified below (the "Payment Blockage Period") during
the continuance of any non-payment event of default with respect to Senior
Indebtedness under the New Credit Agreement ("Significant Senior Indebtedness")
pursuant to which the maturity thereof may be accelerated. The Payment Blockage
Period shall commence on the earlier of (i) receipt by the Trustee of notice
from the trustee or representative for the holders of any Significant Senior
Indebtedness (or the holders of at least a majority in principal amount of such
Significant Senior Indebtedness then outstanding) or (ii) if such non-payment
event of default results from the acceleration of the Notes, the date of such
acceleration, and shall end 179 days thereafter (unless such Payment Blockage
period shall be earlier terminated). In no event will a Payment Blockage Period
extend beyond 179 days from the date the payment on the Notes was due. Not more
than one Payment Blockage Period with respect to the Notes may be commenced
during any period of 360 consecutive days. No event of default that existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Significant Senior Indebtedness initiating such period
shall be, or be made, the basis for the commencement of a second Payment
Blockage Period by the representative for or the holders of such Significant
Senior Indebtedness whether or not within a period of 360 consecutive days.
(Section 10.02)
 
  As a result of the subordination provisions described above, in the event of
insolvency of the Company, creditors of the Company who are not holders of
Senior Indebtedness may recover less ratably than holders of Senior
Indebtedness and may recover more ratably than holders of the Notes and the
Company may be unable to make all payments due under the Notes.
 
  As of October 30, 1993, after giving effect to the issuance of the Notes and
the application of the net proceeds therefrom, the aggregate amount of Senior
Indebtedness outstanding would have been $8.3 million. In the future, the
Company may issue additional Senior Indebtedness to refinance existing
indebtedness or for other corporate purposes. See "--Certain Covenants--
Limitation on Additional Indebtedness and New Operating Leases."
 
CERTAIN COVENANTS
 
  Limitation on Additional Indebtedness and New Operating Leases. The Company
may not, and may not permit any of its Subsidiaries to, Incur, directly or
indirectly, any Indebtedness (including Acquired Indebtedness) or enter into
any New Operating Lease, unless the Consolidated Fixed Charge Coverage Ratio
for the Reference Period, determined on the date of issuance of such
Indebtedness or the date of execution of such New Operating Lease, as the case
may be, and after giving effect to: (i) Incurrence of such Indebtedness and (if
applicable) the application of the Net Proceeds thereof to refinance other
Indebtedness as if such Indebtedness was issued and the application of such Net
Proceeds occurred at the beginning of the Reference Period; (ii) Incurrence and
retirement of any other Indebtedness since the last day of the most recent
fiscal quarter of the Company contained in the Reference Period as if such
Indebtedness was Incurred or retired at the beginning of the Reference Period;
and (iii) the execution of such New Operating Lease and any other New Operating
Leases executed since the last day of the most recent fiscal quarter of the
Company contained in the Reference Period as if such New Operating Lease and
any such other New Operating Leases were executed at the beginning of the
Reference Period (it being understood that, for purposes of determining the
Consolidated Fixed Charge Coverage Ratio, New Operating Lease payments shall be
included in Consolidated Operating Lease Payments), is equal to or greater than
the ratio of 2.0 to 1.0. (Section 4.06)
 
  Notwithstanding the preceding paragraph, the Company and the Subsidiaries may
Incur Permitted Indebtedness. (Section 4.06)
 
 
                                       36

 
  Limitation on Restricted Payments. The Company may not, and may not permit
any Subsidiary, directly or indirectly, to (i) declare or pay any dividend or
make any distribution in respect of the Company's or any Subsidiary's Capital
Stock or to the direct or indirect holders of the Company's or any Subsidiary's
Capital Stock (except dividends or distributions payable solely in the
Company's Non-Convertible Capital Stock or in options, warrants or other rights
to purchase the Company's Non-Convertible Capital Stock and except dividends or
distributions payable from a Subsidiary to the Company or a Wholly Owned
Subsidiary which is a Guarantor), (ii) purchase, redeem or otherwise acquire or
retire for value, any Capital Stock of the Company or any Subsidiary, (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment, any Subordinated Indebtedness of the Company or any Indebtedness of a
Subsidiary (other than Guarantor Senior Indebtedness and other than the
Company's 14.25% Subordinated Debentures due 2000) or (iv) make any Investment
in any Subsidiary (except for prepayments of leases of underperforming or
nonutilized convenience stores in the ordinary course of business), the Non-
Recourse Subsidiary (except as permitted by clause (iii) of "--Limitations on
Investments" below) or any other Affiliate of the Company (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being hereinafter referred to as a "Restricted
Payment"), unless: (A) no Default or Event of Default will have occurred and be
continuing at the time or as a consequence of such Restricted Payment; (B) at
the time of such Restricted Payment, the Company could incur an additional
$1.00 of Indebtedness (not including Permitted Indebtedness) under the covenant
described under "Limitation on Additional Indebtedness"; and (C) such
Restricted Payment, together with the aggregate of all other Restricted
Payments made since May 1, 1993 would not exceed the sum of (x) 50% of
Consolidated Net Income (or if Consolidated Net Income is a deficit minus 100%
of such deficit) accrued on a cumulative basis from May 1, 1993 to the end of
the most recent fiscal quarter ending prior to the date of such proposed
Restricted Payment, calculated on a cumulative basis as if such period were a
single accounting period; (y) the aggregate Net Proceeds received by the
Company from any Person (other than a Subsidiary and the Non-Recourse
Subsidiary) subsequent to the Issue Date (1) as a result of the issuance of
Capital Stock of the Company (other than Redeemable Stock or Exchangeable
Stock) or (2) as a result of a capital contribution from its shareholders, but,
with respect to any proceeds received by the Company from an employee stock
ownership plan that Incurs any Indebtedness, only to the extent that any such
proceeds are equal to any increase in the Consolidated Net Worth of the Company
resulting from principal repayments made by such employee stock ownership plan
with respect to the Indebtedness Incurred by it to finance the purchase of such
Capital Stock; and (z) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary) subsequent to the Issue Date of any Indebtedness of the
Company convertible into or exchangeable for Capital Stock (other than
Redeemable Stock or Exchangeable Stock) of the Company. (Section 4.07)
 
  The foregoing provisions do not prohibit (i) the payment of any dividend in
respect of the Company's or any Subsidiary's Capital Stock within 60 days after
the date of declaration thereof, if on such date of declaration such payment
complied with the provisions of the Indenture and provided that at the time of
payment no other Default or Event of Default has occurred and is continuing;
(ii) the purchase, redemption, acquisition or retirement of any Indebtedness
with the Incurrence of Refinancing Indebtedness permitted under "Limitation on
Additional Indebtedness and New Operating Leases"; (iii) any dividend on shares
of the Company's or any Subsidiary's Capital Stock payable in shares of the
Company's or such Subsidiary's Capital Stock (other than Redeemable Stock or
Exchangeable Stock); and (iv) an Investment by the Company in a Wholly-Owned
Subsidiary which is a Guarantor or a Person who will become a Wholly-Owned
Subsidiary which is a Guarantor as a result of such Investment. (Section 4.07)
 
  Limitation on Investments. The Company may not, and may not permit any
Subsidiary, directly or indirectly, to make any Investment other than (i)
Permitted Investments; (ii) an Investment constituting a Restricted Payment if
such Restricted Payment is permitted by the covenant described under
"Limitation on Restricted Payments"; or (iii) Investments in the Non-Recourse
Subsidiary in an amount not to exceed $2.5 million. (Section 4.08)
 
                                       37

 
  Limitation on Liens. The Company may not, and may not permit any Subsidiary,
directly or indirectly, to create, incur, assume or permit to exist any Lien
upon any of its or any Subsidiary's property or assets now owned or hereafter
acquired, other than Liens that are: (i) outstanding immediately prior to the
issuance of the Notes; (ii) Liens securing Indebtedness of a Subsidiary owing
to the Company or a Wholly Owned Subsidiary which is a Guarantor; (iii) Liens
securing Senior Indebtedness of the Company permitted to be Incurred by the
covenant described under "Limitation on Additional Indebtedness and New
Operating Leases"; (iv) Permitted Liens; (v) Liens incurred in connection with
a Sale-Leaseback Transaction permitted under "Limitation on Sale-Leaseback
Transactions"; (vi) Liens on property of a Person existing at the time such
Person is acquired by, merged into or consolidated with the Company or any
Subsidiary (except to the extent such Liens were incurred in connection with,
or in contemplation of, such acquisition, merger or consolidation) which Lien
is not applicable to any Person or the properties or assets of any Person,
other than the Person, or the property or asset of the Person, so acquired; and
(vii) any extension, renewal or replacement (including successive extensions,
renewals or replacements) of Liens permitted by any of clauses (i) through (vi)
above ("Existing Liens"), so long as (A) the Lien does not extend beyond
property or assets of the Company and its Subsidiaries subject to the Existing
Lien and improvements and construction on such property or assets, and (B) the
Indebtedness secured by the Lien does not exceed the Indebtedness secured at
the time by the Existing Lien. (Section 4.09)
 
  Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company may not, and may not permit any Subsidiary to, create
or otherwise cause or permit to exist or become effective any encumbrance or
restriction of any kind which restricts the ability of any such Subsidiary to:
(i) pay dividends or make any other distributions on such Subsidiary's Capital
Stock or pay any Indebtedness or other obligation owed to the Company or any
Subsidiary, (ii) make any loans or advances to the Company or any Subsidiary,
(iii) guaranty the Notes or any renewals or refinancings thereof or (iv)
transfer any of its property or assets to the Company or any Subsidiary,
except, in each case, for such encumbrances or restrictions existing under or
by reason of (1) applicable law, (2) the Indenture, (3) customary nonassignment
provisions of any lease governing a leasehold interest of the Company or any
Subsidiary, (4) any instrument governing Acquired Indebtedness (except to the
extent such Indebtedness was Incurred in connection with, or in contemplation
of, such acquisition) as in effect at the time of acquisition, which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, (5) Existing Indebtedness, or (6) permitted
Refinancing Indebtedness provided that the encumbrances or restrictions
contained in the agreements governing such Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced, as in effect on the Issue Date. (Section 4.10)
 
  Limitation on Sale-Leaseback Transactions. The Company will not, and will not
permit any Subsidiary to, enter into any Sale-Leaseback Transaction unless at
least one of the following conditions is satisfied: (i) under the provisions
described under "Limitation on Liens" and "Limitation on Additional
Indebtedness and New Operating Leases," the Company or a Subsidiary could
create a Lien on the property to secure Indebtedness in an amount equal to the
Attributable Indebtedness in connection with such Sale-Leaseback Transaction;
or (ii) the net proceeds of such Sale-Leaseback Transaction are at least equal
to the fair market value of such property as determined in good faith by the
Board of Directors of the Company. (Section 4.11)
 
  Limitation on Sales of Assets. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, make any Asset Disposition unless the
Company (or such Subsidiary, as the case may be) receives at the time of such
Asset Disposition consideration which (x) is paid at least 85% in cash and (y)
is at least equal to the fair market value (including the value of all noncash
consideration), as determined in good faith by, and evidenced by a resolution
of, the Board of Directors, if the consideration to be received by the Company
is equal to or greater than $1 million (or, if the consideration to be received
by the Company is less than $1 million but greater than $25,000 (except in the
case of Asset Dispositions to franchisees in the ordinary course of business),
as certified in good faith by two Officers, one of whom shall be the President,
in an Officer's Certificate delivered to the Trustee within 30 Business Days
following such Asset Disposition (no
 
                                       38

 
certificate being required for sales as to which the consideration is $25,000
or less), of the shares and assets subject to such Asset Disposition; provided,
however, that the requirement set forth in clause (x) above shall not apply to
any sale, lease, sublease, transfer or other disposition of stores to
franchisees in the ordinary course of business or of individual
underperforming, nonutilized or obsolete assets by the Company or any
Subsidiary in the ordinary course of business. Within 210 days from the date of
such Asset Disposition (the "Disposition Period"), the Company (or such
Subsidiary, as the case may be) may apply all or any portion of the Net
Available Cash Proceeds from such Asset Disposition to (x) the prepayment of
Senior Indebtedness or (y) an investment in Fixed Assets in the same or
substantially similar line of business as the assets that were the subject of
such Asset Disposition, provided that, if such Net Available Cash Proceeds are
applied to the prepayment of Senior Indebtedness, the related loan commitment,
if any, shall be permanently reduced, except that in the event the Company
repays revolving loans outstanding under the New Credit Agreement with such Net
Available Cash Proceeds, the related loan commitment need not be permanently
reduced so long as the Company reborrows the full amount of the amount so
prepaid and invests such amount in Fixed Assets in the same or substantially
similar line of business as the assets that were the subject of such Asset
Disposition within the Disposition Period. Without limiting the lines of
business which are considered the same or substantially similar for the
purposes hereof, the sale of gasoline, the operation of convenience stores, the
franchising of convenience stores, and the manufacturing, processing and
distribution businesses currently conducted by the Company will be deemed to
qualify as the same or substantially similar lines of business. Notwithstanding
the foregoing, if the Company enters into a written agreement within the
Disposition Period pursuant to which the Company commits to reinvest such Net
Available Cash Proceeds in Fixed Assets in the same or substantially similar
line of business as the assets that were the subject of such Asset Disposition,
the Company shall be permitted to reinvest such Net Available Cash Proceeds
within 90 days from the date of termination of the Disposition Period in
accordance with such written agreement. Any Net Available Cash Proceeds from
any such Asset Disposition that are not applied or invested as provided in the
preceding two sentences shall constitute and be referred to herein as "Excess
Proceeds." When (x) any Excess Proceeds arise from the sale, issuance or other
disposition of Capital Stock of a Subsidiary or the Non-Recourse Subsidiary
(except to a Wholly Owned Subsidiary which is a Guarantor) or the sale or other
disposition of all or substantially all of the assets of a Subsidiary or the
Non-Recourse Subsidiary in one transaction or a series of related transactions
(except to a Wholly Owned Subsidiary which is a Guarantor) or (y) the aggregate
amount of Excess Proceeds from all Asset Dispositions (other than those
referred to in clause (x) of this sentence) exceeds $5.0 million, the Company
shall make an Offer (as defined in the following paragraph) to purchase Notes
pursuant to and subject to the conditions of the following paragraph.
Notwithstanding the foregoing, an aggregate of $1.0 million of Net Available
Cash Proceeds received by the Company and/or the Subsidiaries in any fiscal
year from Asset Dispositions, not involving the sale, issuance or other
disposition of Capital Stock of a Subsidiary or the Non-Recourse Subsidiary or
the sale or other disposition of all or substantially all of the assets of a
Subsidiary or the Non-Recourse Subsidiary, shall not be subject to the covenant
described in this paragraph. (Section 4.16)
 
  In the event of an Asset Disposition that requires the purchase of Notes
pursuant to the preceding paragraph, the Company will be required to make an
offer for the Notes (an "Offer") and repurchase Notes tendered pursuant thereto
in an amount equal to the aggregate amount of Excess Proceeds, at a repurchase
price in cash equal to 100% of their principal amount plus accrued interest to
the date of repurchase in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. Upon completion
of the repurchase, if any, of Notes pursuant to the Offer, the amount of Excess
Proceeds shall be reset to zero. If the aggregate repurchase price of Notes
tendered pursuant to the Offer is less than the Excess Proceeds allotted to the
repurchase of the Notes, the Company may use the remaining Excess Proceeds for
general corporate purposes. (Section 3.09)
 
  Notwithstanding the foregoing, the Company may not, and may not permit any
Subsidiary to, directly or indirectly, make any Asset Disposition of any of the
Capital Stock of a Subsidiary or the Non-Recourse Subsidiary except pursuant to
an Asset Disposition of all of the Capital Stock of such Subsidiary or the Non-
Recourse Subsidiary. (Section 4.16)
 
                                       39

 
  Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Subsidiary to, directly or indirectly, enter into or permit to
exist any transaction or series of related transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company or of any Subsidiary (other than a
Wholly Owned Subsidiary which is a Guarantor) on terms that are less favorable
to the Company or such Subsidiary, as the case may be, than those which might
be obtained at the time of such transaction from unrelated third parties. This
provision will not prohibit the payment of reasonable and customary directors'
fees to directors who are not employees of the Company or the payment of
reasonable compensation to employees of the Company in the ordinary course of
business. Without in any way limiting the foregoing restriction, the Company
will not, and will not permit any Subsidiary to, directly or indirectly, enter
into or permit to exist any transactions or series of related transactions
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company or of any
Subsidiary (other than a Wholly Owned Subsidiary which is a Guarantor)
involving aggregate payments in excess of $250,000 unless: (i) a committee of
independent members of the Board of Directors of the Company shall approve by
resolution certifying that such transaction or series of transactions comply
with the first sentence of the covenant described in this paragraph; and (ii)
with respect to (A) a transaction or series of transactions involving aggregate
payments equal to or greater than $2.0 million, the Company also receives a
written opinion from a nationally-recognized investment bank with total assets
in excess of $1.0 billion that such transaction or series of transactions is
fair to the Company from a financial point of view; or (B) any purchase, sale,
lease or exchange of real property or Fixed Assets involving aggregate payments
equal to or greater than $2.0 million, in lieu of the opinion referred to in
clause (A), at the option of the Company, the Company also receives an opinion
from a qualified appraisal company, that the value of the property sold,
purchased, leased or exchanged by the Company or any Subsidiary is
substantially equal to (or more favorable to the Company than) the value of the
consideration provided by or to the Company, as the case may be, in respect
thereof. (Section 4.12)
 
  Limitation on Other Senior Subordinated Indebtedness. The Company will not
incur any Indebtedness which is senior in right of payment to the Notes and is
subordinate or junior in right of payment to the Company's Senior Indebtedness.
In addition, the Indenture provides that no Guarantor will incur any
Indebtedness which is senior in right of any payment to such Guarantor's
obligations under its Guarantee and the Indenture and which is subordinate or
junior in right of payment to Guarantor Senior Indebtedness of such Guarantor.
(Section 4.13)
 
  Additional Guarantors. If the Company or any Subsidiary makes any Investment
having a fair market value exceeding $1,000, in one or a series of related
transactions, in any Subsidiary which is not a Guarantor, or any Subsidiary
which is not a Guarantor holds property or assets (including, without
limitation, cash, businesses, divisions, real property, assets or equipment)
having a fair market value exceeding $1,000, the Company shall cause such
Subsidiary to (i) execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(ii) deliver to the Trustee an Opinion of Counsel that such supplemental
indenture has been duly executed and delivered by such Subsidiary. Thereafter,
such Subsidiary shall be a Guarantor for all purposes of the Indenture (Section
4.14)
 
  Use of Proceeds. The proceeds of the Notes will be used by the Company in the
manner described in this Prospectus. No part of such proceeds will be used to
purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock. Neither the issuance of any
Note nor the use of the proceeds thereof will violate or be inconsistent with
the provisions of Regulations G, T, U or X of the Board of Governors of the
Federal Reserve System. (Section 4.15)
 
  SEC Reports. The Company and each Guarantor will file with the Trustee and
provide the holders of Notes, within 15 days after it files them with the
Commission, copies of its annual report and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Company or any
Guarantor is required to file
 
                                       40

 
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Company may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall continue to file with the Commission and provide the Trustee and the
holders of Notes with such annual reports and such information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which are specified in
Sections 13 or 15(d) of the Exchange Act. The Company and each Guarantor also
shall comply with the provisions of Section 314(a) of the TIA. (Section 4.02)
 
SUCCESSOR COMPANY
 
  Subject to the provisions set forth in the fourth paragraph under
"Guarantees" below, neither the Company nor any Guarantor may consolidate with
or merge with or into, or sell, convey, transfer or lease all or substantially
all of its assets (either in one transaction or a series of transactions) to,
any Person unless: (i) the Person formed by or surviving such consolidation or
merger (if other than the Company or such Guarantor, as the case may be), or to
which such sale, conveyance, transfer or lease shall have been made is
organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and such entity expressly assumes by
a supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company or such
Guarantor, as the case may be, under the Notes or the Guarantees, as the case
may be, and the Indenture; (ii) immediately prior to and after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
such Person or any Subsidiary (including any Guarantor) as a result of such
transaction as having been incurred by such Person or such Subsidiary
(including any Guarantor) at the time of such transaction), no Default or Event
of Default shall have occurred and be continuing; (iii) except with respect to
consolidations, mergers, sales, conveyances, transfers and leases between
Guarantors, immediately after giving effect to such transaction, on a pro forma
basis, such Person would be able to incur an additional $1.00 of Indebtedness
(other than Permitted Indebtedness) under "--Certain Covenants--Limitation on
Additional Indebtedness and New Operating Leases;" (iv) if the Company is a
party to such consolidation, merger, sale, conveyance, transfer and lease,
immediately after giving effect to such transaction, on a pro forma basis, such
Person has Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(v) if such Guarantor is a party to such consolidation, merger, sale,
conveyance, transfer or lease, immediately after giving effect to such
transaction, on a pro forma basis, the Company has Consolidated Net Worth in an
amount which is not less than its Consolidated Net Worth immediately prior to
such transaction; and (vi) the Company, or such Guarantor, as the case may be,
delivers to the Trustee an Officers' Certificate and an Opinion of Counsel,
each stating that such consolidation, merger, sale, conveyance, transfer or
lease and such supplemental indenture comply with the Indenture. Such Person
will be the successor Company, or a successor Guarantor, as the case may be,
but in the case of a sale, conveyance, transfer or lease of all or
substantially all of the assets of the Company or Guarantor, (i) the
predecessor Company will not be released from its obligation to pay the
principal of, premium, if any, and interest on the Notes, and (ii) the
predecessor Guarantor will not be released from its obligation under its
Guarantee. (Section 5.01)
 
DEFAULTS
 
  An Event of Default is defined in the Indenture as: (i) default for 30 days
in the payment of interest on any Note when due; (ii) default in the payment of
principal of, or premium, if any, on any Note when due at its Stated Maturity,
upon redemption, upon required repurchase, upon declaration or otherwise,
including, without limitation, the failure to repurchase Notes when required as
described under "Change of Control" and "--Certain Covenants--Limitation on
Sale of Assets" above; (iii) default in the performance of, or failure to
comply with, any other covenant or agreement contained in the Notes or the
Indenture for a period of 30 days after written notice by the Trustee or
holders of at least 25% of the aggregate principal amount of Notes outstanding;
(iv) the failure of the Company, any of its Subsidiaries (including any
Guarantor) or the Non-Recourse Subsidiary to pay the principal of any
Indebtedness with a principal amount then outstanding in
 
                                       41

 
excess of $500,000, individually or in the aggregate, when the same becomes due
and payable at final maturity and such failure shall continue after any
applicable grace period specified in the agreement relating to such
Indebtedness; or a default on any such Indebtedness which results in such
Indebtedness becoming due and payable prior to its Stated Maturity; (v) certain
events of bankruptcy, insolvency or reorganization of the Company, a Subsidiary
(including any Guarantor) or the Non-Recourse Subsidiary; (vi) any judgment or
decree for the payment of money in excess of $500,000 (to the extent not
covered by insurance) is rendered against the Company, a Subsidiary (including
any Guarantor) or the Non-Recourse Subsidiary and is not discharged and either
(A) an enforcement proceeding has been commenced by a creditor upon such
judgment or decree or (B) there is a period of 45 days following such judgment
or decree during which such judgment or decree is not discharged, waived or the
execution thereof stayed; (vii) any of the Guarantees shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect, or any Guarantor, or any person acting
by or on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Guaranty; (viii) failure by the Company or any Subsidiary to comply with
the restrictions set forth under "Successor Company" or "Certain Covenants--
Limitations on Sales of Assets" above; or (ix) failure by the Company to comply
with the covenant described under "Use of Proceeds." (Section 6.01)
 
  If an Event of Default relating to certain events of bankruptcy, insolvency
or reorganization of the Company, a Subsidiary (including any Guarantor) or the
Non-Recourse Subsidiary occurs and is continuing, the principal of and interest
on all the Notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. If any other Event of Default occurs and is continuing, the
Trustee or the holders of at least 25% in principal amount of the outstanding
Notes may declare the principal of and accrued but unpaid interest on all the
Notes to be due and payable. Upon such a declaration, such principal and
interest shall be immediately due and payable. Under certain circumstances, the
holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences. (Section
6.02)
 
  Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium, if any, or interest when due, no holder of a
Note may pursue any remedy with respect to the Indenture, the Guarantees or the
Notes unless (i) such holder has previously given the Trustee notice that an
Event of Default is continuing, (ii) holders of at least 25% in aggregate
principal amount of the Notes have requested the Trustee to pursue the remedy,
(iii) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense, (iv) the Trustee has not complied with
such request within 60 days after the receipt thereof and the offer of security
or indemnity and (v) the holders of a majority in aggregate principal amount of
the Notes have not given the Trustee a direction inconsistent with such request
within such 60-day period. Subject to certain restrictions, the holders of a
majority in principal amount of the Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other holder of a Note or that would involve the Trustee in
personal liability. (Sections 4.03, 6.05, 6.06 and 7.01)
 
  The Indenture provides that if a Default occurs and is continuing and is
known to an officer in the Corporate Trust Department of the Trustee, the
Trustee must mail to each holder of the Notes notice of the Default within 60
days after it occurs. Except in the case of a Default in the payment of
principal of, premium, if any, or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its Trust officers determines
that withholding notice is in the interest of the holders of the Notes. In
addition, the Company is required to deliver to the Trustee, within 90 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The
 
                                       42

 
Company also is required to deliver to the Trustee, within 10 days after it
obtains knowledge thereof, written notice of any event which would constitute a
Default, its status and what action the Company is taking or proposes to take
in respect thereof. (Sections 6.02, 7.05 and 7.06)
 
GUARANTEES
 
  The principal of, premium (if any) and interest on the Notes and all other
amounts payable by the Company under the Indenture are unconditionally
guaranteed on a senior subordinated basis, jointly and severally, by the
Guarantors. All payments pursuant to the Guarantees by each Guarantor are (i)
subordinated in right of payment to the prior payment in full of all Guarantor
Senior Indebtedness, to the same extent and manner that all payments pursuant
to the Notes are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness of the Company and (ii) senior in right of payment
to all Guarantor Subordinated Indebtedness. It is anticipated that all of the
Guarantors will also guarantee the Company's obligations under the New Credit
Agreement, and the Company will pledge all of the issued and outstanding shares
of Capital Stock of the Guarantors to secure Indebtedness outstanding under the
New Credit Agreement. As of October 30, 1993 after giving effect to the
issuance of the Notes and the application of the net proceeds therefrom,
Guarantors as a group would have had outstanding Guarantor Senior Indebtedness
of approximately $8.5 million. In the future, the Guarantors may issue
additional Guarantor Senior Indebtedness. See "--Certain Covenants--Limitation
on Additional Indebtedness and New Operating Leases." (Section 11.02)
 
  The obligations of each Guarantor in respect of its Guarantee are limited to
the maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor in respect of its Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law. Each Guarantor
that makes a payment or distribution under its Guarantee shall be entitled to a
contribution from each other Guarantor in an amount pro rata, based on the net
assets of each Guarantor, determined in accordance with GAAP. (Section 11.05)
 
  Separate financial statements of the Guarantors are not included herein
because each is jointly and severally liable with respect to the Company's
obligations under the Notes and the Indenture, and the operations of the Non-
Recourse Subsidiary are inconsequential to the operations of the Company on a
consolidated basis.
 
  In the event of a sale or other disposition of all or substantially all of
the assets of any Guarantor, by way of merger, consolidation or otherwise, or
all of the Capital Stock of any Guarantor, then such Guarantor (in the event of
a sale or other disposition of all of the Capital Stock of such Guarantor) or
the corporation acquiring the property (in the event of a sale or other
disposition by way of a merger, consolidation or otherwise of all or
substantially all of the assets of such Guarantor) shall be released and
relieved of its obligations under its Guarantee provided that (i) after giving
effect thereto, no Event of Default shall have occurred and be continuing; (ii)
the Company shall apply the Net Available Cash Proceeds of such sale or other
disposition in accordance with the covenant described under "--Certain
Covenants--Limitation on Sales of Assets"; and (iii) such Guarantor has been
unconditionally and fully released in writing from all obligations under
guarantees of other Indebtedness of the Company, each Subsidiary and the Non-
Recourse Subsidiary (including, without limitation, Indebtedness under the New
Credit Agreement). (Section 11.03)
 
AMENDMENT, SUPPLEMENT, WAIVER
 
  Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of a majority in principal amount of the Notes
then outstanding and any past default or compliance with any provisions may be
waived with the consent of the holders of a majority in principal amount of the
Notes then outstanding. However, without the consent of each holder of an
outstanding Note, no amendment
 
                                       43

 
or waiver may, among other things, (i) reduce the amount of Notes whose holders
must consent to an amendment or waiver, (ii) reduce the interest rate of or
extend the fixed maturity of any Note, (iii) reduce the premium payable upon
the redemption of any Note or change the time at which any Note may be
redeemed, (iv) make any Note payable in currency other than that stated in the
Note, (v) impair the right of any holder of the Notes to receive payment of
principal and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vi) impair any provisions relating to security
for or guarantees with respect to the Notes, (vii) make any change in the
subordination provisions of the Indenture, the Notes or the Guarantees that
adversely affects the rights of any holder of Notes, or (viii) make any change
in the amendment or waiver provisions which require the consent of each holder
of Notes. (Section 9.02)
 
  Neither the Company nor any Subsidiary shall, directly or indirectly, pay or
cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any holder of any Notes for or as an inducement to any consent,
waiver or amendment of any terms or provisions of the Notes unless such
consideration is offered to be paid or agreed to be paid to all holders of the
Notes which so consent, waive or agree to amend in the time frame set forth in
solicitation documents relating to such consent, waiver or agreement.
(Section 4.22)
 
  Without the consent of any holder of the Notes, the Company, the Guarantors
and the Trustee may amend or supplement the Indenture to cure any ambiguity,
omission, defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Company and the Guarantor, as the case
may be, under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add additional guarantees of the Notes, to add security for
the Notes, to add to the covenants of the Company for the benefit of the
holders of the Notes or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
holder of the Notes or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the TIA. (Section
9.01)
 
  The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment. (Section 9.02)
 
  After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes
or any defect therein, will not impair the validity of the amendment. (Section
9.02)
 
TRANSFER
 
  The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges. (Section 2.06)
 
SATISFACTION AND DISCHARGE
 
  The Trustee, on demand of and at the expense of the Company, shall execute
proper instruments acknowledging satisfaction and discharge of the Indenture
upon compliance with certain enumerated conditions, including the Company
having paid or duly provided for the payment of all sums payable by the Company
under the Indenture and having delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel stating that there has been compliance
with all conditions precedent relating to such satisfaction and discharge.
(Section 8.01)
 
                                       44

 
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
 
  Legal Defeasance. In addition, the Indenture provides that the Company may
defease and be discharged from its obligations in respect of the Notes (except
for certain obligations to register the transfer, substitution or exchange of
Notes, to replace stolen, lost or mutilated Notes, rights of the Holders to
receive payments of principal of and interest on the Notes, and rights of the
Holders of the Notes as beneficiaries of the Indenture with respect to the
property so deposited with the Trustee payable to all or any of them and to
maintain an office or agency for payments on and registration of transfer of
the Notes and the rights, obligations and immunities of the Trustee), if the
Company or any Guarantor has irrevocably deposited with the Trustee, in trust
for such purpose, (a) money in an amount, (b) U.S. government securities which
through the payment of principal and interest in accordance with their terms
will provide money in an amount, or (c) a combination thereof, sufficient in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
the principal of (and premium, if any) and interest on the outstanding Notes at
maturity or upon redemption, together with all other amounts payable by the
Company under the Indenture. Such defeasance will become effective 91 days
after such deposit and only if, among other things, (a) no Default or Event of
Default with respect to the Notes has occurred and is continuing on the date of
such deposit or occurs as a result of such deposit or at any time during the
period ending on the 91st day after the date of such deposit; (b) such
defeasance does not result in a breach or violation of, or constitute a default
under, any other agreement or instrument to which the Company or such Guarantor
is a party or by which it is bound; (c) the Company or such Guarantor, as the
case may be, has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent relating to a
defeasance have been complied with; and (d) the Company or any Guarantor, as
the case may be, has delivered to the Trustee (i) either a private Internal
Revenue Service ruling or an Opinion of Counsel based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law
that holders of the Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to federal income tax with respect to the Notes on the same
amount, in the same manner, and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, and (ii) an Opinion
of Counsel to the effect that (A) the deposit shall not result in the Company,
the Trustee or the trust being deemed to be an "investment company" under the
Investment Company Act of 1940, as amended, and (B) such deposit creates a
valid trust in which the holders of the Notes who are not "insiders" for
purposes of any bankruptcy law have the sole beneficial ownership interest or
that the holders of the Notes have a non-avoidable first priority security
interest in such trust. Notwithstanding the foregoing, the Company's
obligations to pay principal, premium, if any, and interest on the Notes, and
the Guarantors' obligations under the Guarantees and the Indenture, shall
continue until the Internal Revenue Service ruling or Opinion of Counsel
referred to in clause (i) above is provided with regard to and without reliance
upon such obligations continuing to be obligations of the Company and the
Guarantors, respectively. (Section 8.01)
 
  Covenant Defeasance. The Company will be released from its obligations with
respect to certain covenants contained in the Indenture, including, without
limitation, those described under "Certain Covenants," and any failure to
comply with such covenants will not be an Event of Default, if (a) the Company
deposits or causes to be deposited with the Trustee in trust an amount of cash
or U.S. government securities sufficient to pay and discharge when due the
entire unpaid principal, premium, if any, and interest on all outstanding Notes
and (b) certain other conditions are met. The obligations of the Company under
the Indenture with respect to the Notes, other than with respect to the
covenants and Events of Defaults referred to above, will remain in full force
and effect. (Section 8.01)
 
CONCERNING THE TRUSTEE
 
  Society National Bank is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes. (Section 2.03)
 
  The Trustee is a creditor of the Company and certain of the Guarantors, and
is anticipated to be a lender under the New Credit Agreement. The Indenture
contains certain limitations on the rights of the Trustee as
 
                                       45

 
a creditor of the Company and the Guarantors. The Indenture restricts the
rights of the Trustee to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest (as defined in the Indenture),
it must eliminate such conflict or resign.
 
GOVERNING LAW
 
  The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
(Section 12.09)
 
CERTAIN DEFINITIONS
 
  Set forth below are certain of the defined terms used in the Indenture
(Section 1.01)
 
  "Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary (or such Person is merged into the Company or
a Subsidiary) or assumed in connection with the acquisition of properties or
assets from any such Person and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary or such acquisition.
 
  "Acquired Operating Lease" means any Operating Lease of a Person existing at
the time such Person becomes a Subsidiary (or such Person is merged into the
Company or a Subsidiary) or assumed in connection with the acquisition of
properties or assets from any such Person after the Issue Date and not entered
into in connection with, or in contemplation of, such Person becoming a
Subsidiary or in contemplation of such acquisition, and includes any
replacements or renewals of any such Operating Lease.
 
  "Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. A
specified Person beneficially owning 30% or more of the voting power of the
Voting Stock of a corporation will be presumed to control such corporation
unless another Person beneficially owns more Voting Stock than such specified
Person beneficially owns and such other Person has actual control.
Notwithstanding the foregoing, the term Affiliate shall not include any Wholly
Owned Subsidiary which is a Guarantor but shall include the Non-Recourse
Subsidiary.
 
  "Asset Disposition" means any sale, lease, sublease, transfer, issuance or
other disposition (or series of related sales, leases, subleases, transfers,
issuances or dispositions) of shares of Capital Stock of the Company, any
Subsidiary or the Non-Recourse Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition"), by the Company, any Subsidiary or the Non-
Recourse Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (other than (i) a disposition of inventory
at not less than fair market value in the ordinary course of business, (ii) a
disposition of obsolete assets in the ordinary course of business, (iii) a sale
or issuance of Capital Stock of the Company which is not Exchangeable Stock,
(iv) sales of individual assets in the ordinary course of business having a
fair market value less than, and for consideration less than, $5,000, (v) any
disposition of assets of the Non-Recourse Subsidiary not constituting, together
with any related dispositions by the Non-Recourse Subsidiary, a sale of all or
substantially all of the assets of the Non-Recourse Subsidiary, and (vi) any
disposition to a Wholly Owned Subsidiary which is a Guarantor).
 
  "Attributable Indebtedness" in respect of a Sale-Leaseback Transaction means,
as at the time of the Sale-Leaseback Transaction, the greater of (i) the fair
value of the property subject to such arrangement (as determined in good faith
by the Board of Directors) or (ii) the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during
 
                                       46

 
the remaining term of the lease included in such arrangement (including any
period for which such lease has been extended).
 
  "Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
the numbers of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness multiplied by the
amount of such principal payment by (ii) the sum of all such principal
payments.
 
  "beneficial owner" has the meaning ascribed thereto in Rules 13d-3 and 13d-5
promulgated by the Commission under the Exchange Act, except that a person
shall be deemed to be the beneficial owner of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time; and the terms "beneficial ownership" and
"beneficially owns" have meanings correlative to the foregoing.
 
  "Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
 
  "Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
 
  "Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock, including any Preferred Stock.
 
  "Code" means the Internal Revenue Code of 1986, as from time to time amended.
 
  "Consolidated Fixed Charge Coverage Ratio" of the Company for any period
means the ratio, on a pro forma basis, of (i) the sum of Consolidated Net
Income, Consolidated Fixed Charges and Consolidated Tax Expense, plus
depreciation, and without duplication, all amortization, in each case, for such
period, of the Company and its subsidiaries (other than the Non-Recourse
Subsidiary) on a consolidated basis, as determined in accordance with GAAP, to
(ii) Consolidated Fixed Charges; provided, that in calculating Consolidated
Fixed Charges on a pro forma basis, any Indebtedness bearing a floating
interest rate shall be computed as if the rate in effect on the date of
computation has been the applicable rate for the entire period and the
aggregate amount of available commitments under any revolving credit facility
(excluding any letter of credit facility) of the Company or any Subsidiary will
be deemed to be outstanding.
 
  "Consolidated Fixed Charges" of the Company means, for any period, the sum
of: (i) the aggregate amount of interest which, in conformity with GAAP, would
be set opposite the caption "interest expense" or any like caption on an income
statement for the Company and its subsidiaries (other than the Non-Recourse
Subsidiary) on a consolidated basis (including, without limitation, imputed
interest included on Capital Lease Obligations, all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, the net costs associated with any Interest Rate
Agreement, foreign currency exchange agreement, option or futures contract or
other similar agreement or arrangement relating to interest rates or foreign
exchange rates); (ii) an amount equal to one-third of Consolidated Operating
Lease Payments; and (iii) dividends on Preferred Stock of the Company or a
Subsidiary held by Persons other than the Company or a Wholly Owned Subsidiary
which is a Guarantor. For purposes of clause (iii) of the preceding sentence,
dividends shall be deemed to be an amount equal to the actual dividends paid
divided by one minus the applicable combined federal, state and local income
tax rate of the Company (expressed as a decimal), on a consolidated basis, for
the fiscal year immediately preceding the date of the transaction giving rise
to the need to calculate Consolidated Fixed Charges.
 
 
                                       47

 
  "Consolidated Net Income" means, for the Company for any period, the net
income of the Company and its subsidiaries (other than, except as expressly
provided below, the Non-Recourse Subsidiary) determined on a consolidated basis
in accordance with GAAP; however, there will not be included in such
Consolidated Net Income: (i) subject to clause (iv) below, any net income of
the Non-Recourse Subsidiary or any Person which is not a Subsidiary, except
that (A) the Company's equity in the net income of the Non-Recourse Subsidiary
or any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by the Non-
Recourse Subsidiary (including as a result of sales by the Non-Recourse
Subsidiary of Capital Stock pledged or delivered by borrowers who are
franchisees of convenience stores of the Company or any Subsidiary) or any such
Person during such period to the Company or a Guarantor as a dividend or other
distribution (subject, in the case of a dividend or other distribution to a
Guarantor, to the limitations contained in clause (iii) below) and (B) the
Company's equity in a net loss of the Non-Recourse Subsidiary or any such
Person for such period shall be included in determining such Consolidated Net
Income, (ii) any net income (but not net loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition; (iii) any net income of any Subsidiary
if such Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Subsidiary,
directly or indirectly, to the Company, except that (A) the Company's equity in
the net income of any such Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Subsidiary during such period to the Company or a Guarantor as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to another Subsidiary, to the limitation contained in this clause)
and (B) the Company's equity in a net loss of any such Subsidiary for such
period shall be included in determining such Consolidated Net Income; (iv) any
gain (but not loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated subsidiaries
(including the Non-Recourse Subsidiary and including pursuant to any Sale-
Leaseback Transaction) which is not sold or otherwise disposed of in the
ordinary course of business and any gain (but not loss) realized upon the sale
or other disposition of any Capital Stock of any Person (except for sales by
the Non-Recourse Subsidiary of Capital Stock pledged or delivered by borrowers
who are franchisees of convenience stores of the Company or any Subsidiary up
to the aggregate amount of cash actually distributed by the Non-Recourse
Subsidiary during such period to the Company or a Guarantor as a dividend or
other distribution); (v) any gains or losses from currency exchange
transactions not in the ordinary course of business consistent with past
practice; (vi) any gains (but not losses) attributable to any extraordinary
items; (vii) all extraordinary expenses, including as a result of the write-off
of deferred loan costs in connection with the application of the proceeds from
the sale of the Notes; (viii) the amount of any premium payable on the
Company's 14.25% Subordinated Debentures Due 2000 as a result of prepayment of
such Debentures with the proceeds of the Notes in accordance with the
Prospectus; and (ix) the cumulative effect of a change in accounting
principles.
 
  "Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries
(including, with respect to the Company, the Non-Recourse Subsidiary),
determined on a consolidated basis in accordance with GAAP, as of the end of
the most recent fiscal quarter of such Person ending prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of such Person plus (ii) paid-
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock (only to the extent such amounts shall
be due prior to the final maturity of the Notes) and (C) any amounts
attributable to Exchangeable Stock.
 
  "Consolidated Operating Lease Payments" means for any Reference Period: (i)
the aggregate amount of all rents paid or payable (net of sublease income) by
the Company or any of its consolidated subsidiaries (other than the Non-
Recourse Subsidiary) under all Operating Leases of the Company or any of its
consolidated subsidiaries, all as determined in accordance with GAAP; (ii) less
$2.5 million.
 
  "Consolidated Tax Expense" means, for the Company for any period, the
provision (benefit) for taxes based on income and profits (or losses) of the
Company and its subsidiaries (other than the Non-Recourse
 
                                       48

 
Subsidiary) on a consolidated basis to the extent such income or profits (or
losses) were included in computing Consolidated Net Income of the Company for
such period.
 
  "Default" means any event which is, or after notice or passage of time, or
both, would be, an Event of Default.
 
  "Excess Proceeds" has the meaning set forth in "Certain Covenants--Limitation
on Sales of Assets."
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
  "Exchangeable Stock" means any Capital Stock which is exchangeable or
convertible into another security (other than Capital Stock of the Company
which is neither Exchangeable Stock nor Redeemable Stock).
 
  "Existing Indebtedness" means Indebtedness of the Company and each Subsidiary
in existence on the Issue Date.
 
  "FINOP" means Financial Opportunities, Inc., a Kentucky corporation, licensed
as an SBIC by the SBA, all of the Capital Stock of which is owned by the
Company or a Wholly-Owned Subsidiary.
 
  "Fixed Assets" means assets of the Company, a Subsidiary or a Non-Recourse
Subsidiary which are "fixed assets", as defined in accordance with GAAP.
 
  "Franchise Agreements" means franchise agreements entered into by the Company
or any Subsidiary in the ordinary course of business in connection with the
franchising of the Company's convenience retail stores.
 
  "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are applicable as of the date of
determination; provided, however, that these definitions and all ratios and
calculations contained in the covenants described under "Certain Covenants--
Limitation on Restricted Payments," "Certain Covenants--Limitation on
Additional Indebtedness and New Operating Leases," "Certain Covenants--
Limitation on Sale-Leaseback Transactions," and "Certain Covenants--Limitation
on Sales of Assets" shall be determined in accordance with GAAP as in effect
and applied by the Company on the Issue Date, consistently applied.
 
  "Guarantee" means the guarantee by a Guarantor of the Company's obligations
under the Notes.
 
  "Guarantor" means each Subsidiary executing a signature page to the Indenture
on the Issue Date and any Person who becomes a Guarantor as provided in the
covenant described under "Certain Covenants--Additional Guarantors," and any of
their respective successors or assigns.
 
  "Guarantor Senior Indebtedness" means all Indebtedness of the specified
Guarantor under: (i) its guarantee of the Company's obligations under the New
Credit Agreement; and (ii) all additional Indebtedness that is permitted to be
incurred by such Guarantor under the Indenture that is not by its terms
subordinated to or pari passu with the obligations of such Guarantor under its
Guarantee (it being understood that Indebtedness permitted to be incurred by
such Guarantor under the Indenture that is not by its terms subordinated to or
pari passu with the obligations of such Guarantor under its Guarantee shall not
in any event constitute Guarantor Senior Indebtedness if such Indebtedness is
subordinated by its terms to any other Indebtedness that constitutes Guarantor
Senior Indebtedness). Notwithstanding anything to the contrary in the
foregoing, Guarantor Senior Indebtedness shall not include (w) any liability of
such Guarantor for state, local or other taxes, (x) any Indebtedness between or
among such Guarantor, the Company, any other Subsidiary or the Non-Recourse
Subsidiary, (y) any Indebtedness of such Guarantor incurred for the purchase of
goods or materials or for services obtained in the ordinary course of business,
(z) the Company's 14.25% Subordinated Debentures Due 2000. (Section 11.01)
 
                                       49

 
  "Guarantor Subordinated Indebtedness" means, with respect to a specified
Guarantor, any Indebtedness of such Guarantor (whether outstanding on the Issue
Date or thereafter Incurred) which is subordinate or junior in right of payment
to the Guarantee of such Guarantor.
 
  "Incurrence" means the incurrence, creation, assumption, issuance, guarantee
of the payment of, or in any other manner becoming liable with respect to, the
payment of, any Indebtedness. "Incur" and "Incurred" shall have a comparable
meaning.
 
  "Indebtedness" means, with respect to any Person, without duplication, (i)
the principal of and premium (if any) in respect of (A) indebtedness of such
Person for money borrowed and (B) indebtedness evidenced by notes, debentures,
bonds or other similar instruments (including purchase money obligations) for
payment of which such Person is responsible or liable; (ii) all Capital Lease
Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance, note
purchase facility or similar credit transaction (other than obligations with
respect to letters of credit securing obligations (other than obligations
described in (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not drawn upon
or, if and to the extent drawn upon, such drawing is reimbursed no later than
the third business day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit); (v) all obligations
of the type referred to in clauses (i) through (iv) of other Persons and all
dividends of other Persons for the payment of which, in either case, such
Person is responsible or liable as obligor, guarantor or otherwise; (vi) all
obligations of the type referred to in clauses (i) through (v) of other Persons
secured by any Lien on any property or asset of such Person (whether or not
such obligation is assumed by such Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets or the amount
of the obligation so secured; (vii) Redeemable Stock of such Person; and (viii)
with respect to the Company or any Subsidiary, Preferred Stock of any
Subsidiary (other than Preferred Stock held by the Company or any Wholly Owned
Subsidiary which is a Guarantor); provided, however, that Indebtedness will not
include endorsements of negotiable instruments for collection in the ordinary
course of business.
 
  "Interest Rate Agreement" means the obligation of any Person pursuant to any
interest rate swap agreement, interest rate collar agreement, currency exchange
agreement or other similar agreement or arrangement entered into by such Person
in the ordinary course of business.
 
  "Investment" in any Person means any loan or advance to, any acquisition of
Capital Stock of, equity interest in, obligation or other security of, or
capital contribution to or other investment in, such Person.
 
  "Issue Date" means the date on which the Notes are originally issued.
 
  "Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give any security interest in and any filing or other agreement to give
any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
 
  "Net Available Cash Proceeds" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to such properties or assets or received in any other noncash form)
therefrom, in each case net of all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such Asset Disposition, and in each case net of all
payments made on any Indebtedness which is secured by any assets subject to
 
                                       50

 
such Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by
its terms, or in order to obtain a necessary consent to such Asset Disposition,
or by applicable law, be repaid out of the proceeds from such Asset
Disposition, and net of all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such Asset Disposition.
 
  "Net Proceeds" means, with respect to a specified transaction, total cash
proceeds net of all customary legal expenses, commissions and other fees and
expenses incurred and all Federal, state, provincial, foreign and local taxes
required to be accrued as a liability under GAAP, as a consequence of, and in
connection with, such transaction.
   
  "New Credit Agreement" means the Credit Agreement among the Company, Fleet
Bank, National Association and Society National Bank, as such agreement may be
amended, supplemented or otherwise modified from time to time and any agreement
evidencing any refunding, replacement, refinancing or renewal, in whole or in
part, of the Indebtedness permitted to be borrowed thereunder on the date of
execution thereof.     
 
  "New Operating Leases" means Operating Leases entered into by the Company or
any of its consolidated subsidiaries (other than the Non-Recourse Subsidiary)
following the Issue Date for the purpose of leasing real property, gasoline
equipment or other equipment in connection with the operation of retail
convenience stores not owned, operated or franchised by the Company or any of
its consolidated subsidiaries on or prior to the Issue Date; provided, however,
that the term New Operating Leases shall not be deemed to include Acquired
Operating Leases.
 
  "Non-Convertible Capital Stock" means, with respect to any corporation, any
nonconvertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into nonconvertible common stock of such
corporation which is not Redeemable Stock or Exchangeable Stock; provided,
however, that Non-Convertible Capital Stock does not include any Redeemable
Stock or Exchangeable Stock.
 
  "Non-Recourse Subsidiary" means FINOP, provided that:
 
    (a) no portion of FINOP's Indebtedness or any of its other obligations
  (contingent or otherwise), (i) is guaranteed by the Company or any
  Subsidiary, (ii) is recourse to or obligates the Company or any Subsidiary
  in any way or (iii) subjects any property or asset of the Company or any
  Subsidiary, directly or indirectly, contingently or otherwise, to
  satisfaction thereof;
 
    (b) neither the Company nor any Subsidiary has any contract, agreement,
  arrangement, understanding with FINOP or is subject to an obligation of any
  kind, written or oral, other than on terms no less favorable to the Company
  or such Subsidiary than those that might be obtained at the time from
  Persons who are not Affiliates of the Company;
 
    (c) neither the Company nor any Subsidiary has any obligation (i) to
  subscribe for additional shares of Capital Stock or other equity interests
  of FINOP or (ii) to maintain or preserve FINOP's financial condition or to
  cause FINOP to achieve certain levels of operating results;
 
    (d) FINOP continues to be an SBIC, regulated and licensed as such by the
  SBA, and performs no activities or engages in no business other than as an
  SBIC;
 
    (e) FINOP maintains a bank account or accounts separate from those of the
  Company and each Subsidiary and does not otherwise commingle its funds or
  any other properties or assets with those of the Company or any Subsidiary;
     
    (f) from and after the 90th day following the Issue Date, the Board of
  Directors of FINOP contains at least one independent director who is not an
  officer, director, employee, shareholder (other than a shareholder owning
  less than 1% of the outstanding Capital Stock of any class of the Company's
  or any Subsidiary's Capital Stock) or Affiliate of the Company or any
  Subsidiary; and     
 
                                       51

 
    (g) the sum of Indebtedness and aggregate liquidation preference of
  Preferred Stock of FINOP does not exceed $20 million, unless at the time of
  the Incurrence of additional Indebtedness or the issuance of Preferred
  Stock by FINOP, the Consolidated Fixed Charge Coverage Ratio for the
  Company is equal to or greater than 2.0 to 1.0.
 
  At the time FINOP ceases to meet any of the requirements set forth above for
characterization as the Non-Recourse Subsidiary, FINOP shall be deemed to be a
Subsidiary for all purposes of the Indenture if, at such time, it is properly
characterized as such in accordance with the definition of "Subsidiary" set
forth below.
 
  "Officer" means with respect to any corporation, the Chairman of the Board,
the Chief Executive Officer, the President, any Vice President, the Treasurer
or the Secretary of such corporation.
 
  "Officers' Certificate" means a written certificate containing the
information specified by the Indenture, signed in the name of the Company, any
Guarantor or other obligor on the Notes, as the case may be, by any two of its
Officers, and delivered to the Trustee.
 
  "Operating Lease" shall mean, as applied to any Person, any lease with
respect to which such Person is the lessee (including, without limitation,
leases which may be terminated by the lessee at any time) of any property
(whether real, personal or mixed) which is not a lease which is required to be
classified and accounted for as a capital lease on the face of the balance
sheet of such Person prepared in accordance with GAAP.
 
  "Opinion of Counsel" means a written opinion containing information specified
by the Indenture rendered by legal counsel who is reasonably acceptable to the
Trustee.
 
  "Permitted Holders" means Frank Colaccino and his Related Parties, or in the
event of the death or mental or physical incapacity of Frank Colaccino, any of
Gregory Landry, Robert Stein or Mitchell Kupperman and their respective Related
Parties.
 
  "Permitted Indebtedness" means (i) Indebtedness incurred by the Company under
the New Credit Agreement as in effect on the Issue Date, provided that such
amount shall be permanently reduced by (x) the amount of any revolving loan
commitment reductions from time to time effected under the New Credit
Agreement, and (y) the amount of any prepayments of such Indebtedness which is
not reborrowed and invested as described in the first proviso under "Limitation
on Sales of Assets," and provided further that the aggregate amount of all
Indebtedness permitted to be outstanding thereunder at any one time shall not
exceed $30.0 million and the aggregate amount of Indebtedness evidenced by all
letters of credit permitted to be outstanding thereunder (including the
outstanding principal amount of any loans advanced for drawings thereunder) at
any one time shall not exceed $15.0 million; (ii) guarantees by Subsidiaries of
the Company's Indebtedness referred to in clause (i) of this paragraph; (iii)
Existing Indebtedness and Indebtedness represented by the Notes; (iv)
Indebtedness issued to repay, refund or refinance Indebtedness of the Company
or any Subsidiary permitted under clauses (i), (ii) and (iii) of this paragraph
(such Indebtedness being referred to herein as "Refinancing Indebtedness"),
provided such Refinancing Indebtedness (a) does not exceed the principal or
accreted amount of, (b) ranks in right of payment to the Notes no more than to
the same extent as, (c) has an Average Life and Stated Maturity equal to, or
greater than, and (d) shall not provide for any mandatory redemption,
amortization or sinking fund requirements in an amount greater than or at a
time prior to the amounts and times specified with respect to, the Indebtedness
so repaid, refunded or refinanced; (v) intercompany Indebtedness permitted by
the covenant described under "Limitation on Restricted Payments"; (vi)
Indebtedness under Interest Rate Agreements; (vii) guarantees by the Company or
any Wholly Owned Subsidiary which is a Guarantor of loans (other than loans
made by the Non-Recourse Subsidiary) in the ordinary course of business to
franchisees of the Company's or any Subsidiary's convenience retail stores for
the purpose of financing costs of equipment, leasehold improvements and/or
inventory for such stores pursuant to a Franchise Agreement, provided that the
aggregate liability in respect
 
                                       52

 
of all such Indebtedness shall not exceed $5.0 million at any one time under
this clause (vii); (viii) Capitalized Lease Obligations of the Company or any
Subsidiary for the purpose of purchasing or financing personal computers,
equipment, software, supplies and/or other assets necessary for the operation
of the Company's POS System, provided that the aggregate liability in respect
of all such Indebtedness shall not exceed $6.0 million at any time; (ix)
Indebtedness incurred by FINOP at a time when it satisfied the definition of
Non-Recourse Subsidiary or (x) Indebtedness not otherwise permitted in an
aggregate principal amount not in excess of $7.5 million at any one time
outstanding.
 
  "Permitted Investments" means (a) certificates of deposit with a maturity of
one year or less issued by U.S. commercial banks having capital and surplus in
excess of $100.0 million; (b) commercial paper with a minimum rating of A1
and/or P1 by Standard & Poor's Corporation and/or Moody's Investors Service,
Inc., respectively; (c) direct obligations of the United States or of a United
States agency with a maturity of one year or less; and (d) shares of money
market mutual or similar funds having assets in excess of $100.0 million.
 
  "Permitted Liens" means with respect to any Person, (i) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness), utility
services or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or U.S.
Government bonds to secure surety or appeal bonds to which such Person is a
party, or deposits as security for contested taxes or import duties or for the
payment of rent and incurred in the ordinary course of such Person's business,
(ii) Liens determined by law, such as carriers', warehousemen's, mechanics' and
bankers' Liens and incurred in the ordinary course of such Person's business,
(iii) Liens for taxes not yet subject to penalties for non-payment or which are
being contested in good faith and by appropriate proceedings, if adequate
reserve, as may be required by GAAP, shall have been made therefor, (iv) Liens
in favor of issuers of surety bonds (other than to satisfy any judgment or
judgments) issued pursuant to the request of and for the account of such Person
in the ordinary course of its business and (v) survey exceptions, encumbrances,
easements or reservations of, or rights of others for, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the ownership of
its properties and incurred in the ordinary course of such Person's business.
 
  "Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
 
  "POS System" means the automated reporting system to be installed by the
Company in certain of its retail convenience stores for the purpose of entering
into a central data system maintained by the Company certain information with
respect to such stores through the use of personal computers, equipment,
software, supplies and/or other assets located at such stores.
 
  "Preferred Stock" as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred,
as to the payment of dividends or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
 
  "Public Equity Offering" means an underwritten public offering of common
stock of the Company (other than Redeemable Stock or Exchangeable Stock),
pursuant to an effective registration statement filed pursuant to the
Securities Act of 1933, as amended.
 
  "Redeemable Stock" means any Capital Stock that by its terms or otherwise is
required to be redeemed prior to the first anniversary of the Stated Maturity
of the Notes or is redeemable at the option of the holder thereof any time
prior to the first anniversary of the Stated Maturity of the Notes.
 
                                       53

 
  "Reference Period" means, with respect to any computation of the Consolidated
Fixed Charge Coverage Ratio, the most recent four fiscal quarters of the
Company for which internal financial statements of the Company are available
prior to the date of determination of the Consolidated Fixed Charge Coverage
Ratio.
 
  "Registrar" means the office or agency where Notes may be presented for
registration of transfer or for exchange.
 
  "Related Party" with respect to each Permitted Holder means (a) any spouse or
immediate family member of such Permitted Holder or (b) any trust, corporation,
partnership or other entity, all of the beneficiaries, stockholders, partners,
owners or Persons beneficially holding an 80% or more controlling interest of
which consist of Permitted Holders and/or such other Persons referred to in the
immediately preceding clause (a).
 
  "Sale-Leaseback Transaction" means any arrangement relating to property now
owned or hereafter acquired whereby the Company or a Subsidiary transfers such
property to a Person and leases it back from such Person.
 
  "SBA" means Small Business Administration or any successor thereto
established by the Small Business Act, as amended (15 U.S.C., Section 633), or
any successor statute to carry out the policies of that Act.
 
  "SBIC" means a small business investment company approved by the SBA to
operate under the provisions of the Small Business Investment Act of 1958, as
amended (15 U.S.C., Section 662) or any successor statute and issued a license
as provided in Section 681 of that Act.
 
  "Senior Indebtedness" means all Indebtedness of the Company under: (i) the
New Credit Agreement as in effect on the Issue Date; and (ii) all additional
Indebtedness that is permitted under the Indenture that is not by its terms
subordinated to or pari passu with the Notes (it being understood that
Indebtedness permitted under the Indenture that is not by its terms
subordinated to or pari passu with the Notes shall not in any event constitute
Senior Indebtedness if such Indebtedness is subordinated by its terms to any
other Indebtedness that constitutes Senior Indebtedness). Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness shall not
include (w) the Company's 14.25% Subordinated Debentures Due 2000, (x) any
liability of the Company, any Subsidiary or the Non-Recourse Subsidiary for
state, local or other taxes, (y) any Indebtedness between or among the Company,
any Subsidiary or the Non-Recourse Subsidiary, or (z) any Indebtedness of the
Company, any Subsidiary or the Non-Recourse Subsidiary incurred for the
purchase of goods or materials or for services obtained in the ordinary course
of business (other than Indebtedness incurred under any revolving credit
facility under the New Credit Agreement for such purpose).
 
  "Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision.
 
  "Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinated or
junior in right of payment to the Notes.
 
  "Subsidiary" means any corporation, association, partnership or other
business entity of which more than 50% of the total voting power of shares of
Capital Stock or other interest (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) the Company, (ii) the Company and one or more
Subsidiaries, or (iii) one or more Subsidiaries. Notwithstanding the foregoing,
the Non-Recourse Subsidiary shall not be deemed to be a Subsidiary.
 
  "U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
 
                                       54

 
  "Voting Stock" means, with respect to a corporation, all classes of capital
stock then outstanding of such corporation normally entitled to vote in
elections of directors.
 
  "Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares) is owned by the Company or another
Wholly Owned Subsidiary.
 
                                  UNDERWRITING
 
  Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Guarantors, and Bear, Stearns & Co. Inc. (the
"Underwriter"), the Company has agreed to sell to the Underwriter and the
Underwriter has agreed to purchase from the Company, the aggregate principal
amount of the Notes.
 
  The Underwriting Agreement provides that the obligation of the Underwriter to
purchase Notes is subject to certain conditions, and that if any of the Notes
are purchased by the Underwriter pursuant to the Underwriting Agreement, all of
the Notes agreed to be purchased by the Underwriter pursuant to the
Underwriting Agreement must be so purchased.
   
  The Underwriter has advised the Company that it proposes to offer the Notes
to the public at the public offering price set forth on the cover page of this
Prospectus, and in part to certain selected dealers at such price less a
concession not in excess of 0.125% of the principal amount thereof. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of 0.250% of the principal amount thereof to certain other dealers. After the
initial public offering, the public offering price, concession and reallowance
may be changed. The Underwriter has agreed to bear certain expenses associated
with this offering.     
 
  The Company has no plans to list the Notes on any securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
Company has been advised by the Underwriter that it presently intends to make a
market in the Notes; however, the Underwriter is not obligated to do so. Any
such market-making activity may be discontinued at any time for any reason,
without notice. There can be no assurance that an active market for the Notes
will develop or if a market does develop, at what prices the Notes will trade.
If such a market were to develop, the Notes could trade at prices that may be
higher or lower than the initial offering price thereof, depending on many
factors, including prevailing interest rates, general economic conditions, the
Company's operating results and the market for similar debt securities. To the
extent that an active trading market for the Notes does not develop, the
liquidity and trading prices for the Notes may be adversely affected. See
"Investment Considerations--No Prior Market for the Notes."
 
  The Company has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments that the Underwriter may be
required to make in respect thereof.
 
                             CERTAIN LEGAL MATTERS
 
  The validity of the securities offered hereby will be passed upon for the
Company by Schatz & Schatz, Ribicoff & Kotkin, Hartford, Connecticut. Certain
legal matters with respect to this offering are being passed upon for the
Underwriter by Dorsey & Whitney (a partnership including professional
corporations), New York, New York.
 
                                    EXPERTS
 
  The Consolidated Financial Statements and schedules of the Company included
in or incorporated by reference into this Prospectus have been audited by
Arthur Andersen & Co., Independent Public Accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
 
                                       55

 
                             AVAILABLE INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Notes and the Guarantees offered hereby to which reference is hereby made. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement. The
Registration Statement may be inspected at the office of the Commission at 450
Fifth Street, N.W., Washington, DC 20549, and copies thereof may be obtained
from the Commission at prescribed rates. Statements made in this Prospectus as
to the contents of any contract, agreement or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract, agreement or document filed or incorporated by reference as an
exhibit to the Registration Statement.
 
  The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy and information statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
DC 20549 and at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates. In addition,
such reports, proxy and information statements and other information concerning
the Company may also be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
 
  While the Notes are outstanding, the Company will furnish holders of the
Notes with annual reports containing audited consolidated financial statements
and quarterly reports containing unaudited interim consolidated financial
information.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  The following documents filed with the Commission pursuant to the Exchange
Act are incorporated by reference into this Prospectus:
 
    1. Annual Report of the Company on Form 10-K for the fiscal year ended
       January 30, 1993, as amended by Form 10-K/A Amendment No. 1.
 
    2. Quarterly report of the Company on Form 10-Q for the fiscal quarter
       ended May 1, 1993 as amended by Form 10-Q/A Amendment No. 1.
 
    3. Quarterly report of the Company on Form 10-Q for the fiscal quarter
       ended July 31, 1993 as amended by Form 10-Q/A Amendment No. 1.
 
    4. Quarterly report of the Company on Form 10-Q for the fiscal quarter
       ended October 30, 1993.
 
  Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any statement modified or superseded shall not be deemed, except as modified or
superseded, to constitute part of this Prospectus.
 
  The Company will provide to each person to whom this Prospectus is delivered,
including any beneficial owner of Notes, upon written or oral request of such
person, a copy of the documents incorporated by reference into this Prospectus
(not including exhibits to such documents unless the exhibits are specifically
incorporated by reference into the documents which this Prospectus
incorporates). Requests for such documents should be directed to the Company at
Dairy Mart Convenience Stores, Inc., One Vision Drive, Enfield, Connecticut
06082; Attention: Investor Relations, telephone number (203) 741-4444.
 
                                       56

 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


                                                                           PAGE
                                                                           ----
                                                                        
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Consolidated Statements of Operations for the three fiscal quarters ended
  October 31, 1992 and October 30, 1993...................................  F-2
 Consolidated Balance Sheets as of January 30, 1993 and October 30, 1993..  F-3
 Consolidated Statements of Cash Flows for the three fiscal quarters ended
  October 31, 1992 and October 30, 1993...................................  F-4
 Notes to Interim Consolidated Financial Statements.......................  F-5
CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Public Accountants.................................  F-7
 Consolidated Statements of Operations and Retained Earnings for each of
  the years in the three-year period ended January 30, 1993...............  F-8
 Consolidated Balance Sheets as of February 1, 1992 and January 30, 1993..  F-9
 Consolidated Statements of Cash Flows for each of the years in the three-
  year period ended January 30, 1993...................................... F-10
 Notes to Consolidated Financial Statements............................... F-11

 
                                      F-1

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 


                                                     FOR THE THREE FISCAL
                                                        QUARTERS ENDED
                                               ---------------------------------
                                               OCTOBER 31, 1992 OCTOBER 30, 1993
                                               ---------------- ----------------
                                                          
Net Sales of the Company, Its Subsidiaries
 and Franchises..............................      $587,390         $581,850
                                                   ========         ========
Revenues.....................................      $435,623         $450,379
Cost of sales................................       318,019          327,847
                                                   --------         --------
  Gross profit...............................       117,604          122,532
Store operating expenses.....................        83,545           86,426
General and administrative expenses..........        24,936           25,250
                                                   --------         --------
  Income from operations.....................         9,123           10,856
Interest expense.............................        (5,541)          (5,751)
Interest income..............................           931              575
Gain (loss) on disposition of properties,
 net.........................................          (332)              59
                                                   --------         --------
  Income before income taxes and cumulative
   effect of change in accounting for income
   taxes.....................................         4,181            5,739
Provision for income taxes...................         1,672            2,296
                                                   --------         --------
  Income before cumulative effect of change
   in accounting for income taxes............         2,509            3,443
Cumulative effect of change in accounting for
 income taxes (Note 2).......................        (3,951)             --
                                                   --------         --------
  Net income (loss)..........................      $ (1,442)        $  3,443
                                                   ========         ========
Weighted average shares outstanding..........         5,415            5,519
                                                   ========         ========
Earnings (loss) per share:
Before cumulative effect of change in
 accounting for income taxes.................      $    .46         $    .62
Cumulative effect of change in accounting for
 income taxes (Note 2).......................          (.73)             --
                                                   --------         --------
  Earnings (loss) per share..................      $   (.27)        $    .62
                                                   ========         ========

 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-2

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 


                                              JANUARY 30, 1993 OCTOBER 30, 1993
                                              ---------------- ----------------
                                                                 (UNAUDITED)
     ASSETS
     ------
                                                         
Current Assets:
  Cash.......................................     $  6,483         $  6,315
  Accounts and notes receivable..............       11,069           10,020
  Inventory..................................       26,857           27,392
  Prepaid expenses and other current assets..        2,306            2,891
  Deferred income taxes......................        4,045            2,735
                                                  --------         --------
    Total current assets.....................       50,760           49,353
                                                  --------         --------
Property and Equipment:
  Land and improvements......................       14,134           15,117
  Buildings and leaseholds...................       51,659           53,860
  Equipment..................................       71,191           75,014
                                                  --------         --------
                                                   136,984          143,991
  Less--Accumulated depreciation.............       46,341           51,588
                                                  --------         --------
    Net property and equipment...............       90,643           92,403
                                                  --------         --------
Property Under Capital Leases, net...........        2,433            1,938
                                                  --------         --------
Other Assets:
  Goodwill, net..............................       11,316           11,049
  Franchise and operating rights, net........        8,009            7,745
  Favorable leases purchased, net............          602              548
  Notes receivable...........................        3,607            2,667
  Other......................................        7,177            7,118
                                                  --------         --------
    Total other assets.......................       30,711           29,127
                                                  --------         --------
Total assets.................................     $174,547         $172,821
                                                  ========         ========

    LIABILITIES AND STOCKHOLDERS' EQUITY
    ------------------------------------
                                                         
Current Liabilities:
  Current portion of long-term debt..........     $  7,803         $  8,047
  Current portion of capital lease obliga-
   tions.....................................        1,087            1,128
  Accounts payable...........................       27,768           29,069
  Accrued expenses...........................       13,599           15,177
  Accrued restructuring expenses.............        5,200              661
                                                  --------         --------
    Total current liabilities................       55,457           54,082
                                                  --------         --------
Long-Term Debt, less current portion.........       69,645           65,809
                                                  --------         --------
Capital Lease Obligations, less current por-
 tion........................................        2,500            1,839
                                                  --------         --------
Other Liabilities and Deferred Credits.......        5,352            5,488
                                                  --------         --------
Deferred Income Taxes........................        8,861            9,183
                                                  --------         --------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
  Class A Common Stock.......................           32               32
  Class B Common Stock.......................           30               30
  Paid-in capital in excess of par value.....       27,212           27,457
  Retained earnings..........................       10,463           13,906
  Treasury stock, at cost....................       (5,005)          (5,005)
                                                  --------         --------
    Total stockholders' equity...............       32,732           36,420
                                                  --------         --------
Total liabilities and stockholders' equity...     $174,547         $172,821
                                                  ========         ========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-3

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                 (IN THOUSANDS)
 


                                                    FOR THE THREE FISCAL
                                                       QUARTERS ENDED
                                              ---------------------------------
                                              OCTOBER 31, 1992 OCTOBER 30, 1993
                                              ---------------- ----------------
                                                         
Cash flows from operating activities:
  Net income (loss)..........................     $ (1,442)        $ 3,443
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Cumulative effect of change in accounting
     for income taxes........................        3,951             --
    Payment of accrued restructuring
     expenses................................          --           (4,539)
    Depreciation and amortization............       10,529           9,577
    Decrease in store fixed assets resulting
     from franchising activities.............          --               65
    (Decrease) increase in deferred income
     taxes...................................        (983)           1,632
    (Gain) loss on other disposition of
     properties, net.........................          332             (59)
    Decrease in accounts and notes
     receivable..............................        2,339           1,049
    Increase in inventory....................       (3,917)           (535)
    Increase in accounts payable.............        4,676           1,301
    Increase in other current assets and
     liabilities, net........................        1,739             993
    (Decrease) increase in other noncurrent
     liabilities and deferred credits........         (274)            136
                                                  --------         -------
Net cash provided by operating activities....       16,950          13,063
                                                  --------         -------
Cash flows from investing activities:
  Purchase of property and equipment.........      (14,237)        (10,905)
  Proceeds from sale of property and
   equipment.................................          919           1,665
  Proceeds from long-term notes receivable...        1,185           1,104
  Increase in long-term notes receivable.....         (925)           (164)
  Increase in other assets...................       (1,177)           (717)
                                                  --------         -------
Net cash used by investing activities........      (14,235)         (9,017)
                                                  --------         -------
Cash flows from financing activities:
  Repayment of term debt.....................       (4,000)         (7,000)
  Increase (decrease) in revolving loan, net.        3,800            (400)
  Additional long-term debt..................          --            4,476
  Repayment of other long-term debt and
   capital lease obligations.................       (1,388)         (1,535)
  Increases in common stock and paid-in
   capital...................................          481             245
                                                  --------         -------
Net cash used by financing activities........       (1,107)         (4,214)
                                                  --------         -------
Increase (decrease) in cash..................        1,608            (168)
Cash at beginning of fiscal year.............        4,854           6,483
                                                  --------         -------
Cash at end of third fiscal quarter..........     $  6,462         $ 6,315
                                                  ========         =======

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-4

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
                                OCTOBER 30, 1993
                                  (UNAUDITED)
 
  The unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules
and regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The information
furnished reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented, and which are of a normal, recurring nature. It is suggested that
these interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements and the notes thereto included on
pages F-8 through F-19 of this Prospectus.
 
1. ACCOUNTING POLICIES
 
  The financial statements included herein have been prepared in accordance
with the accounting policies described in Note 1 to the January 30, 1993
audited consolidated financial statements included on pages F-11 and F-12 of
this Prospectus. Certain prior year amounts have been reclassified to conform
to the presentation used for the current year.
 
2. FEDERAL AND STATE INCOME TAXES
 
  The Company adopted the provisions of SFAS No. 109 effective February 2, 1992
and recorded a charge of $3,951,000 in the prior fiscal year's first quarter
ended May 2, 1992, which decreased earnings per share for the first three
fiscal quarters ended October 31, 1992 by $.73, for the cumulative effect of
this change in accounting principle. As a result of this change, the Company
also adjusted the carrying value of certain assets and recorded additional
depreciation and amortization expense of $391,000 for the three fiscal quarters
ended October 31, 1992.
 
3. CHANGES IN CAPITAL ACCOUNTS
 
  An analysis of the capital stock accounts for the three fiscal quarters ended
October 30, 1993 follows:
 


                                                COMMON STOCK
                             --------------------------------------------------
                                                                      PAID-
                             CLASS A SHARES CLASS B SHARES          IN CAPITAL
                               ISSUED AT      ISSUED AT            IN EXCESS OF
                             $.01 PAR VALUE $.01 PAR VALUE AMOUNT   PAR VALUE
                             -------------- -------------- ------- ------------
                                                       
Balance January 30, 1993....   3,173,802      2,971,318    $61,453 $27,211,806
Employee stock purchase
 plan.......................      22,622            --         226      99,770
Stock options exercised.....       2,812         48,789        516     145,612
Exchange of Class B shares
 for Class A shares.........      65,000        (65,000)       --          --
                               ---------      ---------    ------- -----------
Balance October 30, 1993....   3,264,236      2,955,107    $62,195 $27,457,188
                               =========      =========    ======= ===========

 
  As of October 30, 1993, there were 521,625 shares of Class A Common Stock and
175,957 shares of Class B Common Stock held as treasury stock at an aggregate
cost of $5,004,847, leaving 2,742,611 Class A shares and 2,779,150 Class B
shares outstanding.
 
4. EARNINGS PER SHARE
 
  Earnings per share is based on the weighted average number of shares
outstanding, including the dilutive effect of stock options, if appropriate and
material, during each period.
 
                                      F-5

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
        NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
                                OCTOBER 30, 1993
                                  (UNAUDITED)
 
5. SEASONALITY
 
  The results of operations for the three fiscal quarters ended October 30,
1993 are not necessarily indicative of results to be expected for the full
fiscal year. The convenience store industry in the Company's marketing areas
experiences a higher percentage of revenues and profit margins during the
summer months than during the winter months. Historically, the Company has
achieved higher earnings in its second and third fiscal quarters, as compared
to its first and fourth fiscal quarters.
 
6. COMMITMENTS AND CONTINGENCIES
 
  The Company has various commitments and contingencies as described in Note 11
to the January 30, 1993 audited consolidated financial statements included on
page F-18 of this Prospectus.
 
  In addition to those commitments and contingencies, the Company has certain
environmental contingencies related to the ongoing costs to comply with
federal, state and local environmental laws and regulations, including costs
for assessment, compliance, remediation and certain capital expenditures
related to its gasoline operations. In the ordinary course of business, the
Company is involved in environmental assessment and remediation activities with
respect to releases of regulated substances from 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. Due to the
nature of such releases, the actual costs of assessment and remediation
activities may vary significantly from year to year. Additionally, under
current federal and state regulatory programs, the Company will be obligated by
December, 1998 to upgrade or replace all existing underground storage tanks
("USTs") it owns or operates. The Company presently estimates that it will be
required to make capital expenditures related to the upgrading or replacing of
USTs ranging from approximately $16.0 million to $20.0 million in the aggregate
through December, 1998, which capital expenditures could be reduced for
locations which may be closed in lieu of the capital costs of compliance.
 
  The Company's estimates of costs to be incurred for environmental assessment
and remediation and for UST upgrading and other regulatory compliance are based
on factors and assumptions that could change due to modifications of regulatory
requirements, detection of unanticipated environmental conditions or other
unexpected circumstances.
 
                                      F-6

 
                    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 30, 1993 and February 1, 1992 and the related consolidated statements
of operations and retained earnings and cash flows for each of the three years
in the period ended January 30, 1993. 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 30, 1993 and February 1, 1992 and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 1993, in conformity with generally accepted
accounting principles.
 
  As discussed in Notes 1 and 6 of notes to consolidated financial statements,
effective February 2, 1992, the Company changed its method of accounting for
income taxes.
 
 
Hartford, Connecticut                     Arthur Andersen & Co.
April 29, 1993
 
                                      F-7

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
          CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
 
  FOR THE YEARS ENDED FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 


                                        1991           1992           1993
                                    -------------  -------------  -------------
                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                         
Net Sales of the Company, Its
 Subsidiaries and Franchises......  $     807,586  $     794,758  $     773,766
                                    =============  =============  =============
Revenues..........................  $     586,984  $     571,980  $     578,767
Cost of sales.....................        429,084        415,981        425,180
                                    -------------  -------------  -------------
  Gross profit....................        157,900        155,999        153,587
Store operating expenses..........        111,094        109,071        112,249
General and administrative
 expenses.........................         32,083         32,268         34,419
Nonrecurring charge for
 restructuring (Note 12)..........            --             --           5,200
                                    -------------  -------------  -------------
  Income from operations..........         14,723         14,660          1,719
Interest expense..................         (8,273)        (8,122)        (7,330)
Interest income...................            750            781          1,247
Loss on disposition of properties,
 net..............................           (398)          (298)          (433)
                                    -------------  -------------  -------------
  Income (loss) before income
   taxes and cumulative effect of
   change in accounting for income
   taxes..........................          6,802          7,021         (4,797)
Benefit from (provision for)
 income taxes.....................         (2,989)        (2,929)         1,898
                                    -------------  -------------  -------------
  Income (loss) before cumulative
   effect of change in accounting
   for income taxes...............          3,813          4,092         (2,899)
Cumulative effect of change in
 accounting for income taxes
 (Note 6).........................            --             --          (3,951)
                                    -------------  -------------  -------------
  Net income (loss)...............  $       3,813  $       4,092  $      (6,850)
                                    =============  =============  =============
Earnings (loss) per share:
  Before cumulative effect of
   change in accounting for income
   taxes..........................  $         .72  $         .75  $        (.53)
  Cumulative effect of change in
   accounting for income
   taxes (Note 6).................            --             --            (.73)
                                    -------------  -------------  -------------
Earnings (loss) per share.........  $         .72  $         .75  $       (1.26)
                                    =============  =============  =============
Retained earnings, beginning of
 year.............................  $       9,408  $      13,221  $      17,313
Net income (loss).................          3,813          4,092         (6,850)
                                    -------------  -------------  -------------
Retained earnings, end of year....  $      13,221  $      17,313  $      10,463
                                    =============  =============  =============

- --------
Note: Excise taxes approximating $17,472,000, $21,230,000 and $23,855,000
      collected from customers on retail gasoline sales are included in
      Revenues and Cost of sales for fiscal years 1991, 1992 and 1993,
      respectively.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-8

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                     FEBRUARY 1, 1992 AND JANUARY 30, 1993
 


                                                               1992      1993
                                                             --------  --------
                                                              (IN THOUSANDS,
                                                             EXCEPT PER SHARE
                                                                 AMOUNTS)
                          ASSETS
                          ------
                                                                 
Current Assets:
  Cash.....................................................  $  4,854  $  6,483
  Accounts and notes receivable............................    12,507    11,069
  Inventory................................................    24,131    26,857
  Prepaid expenses and other current assets................     3,349     2,306
  Deferred and refundable income taxes.....................     1,370     4,045
                                                             --------  --------
    Total current assets...................................    46,211    50,760
                                                             --------  --------
Property and Equipment:
  Land and improvements....................................    11,477    14,134
  Buildings and leaseholds.................................    44,842    51,659
  Equipment................................................    64,629    71,191
                                                             --------  --------
                                                              120,948   136,984
  Less--Accumulated depreciation...........................    37,974    46,341
                                                             --------  --------
    Net property and equipment.............................    82,974    90,643
                                                             --------  --------
Property Under Capital Leases, net of accumulated amortiza-
 tion of $3,804 and $4,834.................................     3,463     2,433
                                                             --------  --------
Other Assets:
  Goodwill, net of accumulated amortization of $2,151 and
   $2,509..................................................    11,674    11,316
  Franchise and operating rights, net of accumulated amor-
   tization of $1,783 and $2,135...........................     8,361     8,009
  Favorable leases purchased, net of accumulated amortiza-
   tion of $4,382 and $4,790...............................     1,010       602
  Notes receivable.........................................     4,624     3,607
  Other....................................................     7,238     7,177
                                                             --------  --------
    Total other assets.....................................    32,907    30,711
                                                             --------  --------
Total assets...............................................  $165,555  $174,547
                                                             ========  ========

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
                                                                 
Current Liabilities:
  Current portion of long-term debt........................  $  4,447  $  7,803
  Current portion of capital lease obligations.............     1,149     1,087
  Accounts payable.........................................    25,482    27,768
  Accrued expenses.........................................    12,484    13,599
  Accrued restructuring expenses...........................       --      5,200
                                                             --------  --------
    Total current liabilities..............................    43,562    55,457
                                                             --------  --------
Long-Term Debt, less current portion above.................    69,986    69,645
                                                             --------  --------
Capital Lease Obligations, less current portion above......     3,537     2,500
                                                             --------  --------
Other Liabilities and Deferred Credits.....................     4,205     5,352
                                                             --------  --------
Deferred Income Taxes......................................     5,165     8,861
                                                             --------  --------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
  Class A Common Stock, par value $.01, 20,000,000 shares
   authorized,
   3,085,459 and 3,173,802 issued..........................        31        32
  Class B Common Stock, par value $.01, 10,000,000 shares
   authorized,
   2,973,693 and 2,971,318 issued..........................        30        30
  Paid-in capital in excess of par value...................    26,731    27,212
  Retained earnings........................................    17,313    10,463
  Treasury stock, at cost..................................    (5,005)   (5,005)
                                                             --------  --------
    Total stockholders' equity.............................    39,100    32,732
                                                             --------  --------
Total liabilities and stockholders' equity.................  $165,555  $174,547
                                                             ========  ========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-9

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  FOR THE YEARS ENDED FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 


                                                  1991      1992       1993
                                                 -------  ---------  ---------
                                                       (IN THOUSANDS)
                                                            
Cash flows from operating activities:
  Net income (loss)............................. $ 3,813  $   4,092  $  (6,850)
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Cumulative effect of change in accounting
     for income taxes...........................     --         --       3,951
    Accrued restructuring expenses..............     --         --       5,200
    Depreciation and amortization...............  13,358     13,571     13,664
    Increase (decrease) in deferred income
     taxes......................................     196      1,231     (3,647)
    Decrease in store fixed assets resulting
     from franchising activities................     893        679        --
    Loss on other disposition of properties.....     398        298        433
    (Increase) decrease in accounts and notes
     receivable.................................  (2,079)    (3,377)     1,438
    Decrease (increase) in inventory............     354      2,244     (2,726)
    (Decrease) increase in accounts payable.....  (1,483)    (4,360)     2,286
    Decrease (increase) in other current assets
     and liabilities, net.......................   3,531     (2,107)     1,090
    (Decrease) increase in other noncurrent
     liabilities and deferred credits...........    (251)       (24)     1,147
                                                 -------  ---------  ---------
Net cash provided by operating activities.......  18,730     12,247     15,986
                                                 -------  ---------  ---------
Cash flows from investing activities:
  Purchase of property and equipment............ (14,307)  (12,521)    (17,992)
  Acquisition of Stop-N-Go assets............... (16,191)       --         --
  Proceeds from sale of property and equipment..   1,432        623      1,603
  Increase in long-term notes receivable........  (1,371)    (1,791)    (1,057)
  Proceeds from long-term notes receivable......   1,135      1,042      2,074
  Increase in intangibles and other assets......  (2,468)    (1,116)    (1,383)
                                                 -------  ---------  ---------
Net cash used by investing activities........... (31,770)   (13,763)   (16,755)
                                                 -------  ---------  ---------
Cash flows from financing activities:
  Issuance (repayment) of term debt.............  35,000     (2,000)    (4,000)
  (Decrease) increase in revolving loan, net.... (23,500)     2,900      5,400
  Additional long-term debt.....................   1,194      1,736      2,327
  Repayment of other long-term debt and capital
   lease obligations............................  (1,807)    (1,881)    (1,811)
  Repurchase of subordinated debentures.........     --        (380)       --
  Treasury stock purchases......................     (65)       --         --
  Other increases in common stock and paid-in
   capital......................................     128        166        482
                                                 -------  ---------  ---------
Net cash provided by financing activities.......  10,950        541      2,398
(Decrease) increase in cash.....................  (2,090)      (975)     1,629
Cash at beginning of year.......................   7,919      5,829      4,854
                                                 -------  ---------  ---------
Cash at end of year............................. $ 5,829  $   4,854  $   6,483
                                                 =======  =========  =========
Supplemental disclosures:
Cash paid during the year--
  Interest...................................... $ 8,534  $   8,064  $   7,191
  Income taxes..................................   2,369      2,453      1,535
Noncash investing and financing activities--
  Capital lease obligations.....................     986        168        --
                                                 =======  =========  =========

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-10

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 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 business--The Company owns, operates and franchises convenience
retail stores, a number of which also sell gasoline. The Company also
manufactures and distributes certain dairy and other products for sale at the
majority of these locations.
 
  Fiscal year--The Company's fiscal year ends on the Saturday closest to
January 31.
 
  Inventory--Store and manufacturing and distribution inventory is stated
primarily at the lower of last-in, first-out (LIFO) cost or market. Gasoline
inventory is stated at the lower of first-in, first-out (FIFO) cost or market.
 
  Property and depreciation--Property is stated at cost and is depreciated on
the straight-line basis for financial reporting purposes over the following
estimated useful lives:
 
                                                           
       Buildings.................................................... 15-40 years
       Equipment....................................................  5-20 years

       
 
  Leaseholds are depreciated primarily over 10-25 years or the life of the
lease.
 
  Goodwill and franchise and operating rights--Goodwill represents the excess
of cost over fair value of net assets purchased and is being amortized on a
straight-line basis over a period of 40 years. Franchise and operating rights
represent the value of franchise relationships purchased in connection with
past acquisitions and are being amortized on a straight-line basis over a
period of 40 years. The Company assesses the recoverability of these
intangibles by determining whether the amortization of the goodwill and
franchise and operating rights balances over the remaining lives can be
recovered through projected future results. At this time, the Company is
profitable, after exclusion of one-time restructuring charges, and expects full
recoverability. Therefore, it is the Company's belief that no impairment of
goodwill and franchise and operating rights has occurred.
 
  Favorable leases purchased--The cost of favorable leases purchased in
connection with past acquisitions is being amortized over the remaining terms
of the leases.
 
  Computer software costs--The Company capitalizes the costs incurred for the
purchase or development of computer software, and amortizes them over a five
year period. As of January 30, 1993 and February 1, 1992, the Company had
capitalized, net of accumulated amortization, $1,212,000 and $1,297,000 of such
costs, which are included in the accompanying Consolidated Balance Sheets as
other assets.
 
  Income taxes--Effective February 2, 1992, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Prior to the implementation of SFAS No.
109, the Company accounted for income taxes using the deferral method as
required by Accounting Principles Board Opinion No. 11.
 
  Self insurance reserves--The Company is self-insured for certain property and
liability, and accident and health insurance risks and establishes reserves for
estimated outstanding claims based on its historical claims experience and
reviews by loss reserve specialists. The Company has purchased insurance
coverage for losses that may occur above certain levels. As of January 30, 1993
and February 1, 1992, the Company has established reserves for these risks of
$6,231,000 and $5,687,000, which are recorded on a present value basis using a
discount rate of 8%.
 
 
                                      F-11

 
             DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993

  Revenue recognition--The Company recognizes revenues as earned, including
franchise revenues. Franchise revenues represent a percentage of franchise
store sales remitted to the Company on a weekly or monthly basis, as well as
revenues derived from initial fees and the gain on sale of store assets to
franchisees. Net Sales of the Company, its Subsidiaries and Franchises is
comprised of the Company's revenues plus store sales of franchise locations
and excludes related franchise fees.
 
  Store preopening and closing costs--Expenditures of a non-capital nature
associated with opening a new store are expensed as incurred. At the time of
the decision to close a store, estimated unrecoverable costs are charged to
expense. Such costs include the net book value of abandoned fixtures,
equipment, leasehold improvements and a provision for the present value of
future lease obligations, less estimated sub-rental income.
 
  Earnings per share--Earnings per share have been calculated based on the
weighted average number of shares outstanding and the effect of stock options,
if dilutive, during each period. The number of shares used in the calculations
for earnings per share were 5,422,971, 5,467,514 and 5,315,189 for the years
ended January 30, 1993, February 1, 1992 and February 2, 1991, respectively.
 
  Reclassifications--Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used for the
current year.
 
2. ACCOUNTS AND NOTES RECEIVABLE:
 
  A summary of accounts and notes receivable as of February 1, 1992 and January
30, 1993 is as follows:
 


                                                                 1992    1993
                                                                ------- -------
                                                                (IN THOUSANDS)
                                                                  
   Franchise accounts receivable............................... $ 5,652 $ 4,555
   Franchise notes receivable..................................   4,846   3,967
   Other.......................................................   7,816   7,807
                                                                ------- -------
                                                                 18,314  16,329
   Less allowance for doubtful accounts and notes..............   1,183   1,653
                                                                ------- -------
   Net accounts and notes receivable...........................  17,131  14,676
   Less noncurrent notes receivable............................   4,624   3,607
                                                                ------- -------
   Current accounts and notes receivable....................... $12,507 $11,069
                                                                ======= =======

 
  Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Instruments," requires companies to disclose
market value information related to financial instruments including accounts
and notes receivable. 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 current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. As of January 30, 1993, the carrying amount
of noncurrent notes receivable approximates the fair value.
 
 
                                     F-12

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993

3. INVENTORY:
 
  A summary of inventory as of February 2, 1991, February 1, 1992 and January
30, 1993 is as follows:
 


                                                       1991     1992     1993
                                                      -------  -------  -------
                                                          (IN THOUSANDS)
                                                               
Inventory valued at FIFO cost........................ $30,555  $28,781  $32,265
LIFO reserve.........................................  (4,180)  (4,650)  (5,408)
                                                      -------  -------  -------
Inventory primarily valued at LIFO cost.............. $26,375  $24,131  $26,857
                                                      =======  =======  =======

 
  The LIFO reserve reflects the difference between stating the inventory at
historical LIFO cost and the more current FIFO cost. The LIFO reserve increased
by $758,000 in 1993, $470,000 in 1992 and $808,000 in 1991. Had the FIFO method
been used, cost of sales would have been reduced and gross profit would have
increased by these amounts. Earnings (loss) per share would have been increased
(decreased) by ($.08) in 1993, $.05 in 1992 and $.09 in 1991, had the FIFO
method been used.
 
  During 1993, 1992 and 1991 the Company liquidated certain LIFO inventory that
was carried at lower costs prevailing in prior years. The effect of this
liquidation was to increase net income or decrease net loss by approximately
$60,000 ($.01 per share) in 1993, $61,000 ($.01 per share) in 1992 and $63,000
($.01 per share) in 1991.
 
4. LONG-TERM DEBT:
 
  At January 30, 1993, the Company had the following long-term debt:
 


                            INTEREST      MATURITY
                              RATE      (FISCAL YEAR)  TOTAL  CURRENT LONG-TERM
                          ------------- ------------- ------- ------- ---------
                                                           (IN THOUSANDS)
                                                       
Bank term loan........... Prime +  1/4%   1994-1997   $29,000 $7,000   $22,000
Subordinated debentures..    14.25%       1996-2001    27,183    --     27,183
Bank revolving loan...... Prime +  1/4%     1997       11,800    --     11,800
Small Business Adminis-
 tration debentures......  7.9%-10.7%     1996-2002     4,220    --      4,220
Equipment financing......   6.5%-8.6%     1996-2000     2,812    610     2,202
Real estate mortgage
 notes payable...........  6.7%-12.0%     1994-2012     2,433    193     2,240
                                                      ------- ------   -------
                                                      $77,448 $7,803   $69,645
                                                      ======= ======   =======

 
  In January 1991, the Company entered into a credit agreement with a group of
banks which provides for a $35,000,000 term loan and a $15,000,000 revolving
credit loan. The term loan is being repaid in semi-annual installments which
began August 31, 1991, with the final installment due and payable on February
28, 1996. The outstanding balance of the revolving credit loan is due and
payable on February 28, 1996. The credit agreement provides for interest
payments based on the agent bank's prime rate plus 1/4%. At January 30, 1993,
the agent bank's prime rate was 6%. The loan agreement also provides for a
commitment fee of 3/8% on any unused portion of the revolving credit loan.
Among other restrictions, the credit agreement restricts the Company from
paying cash dividends and repurchasing Company stock and subordinated
debentures and contains financial covenants relating to specified levels of:
earnings before interest, rent and taxes to interest and rent; cash flow to
debt service; and senior liabilities to net worth; as well as the maintenance
of minimum tangible capital. In connection with the credit agreement, the
Company has pledged as collateral capital stock of certain subsidiary
corporations of the Company, as well as a security interest in any loans made
between the Company and its subsidiaries.
 
                                      F-13

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 
  The Company originally issued $35,000,000 principal amount of subordinated
debentures in November, 1985. Since that date, the Company has repurchased
$7,817,000 principal amount of these debentures. The gain on these repurchases
has not been material after deducting the write-off of related deferred bond
financing costs. The subordinated debentures are redeemable during the period
November 15, 1990 through November 15, 1995, at rates starting at 107% of
principal amount, reduced each year by 1.4%. The Company must redeem $5,250,000
principal amount of debentures annually commencing November 15, 1995 until
final payment becomes due November 15, 2000, after considering amounts
repurchased by the Company.
 
  SFAS No. 107 requires companies to disclose market value information related
to debt based on trade prices, if available, or rates available to the Company
for debt with similar terms and maturities. As of January 30, 1993, the fair
value of the bank term loan, bank revolving loan and Small Business
Administration debentures approximated the carrying amount. As of January 30,
1993, the fair value of the subordinated debentures was approximately
$28,300,000.
 
  Maturities on long-term debt for the next five years are as follows:
 


   FISCAL YEAR                                                        AMOUNT
   -----------                                                    --------------
                                                                  (IN THOUSANDS)
                                                               
    1994.........................................................    $ 7,803
    1995.........................................................      7,858
    1996.........................................................     17,716
    1997.........................................................     21,592
    1998.........................................................      5,753

 
5. LEASES:
 
  The Company leases operating properties, including store locations and office
space, under various lease agreements expiring through 2011. Certain of these
locations are sublet to the Company's franchisees.
 
  A summary of future minimum lease payments and sublease receipts at January
30, 1993 is as follows:
 


                                                                         NET
                                          CAPITAL OPERATING OPERATING OPERATING
PAYABLE/RECEIVABLE IN FISCAL YEAR ENDING  LEASES   LEASES   SUBLEASES  LEASES
- ----------------------------------------  ------- --------- --------- ---------
                                                     (IN THOUSANDS)
                                                          
1994..................................... $1,390   $14,067   $ 4,117   $ 9,950
1995.....................................  1,150    11,199     3,057     8,142
1996.....................................    376     7,834     2,011     5,823
1997.....................................    348     5,309     1,227     4,082
1998.....................................    308     3,097       838     2,259
Thereafter...............................  1,249     6,777       640     6,137
                                          ------   -------   -------   -------
Total minimum............................  4,821   $48,283   $11,890   $36,393
                                                   =======   =======   =======
Less amounts representing interest and
 executory costs.........................  1,234
                                          ------
Present value of minimum lease payments.. $3,587
                                          ======

 
  Rental expense for all operating leases is as follows:


                                                          1991    1992    1993
                                                         ------- ------- -------
                                                             (IN THOUSANDS)
                                                                
   Leases............................................... $14,404 $15,579 $15,573
   Less subleases.......................................   4,328   4,656   4,659
                                                         ------- ------- -------
   Net.................................................. $10,076 $10,923 $10,914
                                                         ======= ======= =======

 
                                      F-14

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 
6. FEDERAL AND STATE INCOME TAXES:
 
  The Company adopted the provisions of SFAS No. 109 effective February 2, 1992
and recorded a charge of $3,951,000 for the fiscal year ended January 30, 1993
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 as a result of this change.
 
  The provision for (benefit from) income taxes for the fiscal years ended
February 2, 1991, February 1, 1992 and January 30, 1993 is as follows:


                                                          1991    1992   1993
                                                         ------  ------ -------
                                                            (IN THOUSANDS)
                                                               
   Current provision
     Federal............................................ $2,591  $1,215 $ 1,309
     State and local....................................    202     483     440
                                                         ------  ------ -------
       Total current provision..........................  2,793   1,698   1,749
                                                         ------  ------ -------
   Deferred provision (benefit)
     Federal............................................   (428)    930  (3,118)
     State and local....................................    624     301    (529)
                                                         ------  ------ -------
       Total deferred provision (benefit)...............    196   1,231  (3,647)
                                                         ------  ------ -------
   Total provision (benefit)............................ $2,989  $2,929 $(1,898)
                                                         ======  ====== =======

 
  A reconciliation of the difference between the statutory federal income tax
rate and the effective income tax rate follows:


                                                   PERCENT OF PRETAX INCOME
                                                  ------------------------------
                                                    1991       1992       1993
                                                  --------   --------   --------
                                                               
   Statutory federal income tax rate............        34%        34%       (34)%
   Increase (decrease) from:
     State income tax provision (benefit), net
      of federal tax effect.....................         8          7         (1)
     Nondeductible depreciation and amortization
      of acquired assets........................         3          4          2
     Targeted jobs credit.......................        (3)        (3)        (7)
     Sale or writedown of assets creating
      capital losses, net of utilization........         2         --         --
                                                  --------   --------   --------
   Effective income tax rate....................        44%        42%       (40)%
                                                  ========   ========   ========

 
  Deferred tax liabilities and assets 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) at January 30, 1993
are as follows:
 


                                                                       1993
                                                                  --------------
                                                                  (IN THOUSANDS)
                                                               
   Capitalized leases............................................    $    306
   Depreciation and amortization.................................     (11,474)
   Vacation accrual..............................................         402
   Inventory (LIFO)..............................................      (1,628)
   Reserve for asset valuations..................................         677
   Insurance reserves not deductible for tax purposes............       1,586
   Income deferred for financial statement purposes..............         778
   Reserve for closed stores and renovation......................         667
   Accrued restructuring expenses................................       2,111
   Tax credit carryforwards......................................       1,855
   Other.........................................................         (96)
                                                                     --------
   Net deferred tax liability....................................    $ (4,816)
                                                                     ========

 
 
                                      F-15

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993

  As of January 30, 1993, the Company had alternative minimum tax credits
aggregating approximately $400,000 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 system. In addition, the Company had approximately
$1,455,000 of targeted jobs credit carryforwards that expire from fiscal 2006
to 2008. No valuation allowance for deferred tax assets was provided as of
January 30, 1993.
 
  The Company and its subsidiaries file a consolidated federal income tax
return but generally file separate state income tax returns. As of January 30,
1993, the Company had net operating loss carryforwards for state income tax
purposes of approximately $415,000 which expire, if unused, from fiscal 1994 to
2007.
 
7. CAPITAL STOCK:
 
  An analysis of the capital stock accounts follows:
 


                                          COMMON STOCK
                              -------------------------------------
                                                                       PAID-
                              CLASS A SHARES CLASS B SHARES          IN CAPITAL
                              ISSUED AT $.01 ISSUED AT $.01         IN EXCESS OF
                                PAR VALUE      PAR VALUE    AMOUNT   PAR VALUE
                              -------------- -------------- ------- ------------
                                                        
Balance February 3, 1990....    2,306,815      2,484,985    $47,918 $26,450,180
Employee stock options exer-
 cised......................          --          12,250        123      41,650
Employee stock purchase
 plan.......................       15,954            --         160      84,763
Exchange of Class B shares
 for Class A shares.........       45,900        (45,900)       --          --
                                ---------      ---------    ------- -----------
Balance February 2, 1991....    2,368,669      2,451,335     48,201  26,576,593
Employee stock options exer-
 cised......................        2,187         14,275        165      69,522
Employee stock purchase
 plan.......................       16,889            --         169      99,240
Exchange of Class B shares
 for Class A shares.........      101,400       (101,400)       --          --
Five-for-Four Stock Split...      596,314        609,483     12,058     (12,058)
Other.......................          --             --         --       (2,681)
                                ---------      ---------    ------- -----------
Balance February 1, 1992....    3,085,459      2,973,693     60,593  26,730,616
Employee stock options exer-
 cised......................       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
                                =========      =========    ======= ===========

 
  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, 1,116,920 shares remain available for issuance as of January 30, 1993.
 
  As of January 30, 1993, February 1, 1992 and February 2, 1991, the Company
held 521,625 shares of Class A Common Stock and 175,957 shares of Class B
Common Stock as treasury shares.
 
                                      F-16

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 
8. STOCK OPTION PLANS:
 
  The Company adopted Stock Option Plans in 1983, 1985 and 1990 providing for
the granting 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 10,000, 150,000 and
115,000 in fiscal 1993, 1992 and 1991, respectively. At January 30, 1993, the
Company had available for grant under these Plans options to purchase 20,495
shares of Class B Common Stock and 175,750 shares of Class A Common Stock,
after considering the lapse of options previously granted. In addition to the
incentive stock options granted under the above Plans, the Company has granted
non-qualified stock options which are not part of a specific plan. A summary of
activity for all stock options during the fiscal year ended January 30, 1993 is
as follows:
 


                                               OPTIONS     NET                 OPTIONS     OPTIONS
                                             OUTSTANDING OPTIONS             OUTSTANDING EXERCISABLE
                      STOCK                  FEBRUARY 1, GRANTED    OPTIONS  JANUARY 30, JANUARY 30,
PLAN OR FISCAL YEAR   TYPE    OPTION PRICE      1992     (LAPSED)  EXERCISED    1993        1993
- -------------------  -------  ------------   ----------- --------  --------- ----------- -----------
                                                                    
Incentive Stock Options:
     1983 Plan       Class B $2.73 to $ 5.50    91,783      (275)       --      91,508      91,508
     1985 Plan       Class A $6.20 to $10.75   324,875   (13,062)   (10,313)   301,500     246,500
     1990 Plan       Class A $4.60 to $ 7.25   241,875     7,500    (30,000)   219,375      71,875
                                               -------   -------    -------    -------     -------
  Total Incentive Stock Options............    658,533    (5,837)   (40,313)   612,383     409,883
                                               -------   -------    -------    -------     -------
Non-qualified Stock Options:
       1986          Class B      $4.00         12,750       --         --      12,750      12,750
       1987          Class A      $8.80         11,250       --         --      11,250      11,250
       1991          Class A      $6.20         30,000       --     (30,000)       --          --
       1991          Class A      $4.60          5,000       --         --       5,000       5,000
                                               -------   -------    -------    -------     -------
  Total Non-qualified Stock Options........     59,000       --     (30,000)    29,000      29,000
                                               -------   -------    -------    -------     -------
    Total Stock Options....................    717,533    (5,837)   (70,313)   641,383     438,883
                                               =======   =======    =======    =======     =======

 
9. GASOLINE OPERATIONS:
 
  A summary of gasoline operations for the three years ended February 2, 1991,
February 1, 1992 and January 30, 1993 is as follows:
 


                                                       1991     1992     1993
                                                     -------- -------- --------
                                                           (IN THOUSANDS)
                                                              
   Gasoline gallons sold............................  188,930  189,625  196,703
   Gasoline revenues................................ $217,159 $211,152 $214,087
   Cost of gasoline sold............................  196,268  192,340  194,110
   Depreciation.....................................    1,636    1,789    1,916
   Capital expenditures.............................    4,343    2,118    2,128
   Net book value of gasoline equipment.............   11,417   12,161   12,373

 
                                      F-17

 
             DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 
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. Annual
contributions were $100,000, $400,000 and $675,000 for fiscal 1993, 1992 and
1991, 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. The Company does not offer any additional postretirement and
postemployment benefits to its employees.
 
11. COMMITMENTS AND CONTINGENCIES:
 
  At January 30, 1993, the Company is contingently liable for outstanding
letters of credit amounting to $9,719,000. 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 $2,300,000 at January 30, 1993. 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.
 
  On February 26, 1988, 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 five 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
Company for a five year term that began on February 2, 1992 and ends on
January 31, 1997, unless terminated earlier. Under the employment agreement,
Mr. Nirenberg receives an annual salary of $500,000, payable in installments
according to the Company's normal compensation policy, plus customary fringe
benefits.
 
  The Company is party to a number of lawsuits which have arisen in the
ordinary course of business. Management does not believe the outcome of this
litigation will have a material impact on the Company's results of operations
or financial position.
 
12. NONRECURRING CHARGE FOR RESTRUCTURING:
 
  Subsequent to January 30, 1993, the Company announced that it is downsizing
and consolidating its three administrative offices into its new Corporate
headquarters facility in Enfield, Connecticut. The Company historically
maintained administrative offices in Enfield, Connecticut, Louisville,
Kentucky and Cuyahoga Falls, Ohio. As part of the restructuring the Company
will be relocating certain employees as well as separating certain other
individuals. The Company has recorded a nonrecurring charge of $5,200,000
primarily related to severance, relocation and other personnel related costs
associated with the Company's restructuring.
 
                                     F-18

 
              DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
            FEBRUARY 2, 1991, FEBRUARY 1, 1992 AND JANUARY 30, 1993
 
13. BUSINESS ACQUISITION:
 
  The Company acquired for cash the assets of 110 Stop-N-Go convenience food
stores on March 16, 1990, and the assets of 27 Stop-N-Go convenience food
stores on June 21, 1990, bringing the total number of stores aquired to 137.
The cost of the acquisitions approximated $16,191,000 (including inventory)
which cost was allocated based on the fair market value of the assets acquired.
The excess of acquisition costs over the assigned value of assets acquired was
recorded as goodwill. No operating results of Stop-N-Go have been included with
those of the Company prior to the dates of acquisitions.
 
  The following unaudited pro forma information represents the results of
operations of the Company as if the Stop-N-Go stores were included with the
operations of the Company for the entire fiscal year ended February 2, 1991:
 


                                                                   1991
                                                           ---------------------
                                                           (IN THOUSANDS, EXCEPT
                                                             PER SHARE AMOUNT)
                                                        
       Revenues...........................................       $603,218
       Net income.........................................          3,670
       Earnings per share.................................            .69

 
                                      F-19

 
 
 
                      [THIS PAGE INTENTIONALLY LEFT BLANK]
 
 

 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
  NO PERSON, DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS ABOUT
THE COMPANY, THE NOTES, THE OFFERING MADE HEREBY OR ANY OTHER MATTER AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE OF THE NOTES OFFERED HEREBY SHALL, UNDER ANY CIRCUMSTANC-
ES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
 
                               ----------------
 
                               TABLE OF CONTENTS


                                                                            PAGE
                                                                            ----
                                                                         
Prospectus Summary........................................................    3
The Company...............................................................    8
Investment Considerations.................................................   10
Use of Proceeds...........................................................   12
Capitalization............................................................   13
Selected Financial Data...................................................   15
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   17
Business..................................................................   22
Management................................................................   29
Certain Transactions......................................................   30
Description of the New Credit Agreement...................................   32
Description of the Notes..................................................   33
Underwriting..............................................................   55
Certain Legal Matters.....................................................   55
Experts...................................................................   55
Available Information.....................................................   56
Documents Incorporated by Reference.......................................   56
Index to Consolidated Financial Statements................................  F-1

 
                               ----------------
   
  UNTIL MAY 25, 1994 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
    
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                                  $75,000,000
 
             [LOGO OF DAIRY MART CONVENIENCE STORES APPEARS HERE]
                          
                       10 1/4% SENIOR SUBORDINATED     
                                NOTES DUE 2004
 
                               ----------------
 
                                  PROSPECTUS

                               ----------------
 
                           BEAR, STEARNS & CO. INC.
                               
                            FEBRUARY 24, 1994     
 
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                            GRAPHICS APPENDIX LIST
                            ----------------------

EDGAR Version                                    Typeset Version
- -------------                                    ---------------

                                             Shown on the inside front cover of 
                                         the Prospectus will be a color photo of
                                         a Dairy Mart super pumper store located
                                         in Vernon, Connecticut.

                                             Shown on the inside back cover of 
                                         the Prospectus will be a map of the 
                                         eleven states in which Dairy Mart 
                                         operates stores, as well as the more
                                         than 550 communities where the Company
                                         does business. In addition, the map
                                         highlights the location of the 
                                         Company's corporate headquarters, 
                                         regional offices and dairy plants and
                                         distribution center.