-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NeJuWhUvjaWpAwFsHTXnM2sO2gZ13UhTh8ETDtfRPs2Wh/opEWFCVSk2fL7ZKU2Q MRHa4cxBKTRtWDi2m/H9oA== 0000950109-96-002611.txt : 19960619 0000950109-96-002611.hdr.sgml : 19960619 ACCESSION NUMBER: 0000950109-96-002611 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAIRY MART CONVENIENCE STORES INC CENTRAL INDEX KEY: 0000721675 STANDARD INDUSTRIAL CLASSIFICATION: 5412 IRS NUMBER: 042497894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11627 FILM NUMBER: 96555320 BUSINESS ADDRESS: STREET 1: ONE VISION DRIVE CITY: ENFIELD STATE: CT ZIP: 06082 BUSINESS PHONE: 2037414444 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________ (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended FEBRUARY 3, 1996 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ______ to ______ Commission File Number 0-12497 __________________ DAIRY MART CONVENIENCE STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 04-2497894 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VISION DRIVE, ENFIELD, CT 06082 (Address of principal executive offices) Registrant's telephone number, including area code (860) 741-4444 _______________________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock (Par Value $.01) Class B Common Stock (Par Value $.01) (Titles of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of April 1, 1996, 2,804,671 shares of Class A Common Stock and 2,783,060 shares of Class B Common Stock were outstanding, and the aggregate market value of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES, INC., held by nonaffiliates was approximately $22,027,309.00. -2- DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's 1996 definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal year are incorporated by reference in Part III. The Section entitled "INFORMATION REGARDING DM ASSOCIATES AND THE NIRENBERG TRANSACTION" on pages 19 through 21 of the Registrant's Proxy Statement dated December 26, 1995 is incorporated by reference into Part I of this Form 10-K. PART I ------ ITEM 1. BUSINESS GENERAL Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or "Dairy Mart"), operates one of the nation's largest convenience store chains. Founded in 1957, the Company operates or franchises approximately 877 stores under the "Dairy Mart" name in 11 states located in the Northeast, Midwest and Southeast. Approximately 375 stores sell gasoline and approximately 290 stores are franchised. Dairy Mart stores offer a wide range of products and services which cater to the convenience needs of its customers, including milk, ice cream, groceries, beverages, snack foods, candy, deli products, publications, health and beauty aids, tobacco products, lottery tickets and money orders. The stores are typically located in densely populated, suburban areas on sites which are easily accessible to customers and provide ample parking. Dairy Mart stores are generally free standing structures which are well-lit and are designed to encourage customers to purchase high profit margin products, such as deli items, coffee, fountain drinks and other fast food items. The Company is incorporated in Delaware and maintains its principal executive offices at One Vision Drive, Enfield, Connecticut 06082. The Company's telephone number is (860) 741-4444. STORES The Company's stores are generally located in densely populated suburban areas, and are situated close to single-family homes and apartments to attract neighborhood shoppers. Store location, design, lighting and layout are intended to cater to customers' desire for fast and convenient access. Approximately 375 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 typical Dairy Mart store ranges between 2,400 and 2,700 square feet and is a free standing structure. -3- As of February 3, 1996, the Company operated and franchised retail convenience stores in the following three regions of the United States:
NUMBER OF NORTHEAST REGION STORES --------- Massachusetts..................................................... 61 Connecticut....................................................... 56 New York.......................................................... 37 Rhode Island...................................................... 18 -------- Total Northeast Stores......................................... 172 -------- MIDWEST REGION Ohio.............................................................. 448 Michigan.......................................................... 36 Pennsylvania...................................................... 27 -------- Total Midwest Stores........................................... 511 -------- SOUTHEAST REGION Kentucky.......................................................... 151 Indiana........................................................... 20 Tennessee......................................................... 14 North Carolina.................................................... 9 -------- Total Southeast Stores......................................... 194 -------- Total Stores............................................... 877 ========
UPGRADE AND REMODEL OF EXISTING STORE BASE AND CLOSING UNDERPERFORMING STORES The Company has an ongoing program to upgrade and remodel the Company's retail and gasoline locations to cater to the always changing convenience needs of today's customer. The program includes modernizing and re-imaging the store's appearance, upgrading the gasoline facilities and installing the most modern environmental protection equipment. Remodeled stores will also have more space devoted to higher profit margin items and certain stores will install branded fast food concepts, such as Taco Bell(R), Subway(R) and Pizza Hut(R), to attract customers and enhance performance. The Company has historically evaluated the performance of each of its stores in order to determine its contribution to the Company's overall profitability. Management has raised the acceptable level that a store's performance must meet in order for the store to be eligible for on-going capital expenditure support from the Company. Accordingly, in fiscal year 1996, the Company closed 92 of its retail convenience stores and 38 of its retail gasoline facilities due to their inability to meet the Company's economic and non- economic criteria for long-term stability and growth. -4- NEW STORES A major component in the Company's growth strategy is to continue to build new stores and increase its level of gasoline sales. All new store locations have significantly expanded gasoline retailing capacity and devote a greater amount of selling space to high profit margin products. TECHNOLOGICAL UPGRADE The Company's Information Systems group is continuing to evaluate several technological upgrades and procedural enhancement opportunities to increase the efficiency of the existing store operations and corporate support functions. These enhancements will provide more detailed and timely information regarding store operations, including composition of sales, inventory levels and product pricing and profit analysis. GASOLINE OPERATIONS Gasoline sales enable the Company to significantly increase a store's total level of sales without a commensurate increase in overhead. Gasoline sales accounted for approximately 40% of total revenues of the Company in fiscal year 1996 and approximately 35% for fiscal years 1995 and 1994. As of February 3, 1996, 376 stores sold gasoline. Financial information related to the Company's gasoline operations for the last three fiscal years is set forth in Note 11 to the Consolidated Financial Statements. The Company's gasoline pricing strategy is designed, in part, to provide value to customers by offering the same quality gasoline offered by major oil companies at prices which are generally below nationally advertised brands and comparable to other convenience store chains. The Company obtains its gasoline from major oil company suppliers, primarily through spot market purchases, and believes that there are adequate supplies of fuel available from a number of sources at competitive prices. Gasoline profit margins have a significant impact on the Company's income. Such profit margins could be adversely influenced by factors beyond the Company's control, such as volatility in the wholesale gasoline market due to supply interruptions. In addition, gasoline profit margins are continually influenced by competition in each local market area. PRODUCT SELECTION All stores generally offer more than 3,000 food and non-food items limited to a few, well-known brand names as well as the Company's private label products. Most of these items would typically be offered in supermarkets. Food items include a wide variety of products, including canned foods and groceries, dairy products, beverages, snack items, candy, baked goods and food service items, such as fountain soft drinks, coffee, hot dogs, deli meats and deli sandwiches and similar foods. Non-food products and services include gasoline, cigarettes, health and beauty aids, publications, lottery tickets and money orders. In addition to selling well-known brand name products, the stores offer many products -5- that bear the "Dairy Mart" private label, including milk, bakery products, juices and other non-carbonated beverages, ice cream and other dairy products such as dips and cheeses. In recent years, the Company has been altering the mix of products to emphasize the sale of items carrying higher profit margins. Fast food items not only carry higher profit margins but also tend to lead to the purchase of other high profit margin products and impulse items, including salty-snacks, candy and beverages. Dairy Mart has introduced a number of private label products, which generally carry a higher gross profit margin than the Company's average gross profit margin on comparable products. FRANCHISE OPERATIONS The Company franchises 290 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. Most franchisees purchase their products through the same supplier 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 February 3, 1996, there were 131 full franchise locations and 159 limited franchise locations. The Company's franchising strategy seeks to: (i) improve the level of retail experience of its new franchisees; and (ii) increase the level of financial commitment by new franchisees. As part of this strategy, new franchisees are now required to undergo more rigorous and thorough interviews and background checks, receive increased levels of financial and retail training, and typically make larger initial cash payments. The following table sets forth the number of stores, on both a Company operated and franchise operated basis, that were opened or acquired, closed or sold, and transferred between Company operated and franchise operated, during the last three fiscal years:
February 3, 1996 January 28, 1995 January 29, 1994 --------------------------------- -------------------------------- -------------------------------- Company Franchise Company Franchise Company Franchise Operated Operated Total Operated Operated Total Operated Operated Total -------- --------- ----- -------- --------- ----- --------- --------- ------ At beginning of period.. 644 317 961 687 335 1,022 709 370 1,079 Opened or acquired...... 8 - 8 10 1 11 4 - 4 Closed or sold.......... (68) (24) (92) (57) (15) (72) (50) (11) (61) Transferred (net)....... 3 (3) -- 4 (4) -- 24 (24) -- ----- ----- ----- ----- ----- ----- ----- ----- ----- At end of period........ 587 290 877 644 317 961 687 335 1,022 ===== ===== ===== ===== ===== ===== ===== ===== =====
-6- INTERNATIONAL OPERATIONS The Company conducts business outside the United States as a joint- venturer, licensor or consultant. Currently, the Company is a party to two agreements with convenience store operators in South Korea and Mexico. As with the Company's prior international arrangements, both such agreements require a specified commitment of Company personnel, but do not require any significant commitment of capital. ADVERTISING To promote a uniform image for all stores, the Company designs and coordinates advertising for all stores to complement its marketing strategy, which is derived, in part, from market surveys and research. In-store, newspaper, and direct-mail advertising, special promotions and seasonal radio and television advertising usually feature certain items which can be purchased at the stores, and frequently include national brand items for which advertising costs are often supplemented by the national brand suppliers. Sales promotions are generally established and maintained on a bi-weekly or monthly basis. COMPETITION The convenience store and retail gasoline industries are highly competitive. The number and type of competitors vary by location. The Company presently competes with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains. Some of the Company's competitors have greater financial resources than the Company. Key competitive factors include, among others, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing. SEASONALITY Weather conditions have a significant effect on the Company's sales, as convenience store customers are more likely to go to stores to purchase convenience goods and services, particularly higher profit margin items such as fast food items, fountain drinks and other beverages, when weather conditions are favorable. Accordingly, the Company's stores generally experience higher revenues and profit margins during the warmer weather months, which fall within the Company's second and third fiscal quarters. EMPLOYEES As of February 3, 1996 exclusive of franchisees and franchisees' employees, the Company employed, on a full-time or part-time basis, approximately 4,100 employees. -7- ENVIRONMENTAL COMPLIANCE The Company incurs ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures relating to its gasoline operations. These laws and regulations relate primarily to underground storage tanks ("USTs"). The United States Environmental Protection Agency has established standards for, among other things: (i) maintaining leak detection; (ii) upgrading UST systems; (iii) taking corrective action in response to releases; (iv) closing USTs to prevent future releases; (v)keeping appropriate records; and (vi) maintaining evidence of financial responsibility for taking corrective action and compensating third parties for bodily injury and property damage resulting from releases. A number of states in which the Company operates also have adopted UST regulatory programs. In the ordinary course of business, the Company periodically detects releases of gasoline or other regulated substances from USTs it owns or operates. As part of its program to manage USTs, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from its existing and previously operated retail gasoline facilities. The Company accrues its estimates of all costs to be incurred for assessment and remediation for known releases. These accruals are adjusted if and when new information becomes known. Additionally, the Company records as receivables the estimated reimbursements of a portion of the total costs from various state environmental trust funds which have provisions for sharing or reimbursing certain costs incurred by UST owners or operators based upon compliance with the terms and conditions of such funds. Due to the nature of such releases, the actual costs of assessment and remediation activities may vary significantly from year to year. Under current federal and state regulatory programs, the Company also will be obligated by December 22, 1998 to upgrade or replace most existing USTs it owns or operates to meet certain corrosion, overfill- and spill-protection and leak-detection requirements. The Company has been 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 $10.0 to $12.0 million in the aggregate over the next three 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 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -Environmental Responsibility"). The Company's estimate of costs to be incurred for environmental assessment and remediation and for UST upgrading and other regulatory compliance are based on factors and assumptions that could change due to modifications of regulatory requirements, detection of unanticipated environmental conditions, or other unexpected circumstances. As a result, the actual costs incurred may vary significantly from the estimate noted above . -8- BUSINESS OUTLOOK This Form 10-K contains forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include plans and objectives to upgrade and remodel store locations, to build new stores and increase gasoline sales, to improve certain aspects of the franchisee program, to sell or lease certain assets, as well as the availability of supplies of gasoline, the estimated costs for environmental remediation and the sufficiency of the Company's liquidity and the availability of capital. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward- looking statements. Such factors and uncertainties include, but are not limited to, the availability of financing and additional capital to fund the Company's business strategy on acceptable terms, if at all, the future profitability of the Company, the availability of desirable store locations, the Company's ability to negotiate and enter into lease, acquisition and supply agreements on acceptable terms, competition and pricing in the Company's market area, volatility in the wholesale gasoline market due to supply interruptions, modifications of environmental regulatory requirements, detection of unanticipated environmental conditions, the timing of reimbursements from state environmental trust funds, the Company's ability to manage its long-term indebtedness, weather conditions, the favorable resolution of certain pending and future litigation, and general economic conditions. ITEM 2. PROPERTIES Of the 877 stores in operation as of February 3, 1996, 103 store locations were owned by the Company and 774 were leased. In addition, the Company owns 20 locations and is the primary lessee for 86 locations not currently operated as Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such locations to third parties. From time to time the Company enters into sale- leaseback transactions whereby the Company sells retail locations and leases such locations back from the purchasers. The Company owns its corporate headquarters facility in Enfield, Connecticut. This facility has approximately 77,000 square feet and is located on eighty-eight acres of land. The Company also owns its former Northeast region operating office building and former manufacturing and processing plant located in a 33,000 square foot building, and its 200,000 square foot former Midwest processing plant and current regional administrative office located in Cuyahoga Falls, Ohio. The Company also leases administrative offices for its Southeast regional offices. In an effort to redirect capital from within the business to enhance overall returns and increase liquidity, management has identified certain assets which it intends to sell. Management has established an internal rate of return criteria to evaluate assets in order to optimize the return on the Company's capital investment. The Company is attempting to sell its corporate headquarters facility in Enfield, Connecticut, the former Northeast regional operating office, and the buildings and real estate that formerly comprised its Connecticut and Ohio manufacturing and distribution facilities. -9- ITEM 3. LEGAL PROCEEDINGS The Company has been named as a nominal defendant, along with certain of those persons who were directors of the Company in fiscal 1996, in two shareholder derivative actions captioned Kahn v. Nirenberg (C.A. No. 14893) ----------------- and Uni-Marts, Inc. v. Stein (C.A. No. 14713), both of which are pending in the ------------------------ Delaware Court of Chancery of New Castle County. The plaintiffs allege, among other things, that in connection with the settlement of the dispute between Charles Nirenberg and the Company's management with respect to control of the Company (the "Nirenberg Settlement"), the directors violated their fiduciary duty to the Company and its stockholders, violated provisions of Delaware corporate law and wasted corporate assets. Mr. Nirenberg is a former shareholder, director and officer of the Company. The plaintiffs seek, among other things, a declaration that the current structure of the general partner of DM Associates Limited Partnership ("DM Associates") is invalid and that certain voting rights with respect to the Class B Common Stock held by DM Associates should be vested in the Company. The Company is contesting these claims and, at this time is not able to determine what the outcome of this litigation will be. The Company was party to a legal proceeding with Mr. Nirenberg (the "Nirenberg Litigation") that was dismissed with prejudice during the fourth quarter of fiscal 1996. A description of the Nirenberg Litigation and the Nirenberg Settlement is located in the section entitled "INFORMATION REGARDING DM ASSOCIATES AND THE NIRENBERG TRANSACTION" on pages 19 through 21 of the Company's Proxy Statement dated December 26, 1995, which section is incorporated herein by reference. Subsequent to fiscal 1996, the interest of one of the partners of New DM Management Associates I was repurchased by such Partnership. As a result, the remaining partners of New DM Management Associates I are Messrs. Stein and Landry, each of whom owns one-half of the partnership interests of New DM Management Associates I. New DM Management Associates I is the sole general partner of DM Associates. DM Associates is the owner of record of approximately 60% of the total voting power of both classes of Common Stock of the Company. In the ordinary course of business, the Company is party to various other 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 future results of operations or financial condition. -10- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On January 19, 1996, the Company held its Annual Meeting of its stockholders. The following matters were voted on at the Annual Meeting: 1. The election of Thomas W. Janes and Truby G. Proctor, Jr. as Class A Directors and Frank W. Barrett, J. Kermit Birchfield, John W. Everets, Jr., Gregory G. Landry and Robert B. Stein, Jr. as Class B Directors; 2. The adoption of the Company's 1995 Stock Option Plan for Outside Directors; 3. The adoption of the Company's 1995 Stock Option and Incentive Award Plan; and 4. The ratification of the appointment of Arthur Andersen LLP as the Company's independent accountants for the fiscal year ending February 3, 1996. The following chart shows the number of votes cast for or against, as well as the number of abstentions and broker nonvotes, as to each matter voted on at the Annual Meeting:
Broker For Against Abstain Nonvotes ------- ------- ------- -------- 1. Election of Mr. Janes............ 169,738 51,450 - - 2. Election of Mr. Proctor.......... 169,745 51,443 - - 3. Election of Mr. Barrett.......... 2,422,600 42,856 - - 4. Election of Mr. Birchfield....... 2,422,600 42,856 - - 5. Election of Mr. Everets.......... 2,422,600 42,856 - - 6. Election of Mr. Landry........... 2,422,600 42,856 - - 7. Election of Mr. Stein............ 2,422,600 42,856 - - 8. Adoption of 1995 Stock Option Plan for Outside Directors...... 1,613,536 435,691 5,982 631,835 9. Adoption of 1995 Stock Option and Incentive Award Plan........ 1,803,430 524,465 2,790 355,959 10. Ratification of Independent Accountants .................... 2,663,565 22,184 895 -
See item 3. Legal Proceeding for a description of the Nirenberg Settlement. -11- PART II ------- ITEM 5. MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has not paid any cash dividends during the last two fiscal years, and pursuant to loan covenants contained in the Company's new senior revolving credit facility, is currently restricted from paying any dividends and from repurchasing its capital stock. The Company's Class A Common Stock and Class B Common Stock are traded on The NASDAQ Stock Market under the symbols DMCVA and DMCVB. The following table sets forth the high and low sales prices per share of both classes of the Company's Common Stock, as quoted on The NASDAQ Stock Market, for the last two fiscal years.
Class A Class B Common Common Stock Stock ------------------------------- High Low High Low - - ------------------------------------------------------------------------ Fiscal Year Ended February 3,1996: - - ------------------------------------------------------------------------ First Quarter 4 5/8 3 5/8 4 7/8 3 3/4 Second Quarter 5 4 3/4 5 1/2 4 3/4 Third Quarter 6 3/8 5 5/8 7 1/4 6 2/15 Fourth Quarter 6 1/4 5 1/2 6 3/4 5 1/2 - - ------------------------------------------------------------------------ Fiscal Year Ended January 28, 1995: - - ------------------------------------------------------------------------ First Quarter 7 1/4 5 3/4 8 6 3/4 Second Quarter 6 1/2 3 3/4 6 3/4 4 1/4 Third Quarter 4 1/4 2 1/2 4 3/4 2 1/4 Fourth Quarter 4 2 5/8 4 1/4 2 7/8 - - ------------------------------------------------------------------------
There were approximately 3,000 stockholders as of April 1, 1996. Included in this number are shares held in nominee or street names. -12- ITEM 6. SELECTED FINANCIAL DATA
Five Years Ended February 3, 1996 1996(a) 1995(a) 1994(a) 1993(a) 1992 - - --------------------------------- ---------------------------------------------------------- (in thousands, except per share amounts) OPERATING RESULTS: Revenues..................................................................$ 571,311 $ 596,782 $ 591,500 $ 580,014 $ 572,761 ---------------------------------------------------------- Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (EBITDA)............................... 12,831 4,377 23,646 16,323 28,852 ---------------------------------------------------------- Interest Expense.......................................................... 9,661 9,219 7,644 7,456 8,260 ---------------------------------------------------------- Income (Loss) Before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Changes.......................... (9,220) (17,319) 3,102 (4,797) 7,021 ---------------------------------------------------------- Net Income (Loss)......................................................... (6,000) (11,150) 866 (6,850) 4,092 ---------------------------------------------------------- Earnings (Loss) Per Share: Before Extraordinary Item and Cumulative Effect of Accounting Changes (1.12) (1.94) .33 (.53) .75 ---------------------------------------------------------- Net Earnings (Loss) Per Share........................................ (1.12) (2.01) .16 (1.26) .75 ---------------------------------------------------------- BALANCE SHEET DATA: Net Property and Equipment................................................$ 80,387 $ 70,578 $ 93,774 $ 93,076 $ 86,437 ---------------------------------------------------------- Total Assets.............................................................. 164,938 172,228 169,442 175,178 165,555 ---------------------------------------------------------- Long-Term Obligations (b)................................................. 100,881 90,268 77,343 81,035 79,119 ---------------------------------------------------------- Stockholders' Equity...................................................... 9,208 22,817 33,870 32,732 39,100 ----------------------------------------------------------
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(a) The results for the years presented include non-recurring and unusual charges as follows: 1996 1995 1994 1993 1992 - - -------------------------------------------------- ---------------------------------------------------------- (in thousands) NONRECURRING PRE-TAX CHARGES: Costs and Expenses Related to Settlement Agreement with Stockholder.......$ 6,487 $ - $ - $ - $ - Costs to Divest of Dairy Manufacturing and Distribution Operations........ 1,313 2,500 - 5,200 - Administrative Severance, Settlement and Related Costs.................... 1,211 2,800 - - - Regulatory and Administrative Fees and Expenses........................... 1,287 1,216 - - - Writedown of Non-operating Properties to Net Realizable Value............. 1,000 3,584 - - - Costs of Store Closings and Restructuring................................. 902 3,900 - - - ---------------------------------------------------------- $ 12,200 $ 14,000 $ - $ 5,200 $ - ---------------------------------------------------------- OTHER UNUSUAL CHARGES, NET OF RELATED INCOME TAX EFFECT: Extraordinary Loss on Extinguishment of Debt..............................$ - $ - $ 928 $ - $ - Cumulative Effect of Accounting Changes................................... - 389 - 3,951 -
(b) Long-term obligations include the current portion of long-term obligations. -13- FINANCIAL HIGHLIGHTS For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994
1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------- (in thousands, except per share and per gallon amounts and number of locations) Financial Data: Revenues: Merchandise Sales................................................ $341,526 $355,435 $355,808 Gasoline Sales................................................... 226,505 210,541 206,155 Dairy Sales...................................................... - (1) 28,563 27,075 Other............................................................ 3,280 2,243 2,462 ---------------------------------------- Total Revenues.................................. $571,311 $596,782 $591,500 ---------------------------------------- Store Data: Company Operated: Gross Profit $................................................... $111,153 $110,577 $111,152 Average Sales Per Store.......................................... $550 $522 $489 Average Gross Profit Per Store................................... $189 $172 $162 Number of Stores at Year End..................................... 587 644 687 Franchise Operated: Franchise Fee $.................................................. $18,805 $19,426 $19,612 Average Sales Per Store.......................................... $586 $556 $554 Average Gross Profit Per Store................................... $65 $61 $59 Number of Stores at Year End..................................... 290 317 335 Total Stores: Gross Profit $................................................... $129,958 $130,003 $130,764 Average Sales Per Store.......................................... $562 $533 $510 Average Gross Profit Per Store................................... $148 $135 $128 Number of Stores at Year End..................................... 877 961 1,022 Gasoline Data: Gallons Sold..................................................... 212,832 206,441 206,365 Gross Profit $................................................... $24,525 $24,079 $25,320 Average Gallons Sold Per Store................................... 566 508 493 Gross Profit $ Per Gallon........................................ $0.1152 $0.1166 $0.1227 Number of Gas Locations at Year End.............................. 376 406 419 Other Data: Weighted Average Number of Shares.................................. 5,374 5,541 5,532 Book Value Per Share (2)........................................... $1.41 $4.02 $6.07 -------------------------------------------------------------------------------------------------------------------
(1) In fiscal 1996, the Company discontinued its manufacturing and distribution operations. The losses resulting from this operation were reflected as a nonrecurring charge. (2) The calculation utilizes total shares outstanding including the dilutive effect of stock options and warrants, as of February 3, 1996, January 28, 1995 and January 29, 1994. -14- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY RESULTS OF OPERATIONS The Company's net loss for fiscal 1996 was $6.0 million as compared to a net loss of $11.2 million for fiscal 1995 and net income of $0.9 million for fiscal 1994. Each years' results included nonrecurring or unusual items as follows:
FISCAL YEARS ------------------------------- (IN MILLIONS) 1996 1995 1994 - - -------------------------------------------------------------------------------------------------------- NONRECURRING PRE-TAX CHARGES: COSTS AND EXPENSES RELATED TO SETTLEMENT AGREEMENT WITH STOCKHOLDER $ 6.5 $ -- $ -- COSTS TO DIVEST OF DAIRY MANUFACTURING AND DISTRIBUTION OPERATIONS 1.3 2.5 -- ADMINISTRATIVE SEVERANCE, SETTLEMENT AND RELATED COSTS 1.2 2.8 -- REGULATORY AND ADMINISTRATIVE FEES AND EXPENSES 1.3 1.2 -- WRITEDOWN OF NON-OPERATING PROPERTIES TO NET REALIZABLE VALUE 1.0 3.6 -- COSTS OF STORE CLOSINGS AND RESTRUCTURING 0.9 3.9 -- ------------------------------- $12.2 $14.0 $ -- ------------------------------- OTHER UNUSUAL CHARGES, NET OF RELATED INCOME TAX EFFECT: EXTRAORDINARY LOSS ON EXTINGUISHMENT OF DEBT $ -- $ -- $ 0.9 CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- 0.4 --
For a discussion of nonrecurring charges see Note 14 to the Consolidated Financial Statements. RESULTS OF OPERATIONS REVENUES Revenues for fiscal 1996 decreased $25.5 million from fiscal 1995 despite the favorable effect on convenience store and gasoline revenues due to the inclusion of 53 weeks in fiscal 1996 as compared to 52 weeks in fiscal 1995. Revenues for fiscal 1995 increased $5.3 million from fiscal 1994. A summary of revenues by functional area for the three fiscal years is shown below:
Fiscal Years ------------------------------- (in millions) 1996 1995 1994 ------------------------------------------------------------------ Convenience store $ 341.5 $355.4 $355.8 Gasoline 226.5 210.5 206.2 Manufacturing and distribution - 28.6 27.1 Other 3.3 2.3 2.4 ------------------------------- Total $ 571.3 $596.8 $591.5 ===============================
Convenience store revenues decreased $13.9 million, or 3.9%, in fiscal 1996 as compared to fiscal 1995 due to a net reduction of 84 underperforming stores, offset by a 1.3% increase in comparable store sales. Although the reduction in stores 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 or sold had been operating at a loss. Convenience store revenues decreased $0.4 million or 0.1%, in fiscal 1995 as compared to fiscal 1994 due to a net reduction of 61 underperforming stores, offset by a 2.8% increase in comparable store sales. Gasoline revenues increased in fiscal 1996 as compared to fiscal 1995 due to an increase in total gasoline gallons sold of 6,391,000, combined -15- with an increase in the average selling price of gasoline of 4.4 cents per gallon. The increase in gasoline gallons sold was achieved despite the decrease in gasoline retailing facilities from 406 sites at the end of fiscal 1995 to 376 sites at the end of fiscal 1996. On a per location basis, average gallonage increased by approximately 11% in the current fiscal year as compared to the prior fiscal year. These gallonage increases were due primarily to further development of new stores having a major gasoline presence and the remodeling and expansion of gasoline facilities at certain existing locations. Gasoline revenues increased in fiscal 1995 as compared to fiscal 1994 due to an increase in the average selling price of gasoline of 2.1 cents per gallon. Gasoline gallons sold increased marginally in fiscal 1995 as compared to fiscal 1994 despite the decrease in gasoline facilities from 419 sites at the end of fiscal 1994 to 406 sites at the end of fiscal 1995. On a per location basis, average gallonage increased by approximately 3% in fiscal 1995 as compared to fiscal 1994. Manufacturing and distribution revenues are not reflected in the current fiscal year due to the closing and divestiture of the dairy manufacturing and distribution operations. GROSS PROFITS Gross profits for fiscal 1996 increased $0.8 million from fiscal 1995 and gross profits for fiscal 1995 decreased $4.2 million from fiscal 1994. A summary of the gross profits by functional area for the three fiscal years is shown below:
Fiscal Years ------------------------------ (in millions) 1996 1995 1994 ----------------------------------------------------------------- Convenience store $130.0 $130.0 $130.8 Gasoline 24.5 24.1 25.3 Manufacturing and distribution - 0.6 2.7 Other 3.3 2.3 2.4 ------------------------------ Total $157.8 $157.0 $161.2 ==============================
Convenience store gross profit remained constant in fiscal 1996 as compared to fiscal 1995. Improved product gross margins and higher lottery commissions were offset by the overall reduction in the number of stores, as described above. Convenience store gross profits decreased by $0.8 million in fiscal 1995 as compared to fiscal 1994 due to an increase in costs associated with the Company's last in, first out (LIFO) inventory valuation method. The fiscal 1995 LIFO provision reflected a normal inflationary increase, while the fiscal 1994 LIFO provision was reduced due to a substantial decrease in cigarette prices, which constitute one of the Company's major product categories. Gasoline gross profits increased by $0.4 million in fiscal 1996 as compared to fiscal 1995 due to an increase in gasoline gallons sold, as described above, partially offset by a decrease of 0.14 cents in gross margin per gallon. Gasoline profits decreased by $1.2 million in fiscal 1995 as compared to fiscal 1994 primarily due to a decrease of 0.61 cents in gross margin per gallon. -16- Manufacturing and distribution gross profits are not reflected in fiscal 1996 due to the closing and divestiture of the dairy manufacturing and distribution operations. Manufacturing and distribution gross profits declined in fiscal 1995 as compared to fiscal 1994 due to the underutilization of plant capacity and the impact of competitive product pricing. OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses for fiscal 1996 decreased $6.0 million from fiscal 1995 and operating and administrative expenses for fiscal 1995 increased $0.6 million from fiscal 1994. A summary of expenses by functional area for the three fiscal years is shown below:
Fiscal Years ------------------------------ (in millions) 1996 1995 1994 ---------------------------------------------------------- Convenience stores $100.2 $104.3 $104.3 Gasoline 13.3 11.9 11.2 Administrative and Other 31.6 34.9 35.0 ------------------------------ Total $145.1 $151.1 $150.5 ------------------------------
Convenience store operating expenses decreased $4.1 million in fiscal 1996 as compared to fiscal 1995 primarily due to the closure or sale of underperforming stores as described above, partially offset by higher labor, rent and maintenance costs on a per store basis. The increase in maintenance costs was primarily attributable to snow removal expenses caused by severe weather conditions in certain geographic areas in which the Company operates. Convenience store operating expenses remained constant in fiscal 1995 as compared to fiscal 1994. Higher store labor and rent costs were offset by the reduction in the overall number of stores. Gasoline operating expenses increased $1.4 million in fiscal 1996 as compared to fiscal 1995 primarily due to the operation of higher-volume new or remodeled expanded facilities, as described above, partially offset by a decrease in environmental expenses associated with the remediation of gasoline locations after considering expected reimbursements from various state environmental trust funds. Gasoline operating expenses increased $0.7 million in fiscal 1995 as compared to fiscal 1994 primarily due to increased environmental remediation costs. Administrative and other expenses decreased $3.3 million in fiscal 1996 as compared to fiscal 1995 primarily due to the full year impact of operating with a reduced level of administrative support staff. Administrative and other expenses decreased slightly in fiscal 1995 as compared to fiscal 1994 due to a reduction of administrative staff in the fourth quarter of fiscal 1995. INTEREST EXPENSES, INFLATION AND TAXES Interest expense increased in fiscal 1996 as compared to fiscal 1995 and fiscal 1994 due to an increased level of borrowing associated with the issuance of the Series A Notes in March 1994 and Series B Notes in December 1995 (see Note 6 to the Consolidated Financial Statements). -17- Inflation did not have a material effect on the Company's revenues, gross profits, operating and administrative expenses in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, other than the effect of cigarette price reductions discussed above. The effective tax rate for the Company was a benefit of 35% and 38% for fiscal year 1996 and fiscal year 1995, respectively, and a provision of 42% for fiscal year 1994. LIQUIDITY AND CAPITAL RESOURCES The Company generates substantial operating cash flow since most of its revenues are received in cash. The amount of cash generated from operations significantly exceeded the current debt service requirements of the Company's long-term obligations. The fiscal 1996 capital expenditures of the Company were funded by excess operating cash flow and by the cash flow generated from the sale of certain assets. In addition, the Company has a revolving line of credit available, although not utilized during fiscal 1996, to address the timing of certain working capital and capital expenditure disbursements. Management believes that the cash flow from operations and the proceeds from the sale of certain assets, supplemented by the availability of a revolving line of credit, will provide the Company with adequate liquidity and the capital necessary to achieve its expansion initiatives in its retail operations (see "Capital Expenditures"). CASH PROVIDED BY OPERATING ACTIVITIES During fiscal 1996, net cash generated by operations was $3.2 million higher than the prior fiscal year. This increase was primarily due to the improved results of operations in fiscal 1996 as compared to fiscal 1995 (see "Results of Operations") and to cash provided from working capital through the collection of certain accounts receivable and the liquidation of certain inventories associated with asset divestitures, partially offset by the cash outflows in the current fiscal year related to certain nonrecurring charges recorded in fiscal 1995 (see Note 14 to the Consolidated Financial Statements). During fiscal 1996, the Company paid its trade payables in an average of 27 days, which compares to 24 days for fiscal 1995 and fiscal 1994. The cash flow of the Company is also favorably impacted by the Company's use of funds from the sale of money orders, pending remittance of such funds to the issuer of the money orders. As of February 3, 1996 and January 28, 1995, the amounts due the issuer were $7.6 million and $5.3 million, respectively. The Company's remittance obligation to the issuer of the money orders is primarily secured by an outstanding letter of credit in the amount of $7.5 million. CASH PROVIDED BY FINANCING ACTIVITIES Net cash provided by financing activities decreased by $9.0 million from the prior fiscal year. In fiscal 1995, the Company generated net cash of approximately $10.4 million as a result of the recapitalization -18- of the Company's debt structure through the issuance of $75.0 million of 10.25% Senior Subordinated Notes (the "Series A Notes"). The proceeds from the issuance of the Series A Notes, net of offering costs of $2.3 million, were used to retire substantially all of the Company's then existing bank term loan and bank revolving loan and redeem in full the Company's 14.25% subordinated debentures (see Note 6 to the Consolidated Financial Statements). The recapitalization of the Company's debt structure in fiscal 1995 was integral toward accomplishing management's overall objective of redirecting the Company's capital for purpose of expanding its retail operations. As a result of the recapitalization, the Company significantly reduced its near-term debt service requirements thus improving the Company's financial and operating flexibility. In December 1995, the Company issued $13.5 million of 10.25% Senior Subordinated Notes (the "Series B Notes") with substantially the same terms and conditions as the Series A Notes (see Note 6 to the Consolidated Financial Statements). The proceeds from the issuance of the Series B Notes were used to purchase the interests held by the former Chairman of the Board of Directors and certain of his affiliates in DM Associates Limited Partnership for $10.0 million (see Note 9 to the Consolidated Financial Statements). Subsequent to fiscal 1996, the Company entered into a new senior revolving credit facility. Under the terms of the new $30.0 million senior revolving credit facility, the Company has initially available up to $20.0 million in aggregate extensions of credit with $15.0 million available for the issuance of letters of credit. The Company may utilize the new revolving credit facility as needed for working capital and general corporate purposes (see Note 6 to the Consolidated Financial Statements). CASH USED BY INVESTING ACTIVITIES Net cash used by investing activities decreased by $16.0 million from the prior fiscal year, primarily due to increased cash flows generated from the sale of certain assets, including the sale of manufacturing and distribution equipment and the sale and leaseback of 17 existing store properties. In addition, the Company's investing activities were decreased due to the maturation in fiscal 1996 of a U.S. Treasury Bill that was purchased in the prior fiscal year. The above described increases in cash flow were partially offset by an increased level of capital expenditures associated with new store construction and the upgrading of existing store and gasoline facilities. CAPITAL EXPENDITURES The Company anticipates spending approximately $25 million for capital expenditures in fiscal 1997 by purchasing store and gasoline equipment for new stores, remodeling approximately 40 to 50 existing stores, installing fast food concepts, such as Taco Bell(R), Subway(R) and Pizza Hut(R) in the new and remodeled stores, installing store automation in a number of locations, significantly upgrading certain gasoline locations to provide credit card readers at the pump, improve outdoor -19- lighting and to meet current environmental standards (see "Environmental Responsibility"). These capital expenditures will be funded primarily by cash generated from operations and from cash generated by the disposition of assets held for sale as of February 3, 1996, supplemented by the availability of a senior revolving line of credit. The Company intends to lease the real estate for the majority of new store locations. ENVIRONMENTAL RESPONSIBILITY The Company accrues its estimate of all costs to be incurred for assessment and remediation with respect to releases of regulated substances from existing and previously operated retail gasoline facilities. As of February 3, 1996, the Company had recorded an accrual of $1,890,000 for such costs, the majority of which are anticipated to be spent over the next 3 to 5 years. The Company is entitled to reimbursement of a portion of the above costs from various state environmental trust funds based upon compliance with the terms and conditions of such trust funds. As of February 3, 1996, the Company had recorded a net state trust fund reimbursement receivable of $1,137,000 (representing a gross receivable of $1,696,000 less an allowance of $559,000). Although there are no assurances as to the timing, the Company anticipates receiving reimbursements from the state environmental trust funds within one to four years from the payment of the reimbursable assessment and remediation expenses. In addition, the Company estimates that future capital expenditure requirements to comply with federal and state underground gasoline storage tank regulations will be approximately $10.0 to $12.0 million in the aggregate through December 1998. These costs could be reduced for low volume retail gasoline locations closed in lieu of the capital cost of compliance. The Company's estimate of costs to be incurred for environmental assessment and remediation and for required underground storage tank upgrading and other regulatory compliance is based on factors and assumptions that could change due to modifications of regulatory requirements or detection of unanticipated environmental conditions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company and its subsidiaries and notes thereto, appear on Pages F-1 through F-15 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. -20- PART III -------- Information required by Items 10, 11 and 12 (DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT) is incorporated herein by reference from the sections entitled "ITEM 1-ELECTION OF DIRECTORS-Nominees for Election As Directors," "INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS," "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND VOTING RIGHTS," "PRINCIPAL SHAREHOLDERS," AND "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its 1996 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is set forth under "CERTAIN TRANSACTIONS" in the Company's definitive proxy statement, and is incorporated herein by reference. -21- PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following are filed as part of this Form 10-K: (1) Financial Statements: For a listing of financial statements which are filed as part of this Form 10-K, see Page F-1. (2) Financial Statement Schedules: Report of Independent Public Accountants Schedule II - Valuation Accounts All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (3) Exhibits: Exhibit Number: (3) Articles of Incorporation and Bylaws. (3.1) The Company's Restated Certificate of Incorporation, as amended, was filed as Exhibit 3.1 to the Company's Form 10-K for the fiscal year ended February 1, 1992 and is incorporated herein by reference. (3.2) A Certificate of Designation was filed as Exhibit 1 of the Company's Form 8-K for the January 19, 1996 event and is incorporated herein by reference. (3.3) The Company's Amended and Restated Bylaws were filed as Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and are incorporated herein by reference. (4) Instruments defining the rights of security holders, including indentures. (4.1) The instruments defining the rights of the holders of the Company's Common Stock include the Company's Restated Certificate of Incorporation, Certificate of Designation, Amended and Restated Bylaws and Rights Agreement, filed as Exhibits 3.1, 3.2, 3.3 and 10.23 hereto, and those instruments filed as Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Registration No. 33- -22- 639) dated November 5, 1985, which are incorporated herein by reference. (4.2) Amended and Restated Indenture, dated as of December 1, 1995, by and among the Company, Certain Subsidiaries of the Company, as Guarantors, and First Bank National Association, as Trustee, was filed as Exhibit 4.1 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (4.3) The instruments defining the rights of the holder's of the Company's Warrants include the Form of Stock Purchase Warrants filed as Exhibits 10.13 and 10.14 hereto. (10) Material Contracts. (10.1) Credit Agreement dated as of April 24, 1996, among the Company, Bank of Boston Connecticut as agent, and the banks from time to time parties thereto is filed as Exhibit 10.1 attached hereto. (10.2) 1985 Incentive Stock Option Plan, as amended, and form of Incentive Stock Option Agreement, were filed as Exhibit 10.4 to the Company's annual report on Form 10-K for the fiscal year ended January 30, 1988, and are incorporated herein by reference. (10.3) 1983 Incentive Stock Option Plan and form of Incentive Stock Option Agreement thereunder were filed as Exhibit 4.1 and 4.2, respectively, to the Company's Registration Statement on Form S-8 (File No. 33-8209) filed on August 26, 1986, and are incorporated herein by reference. (10.4) 1990 Stock Option Plan and forms of qualified and non-qualified stock option agreements thereunder were filed as Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended February 2, 1991, and are incorporated herein by reference. (10.5) 1995 Stock Option and Incentive Award Plan was filed as Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter ended July 29,1995 and is incorporated herein by reference. (10.6) 1995 Stock Option Plan for Outside Directors was filed as Exhibit 10.6 of the Company's Form 10-K for the fiscal year ended January 28, 1995 and is incorporated herein by reference. (10.7) Employment agreement between the Company and Robert B. Stein, Jr. dated June 8, 1995 was filed as Exhibit 10.2 of the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and is incorporated herein by reference. -23- (10.8) Employment agreement between the Company and Gregory G. Landry dated June 8, 1995 was filed as Exhibit 10.3 of the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and is incorporated herein by reference. (10.9) Employment agreement between the Company and Gary A. Payne dated June 8, 1995 was filed as Exhibit 10.4 of the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and is incorporated herein by reference. (10.10) Employment agreement between the Company and Gregg O. Guy dated June 8, 1995 was filed as Exhibit 10.5 of the Company's Form 10-Q for the fiscal quarter ended July 29, 1995 and is incorporated herein by reference. (10.11) Settlement agreement dated January 27, 1995 between the Company and Frank Colaccino was filed as Exhibit 10.10 of the Company's January 28, 1995 Form 10-K and is incorporated herein by reference. (10.12) Note Purchase Agreement, dated as of December 1, 1995, between the Company and the Purchasers Listed in the Schedule of Purchasers therein, relating to 10-1/4% Senior Subordinated Notes (Series B) due March 15, 2004, was filed as Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.13) Form of Stock Purchase Warrant to Subscribe for and Purchase Shares of Class A Common Stock of the Company (Initially Exercisable for an Aggregate of 1,215,000 Shares of Class A Common Stock) was filed as Exhibit 10.2 of the Company's Form 10- Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.14) Form of Stock Purchase Warrant to Subscribe for and Purchase Shares of Class A Common Stock of the Company (Initially Exercisable for an Aggregate of 500,000 Shares of Class A Common Stock) was filed as Exhibit 10.3 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.15) Registration Rights Agreement, dated December 1, 1995, by and among the Company and the Holders of (i) 10-1/4% Senior Subordinated Notes (Series B) of the Company, due March 15, 2004, and (ii) Warrants to Purchase 1,715,000 shares of Class A Common Stock, par value $.01 per share, of the Company was filed as Exhibit 10.4 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. -24- (10.16) Agreement dated as of October 30, 1995 among the Company, Charles Nirenberg, FCN Properties Corporation and The Nirenberg Family Charitable Foundation, Inc. was filed as Exhibit 10.1 of the Company's Form 8-K/A Amendment No.1 for the October 30, 1995 event and is incorporated herein by reference. (10.17) Modification Agreement, dated as of December 1, 1995, by and among the Company, Charles Nirenberg, FCN Properties Corporation, The Nirenberg Foundation, Inc., formerly known as the Nirenberg Family Charitable Foundation, Inc., Robert B. Stein, Jr., and Gregory G. Landry was filed as Exhibit 10.6 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.18) Amended and Restated Letter Agreement, dated December 1, 1995, to Mitchell J. Kupperman from the Company, Robert B. Stein, Jr., and Gregory G. Landry was filed as Exhibit 10.7 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.19) DM Associates Limited Partnership Agreement, dated March 12, 1992. Incorporated herein by reference to Exhibit E of the Schedule 13D, dated March 12, 1992, filed by DM Associates Limited Partnership, DM Management Associates and Frank Colaccino. (10.20) First Amendment to Partnership Agreement of DM Associates Limited Partnership, dated as of September 8, 1994. Incorporated herein by reference to Exhibit F of the Schedule 13D, Amendment No. 4, dated January 27, 1995, filed by DM Associates Limited Partnership, New DM Management Associates I, New DM Management Associates II, Charles Nirenberg, Robert B. Stein, Jr., Gregory G. Landry, Mitchell J. Kupperman and Frank Colaccino. (10.21) Partnership Agreement of New DM Management Associates I, dated as of September 8, 1994. Incorporated herein by reference to Exhibit G of the Schedule 13D, Amendment No. 4, dated January 27, 1995, filed by DM Associates Limited Partnership, New DM Management Associates I, New DM Management Associates II, Charles Nirenberg, Robert B. Stein, Jr., Gregory G. Landry, Mitchell J. Kupperman and Frank Colaccino. (10.22) First Amendment to Partnership Agreement of New DM Management Associates I, dated as of December 1, 1995, between Robert B. Stein, Jr., Gregory G. Landry and Mitchell J. Kupperman was filed as Exhibit 10.10 of the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.23) Rights Agreement dated as of January 19, 1996 between the Company and the First National Bank of Boston, as Rights -25- Agent, including form of Rights Certificate, was filed as Exhibit 1 of the Company's Form 8-K for the January 19, 1996 event and is incorporated herein by reference. (21) Subsidiaries of the Company. (23) Consent of Arthur Andersen LLP to the incorporation of their reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8. (27) Financial Data Schedule. (99) The Section entitled "Information regarding DM Associates and the Nirenberg Transaction" on pages 19 through 21 of the Company's Proxy Statement dated December 26, 1995. (b) Reports on Form 8-K On October 31, 1995, the Company filed a Current Report on Form 8-K, as amended, with the Securities and Exchange Commission in which the Company reported that the Company, Charles Nirenberg, the former Chairman of the Board of Directors and a Director of the Company, and certain other parties executed agreements settling certain disputes and litigation between the parties. On January 31, 1996, the Company filed a Current Report on Form 8-K in which the Company reported that the Company had adopted a Rights Plan. No Financial Statements were filed with any of the Current Reports. (c) See (3) above. (d) See (2) above. -26- SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 2, 1996 DAIRY MART CONVENIENCE STORES, INC. By /s/ Robert B. Stein, Jr. --------------------------------------- Robert B. Stein, Jr. President, Chief Executive Officer and Chairman of the Board of Directors By /s/ Gregory G. Landry --------------------------------------- Gregory G. Landry Executive Vice President and Chief Financial Officer -27- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Dated: May 2, 1996 /s/ Robert B. Stein, Jr. ---------------------------------------- Robert B. Stein, Jr. President, Chief Executive Officer, Chairman of the Board (Principal Executive Officer) and Director Dated: May 2, 1996 /s/ Gregory G. Landry ---------------------------------------- Gregory G. Landry Executive Vice President, Chief Financial Officer, (Principal Financial and Accounting Officer) and Director Dated: May 2, 1996 /s/ Frank W. Barrett ---------------------------------------- Frank W. Barrett Director Dated: May 2, 1996 /s/ J. Kermit Birchfield, Jr. ---------------------------------------- J. Kermit Birchfield, Jr. Director Dated: May 2, 1996 /s/ John W. Everets, Jr. ---------------------------------------- John W. Everets, Jr. Director Dated: May 2, 1996 /s/ Thomas W. Janes ---------------------------------------- Thomas W. Janes Director Dated: May 2, 1996 /s/ Truby G. Proctor, Jr. ---------------------------------------- Truby G. Proctor, Jr. Director -28- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Stockholders and the Board of Directors of Dairy Mart Convenience Stores, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Dairy Mart Convenience Stores, Inc. and subsidiaries (the Company) included in this Form 10-K, and have issued our report thereon dated April 11, 1996 (except with respect to the matter discussed in Note 6, as to which the date is April 24, 1996). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Hartford, Connecticut April 11, 1996 -29- SCHEDULE II DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES VALUATION ACCOUNTS
Column A Column B Column C Column D Column E - - ---------------------------------- ---------- ------------------------ ------------ ------------ Additions ------------------------ Balance at Charge to Deductions Balance at Beginning Costs and Other and Accounts End of Description of period Expenses Recoveries Written off Period - - ---------------------------------- ---------- ------------------------ ------------ ------------- Reserve for Doubtful Accounts: Fiscal Year Ended January 29, 1994 $1,653,124 $ 958,336 $ -- $ (787,283) $1,824,177 Fiscal Year Ended January 28, 1995 1,824,177 1,053,818 14,057 (1,163,810) 1,728,242 Fiscal Year Ended February 3, 1996 1,728,242 1,220,153 -- (1,101,173) 1,847,222
-30- DAIRY MART CONVENIENCE STORES, INC. INDEX TO FINANCIAL STATEMENTS
Form 10-K Page --------- Report of Independent Public Accountants F-2 Consolidated Statements of Operations and Stockholders' Equity for the Fiscal Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 F-3 Consolidated Balance Sheets as of February 3, 1996 and January 28, 1995 F-4 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 F-5 Notes to Consolidated Financial Statements for the Fiscal Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 F-6 to F-15
F - 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Stockholders and the Board of Directors of Dairy Mart Convenience Stores, Inc.: We have audited the accompanying consolidated balance sheets of Dairy Mart Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of February 3, 1996 and January 28, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 3, 1996. 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 February 3, 1996 and January 28, 1995, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Hartford, Connecticut April 11, 1996 (except with respect to the matter discussed in Note 6, as to which the date is April 24, 1996) F - 2
CONSOLIDATED STATEMENTS OF OPERATIONS Dairy Mart Convenience Stores, Inc. and Subsidiaries - - ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) Revenues (including excise taxes of $36,331, $36,332 and $29,209).................. $ 571,311 $ 596,782 $ 591,500 ------------------------------------------- Cost of goods sold and expenses: Cost of goods sold............................................................... 413,548 439,757 430,254 Operating and administrative expenses............................................ 145,122 151,125 150,500 Interest expense................................................................. 9,661 9,219 7,644 Nonrecurring charges............................................................. 12,200 14,000 - ------------------------------------------- 580,531 614,101 588,398 ------------------------------------------- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change....................................... (9,220) (17,319) 3,102 Benefit from (provision for) income taxes.......................................... 3,220 6,558 (1,308) ------------------------------------------- Income (loss) before extraordinary item and cumulative effect of accounting change......................................................... (6,000) (10,761) 1,794 Extraordinary loss on extinguishment of debt (net of income tax benefit of $677)... - - (928) ------------------------------------------- Income (loss) before cumulative effect of accounting change.................... (6,000) (10,761) 866 Cumulative effect of accounting change............................................. - (389) - ------------------------------------------- Net income (loss) ............................................................ $ (6,000) $ (11,150) $ 866 ==================================================================================================================================== Earnings (loss) per share: Before extraordinary item and cumulative effect of accounting change............. $ (1.12) $ (1.94) $ .33 Extraordinary loss on extinguishment of debt..................................... - - (.17) Cumulative effect of accounting change........................................... - (.07) - ------------------------------------------- Earnings (loss) per share.......................................................... $ (1.12) $ (2.01) $ .16 ====================================================================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - - ----------------------------------------------------------------------------------------------------------------------------- For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 - - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Common Stock ---------------------------------- Retained Class A Class B Paid-in Earning Shares Shares Amount Capital (Deficit) ---------------------------------------------------------------------------- Balance January 30, 1993....................... 3,174 2,971 $ 62 $ 27,212 $ 10,463 Issuance of common stock....................... 30 50 1 271 - Exchange of Class B shares for Class A shares.. 65 (65) - - - Net income (loss).............................. - - - - 866 ---------------------------------------------------------------------------- Balance January 29, 1994....................... 3,269 2,956 63 27,483 11,329 Issuance of common stock....................... 21 6 - 97 - Exchange of Class B shares for Class A shares.. - - - - - Net income (loss).............................. - - - - (11,150) ---------------------------------------------------------------------------- Balance January 28, 1995....................... 3,290 2,962 63 27,580 179 Issuance of common stock....................... 33 - - 110 - Exchange of Class B shares for Class A shares.. 3 (3) - - - Issuance of warrants........................... - - - 2,281 - Purchased interest in stockholder.............. - - - - - Net income (loss).............................. - - - - (6,000) ---------------------------------------------------------------------------- Balance February 3, 1996....................... 3,326 2,959 $ 63 $ 29,971 $ (5,821) ============================================================================================================================= CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - - ------------------------------------------------------------------------------------------------- For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 - - ------------------------------------------------------------------------------------------------- Purchased Treasury Shares Interest In ------------------------ Shares Amount Stockholder ------------------------------------------- Balance January 30, 1993....................... 698 $ (5,005) $ - Issuance of common stock....................... - - - Exchange of Class B shares for Class A shares.. - - - Net income (loss).............................. - - - ------------------------------------------- Balance January 29, 1994....................... 698 (5,005) - Issuance of common stock....................... - - - Exchange of Class B shares for Class A shares.. - - - Net income (loss).............................. - - - ------------------------------------------- Balance January 28, 1995....................... 698 (5,005) - Issuance of common stock....................... - - - Exchange of Class B shares for Class A shares.. - - - Issuance of warrants........................... - - - Purchased interest in stockholder.............. - - (10,000) Net income (loss).............................. - - - ------------------------------------------- Balance February 3, 1996....................... 698 $ (5,005) $ (10,000) =================================================================================================
The accompanying notes are an integral part of these financial statements. F-3
CONSOLIDATED BALANCE SHEETS Dairy Mart Convenience Stores, Inc. and Sudsidiaries - - ------------------------------------------------------------------------------------------------------------------------------------ February 3, 1996 and January 28, 1995 1996 1995 - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) ASSETS Current Assets: Cash...............................................................................................$ 12,654 $ 4,512 Short-term investment.............................................................................. - 2,053 Accounts and notes receivable...................................................................... 9,752 12,398 Inventory.......................................................................................... 20,928 26,044 Prepaid expenses and other current assets.......................................................... 3,454 1,945 Deferred income taxes.............................................................................. 2,669 3,537 ------------------------------- Total current assets ............................................................................. 49,457 50,489 ------------------------------- Assets Held For Sale................................................................................ 8,685 23,378 Property and Equipment, net......................................................................... 80,387 70,578 Intangible Assets, net.............................................................................. 17,277 17,961 Other Assets, net................................................................................... 9,132 9,822 ------------------------------- Total assets........................................................................................$ 164,938 $ 172,228 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term obligations........................................................$ 1,430 $ 1,570 Accounts payable................................................................................... 30,803 28,942 Accrued expenses................................................................................... 14,437 17,214 Accrued interest................................................................................... 3,355 3,052 ------------------------------- Total current liabilities......................................................................... 50,025 50,778 ------------------------------- Long-Term Obligations, less current portion above................................................... 99,451 88,698 ------------------------------- Other Liabilities................................................................................... 6,254 9,935 ------------------------------- Commitments and Contingencies (Note 6, 7, and 13) Stockholders' Equity: Preferred Stock (serial), par value $.01, 1,000,000 shares authorized, no shares issued............ - - Class A Common Stock, par value $.01, 20,000,000 shares authorized, 3,326,296 and 3,290,460 issued. 33 33 Class B Common Stock, par value $.01, 10,000,000 shares authorized, 2,959,017 and 2,961,953 issued. 30 30 Paid-in capital.................................................................................... 29,971 27,580 Retained earnings (deficit)........................................................................ (5,821) 179 Treasury stock, at cost............................................................................ (5,005) (5,005) Purchased interest in stockholder.................................................................. (10,000) - ------------------------------- Total stockholders' equity........................................................................ 9,208 22,817 ------------------------------- Total liabilities and stockholders' equity..........................................................$ 164,938 $ 172,228 ===============================
The accompanying notes are an integral part of these financial statements. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS Dairy Mart Convenience Stores, Inc. and Subsidiaries ==================================================================================================================================== For the Years Ended February 3, 1996, January 28, 1995 and January 29, 1994 - - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Cash flows from operating activities: Net income (loss)......................................................................... $ (6,000) $ (11,150) $ 866 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change................................................... - 389 - Extraordinary loss on extinguishment of debt............................................. - - 928 Cash flow effect of nonrecurring items................................................... 550 9,953 (4,833) Depreciation and amortization............................................................ 12,390 12,477 12,900 Change in deferred income taxes.......................................................... (2,873) (5,160) (95) (Gain) loss on other disposition of properties, net...................................... (376) 880 494 Net change in assets and liabilities: Accounts and notes receivable.......................................................... 2,646 (628) (152) Inventory.............................................................................. 5,116 225 588 Accounts payable....................................................................... 1,861 242 932 Accrued interest....................................................................... 303 1,961 45 Other assets and liabilities........................................................... (3,722) (2,497) 2,612 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities................................................... 9,895 6,692 14,285 - - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of short-term investments........................................................ - (3,953) - Proceeds from sale of short-term investments.............................................. 2,053 1,900 - Purchase of property and equipment........................................................ (20,232) (17,772) (13,749) Proceeds from sale of property, equipment and assets held for sale........................ 14,741 1,120 1,925 Increase in long-term notes receivable.................................................... (1,579) (1,621) (291) Proceeds from collection of long-term notes receivable.................................... 1,706 1,394 1,631 Decrease (increase) in intangibles and other assets....................................... 79 (334) 15 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities....................................................... (3,232) (19,266) (10,469) - - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Issuance of long-term obligations and related warrants.................................... 13,500 74,064 4,915 Repayment of long-term obligations........................................................ (2,131) (63,707) (8,854) Purchased interest in stockholder......................................................... (10,000) - - Issuance of common stock.................................................................. 110 97 272 - - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities......................................... 1,479 10,454 (3,667) - - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash................................................................. 8,142 (2,120) 149 Cash at beginning of year................................................................... 4,512 6,632 6,483 - - ------------------------------------------------------------------------------------------------------------------------------------ Cash at end of year......................................................................... $ 12,654 $ 4,512 $ 6,632 ==================================================================================================================================== Supplemental disclosures: Cash paid during the year - Interest.................................................................................. $ 9,359 $ 8,293 $ 7,700 Income taxes (refunded) paid.............................................................. (1,172) 879 1,199 Noncash investing and financing activities - Issuance of warrants...................................................................... 665 - - Capital lease obligations................................................................. 828 - 330 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. F-5 Dairy Mart Convenience Stores, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS February 3, 1996, January 28, 1995 and January 29, 1994 1. SIGNIFICANT ACCOUNTING POLICIES: CORPORATE ORGANIZATION AND CONSOLIDATION - The accompanying financial statements include the accounts of Dairy Mart Convenience Stores, Inc. and its subsidiaries (the Company). All intercompany transactions have been eliminated. NATURE OF THE BUSINESS - The Company owns, operates and franchises convenience retail stores, a number of which also sell gasoline. The convenience stores are primarily located in eleven states located in the Midwest, Northeast and Southeast. As of February 3, 1996, 58% of the convenience stores were located in the Midwest. The stores offer a wide range of products including groceries, tobacco products, beverages, general merchandise, health and beauty aids and deli products. The Company also manufactured and distributed certain dairy and other products for sale at the majority of these locations, which operations were discountinued in fiscal 1996 (see Note 14). FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January 31. There were 53 weeks included in the fiscal year ended February 3, 1996 and 52 weeks included in the fiscal years ended January 28, 1995 and January 29, 1994. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SHORT-TERM INVESTMENT - As of January 28, 1995, the Company's short-term investment consisted of a U.S. Treasury Bill with a maturity of less than one year. The Company accounted for this investment as being available for sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". As of January 28, 1995, the fair market value of the U.S. Treasury Bill approximated its cost. INVENTORY - Store 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. ASSETS HELD FOR SALE - Assets held for sale represent operating and non-operating assets which the Company intends to sell in the near term and are carried at the lower of cost or estimated net realizable value. The Company reduced the carrying value of certain of these assets to their estimated net realizable value by taking a nonrecurring charge to earnings in fiscal years 1996 and 1995 (see Note 14). The amounts the Company will realize could differ materially from the amounts assumed in arriving at the carrying value. PROPERTY, EQUIPMENT AND DEPRECIATION - Property is stated at cost and is depreciated on the straight-line basis for financial reporting purposes over the following estimated useful lives: - - -------------------------------------------------------------------------------- Buildings 30-40 years - - -------------------------------------------------------------------------------- Equipment 5-20 years - - -------------------------------------------------------------------------------- Leasehold improvements are amortized primarily over the lesser of 10 years or the term of the lease. INCOME TAXES - The Company calculates income taxes in accordance with 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 and tax returns. SELF INSURANCE RESERVES - The Company is self-insured for certain property and liability, and accident and health insurance risks and establishes reserves for estimated outstanding claims based on its historical claims experience and reviews by third-party loss reserve specialists. The Company has purchased insurance coverage for losses that may occur above certain levels. As of February 3, 1996 and January 28, 1995, the Company had established reserves for these risks of $7,305,000 and $8,702,000, respectively, which are recorded on a present value basis. The Company historically has recorded its self insurance reserves using a discount rate based upon the Company's incremental borrowing rate which was 8% as of January 29, 1994. As of January 30, 1994, the Company changed its method of accounting to discount its self insurance reserves at a risk free rate of return. The cumulative effect of this change in accounting method was a charge to income of $389,000, net of the applicable income tax benefit of $271,000. While management believes these reserves are adequate, the ultimate amount of these liabilities could differ from these estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", the Company has disclosed the fair value, related carrying value and method for determining fair value for the following financial instruments in the accompanying notes as referenced: short-term investments (see Note 1), accounts and notes receivable (see Note 2) and long-term obligations (see Note 6). REVENUE RECOGNITION - The Company recognizes revenues as earned, including franchise revenues and interest income. Franchise revenues represent a percentage of franchise store sales remitted to the Company on a weekly or monthly basis, as well as revenues derived from initial fees and the gain on sale of store assets to franchisees. STORE PREOPENING AND CLOSING COSTS - Expenditures of a non-capital nature associated with opening a new store are expensed as incurred. At the time the decision is made to close a store, estimated unrecoverable costs are charged to expense. Such costs include the net book value of abandoned fixtures, equipment, leasehold improvements and a provision for the present value of future lease obligations, less estimated sub-rental income. EARNINGS (LOSS) PER SHARE - Earnings (loss) per share have been calculated based on the weighted average number of shares of common stock outstanding and the effect of stock options, if dilutive, during each year. The Company's interest in DM Associates Limited Partnership ("DM Associates")(see Note 9) is treated similar to treasury stock for earnings (loss) per share purposes. The number of shares used in the calculation for earnings (loss) per share was 5,373,784, 5,540,874, and 5,532,201 ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively. RECLASSIFICATIONS - Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the presentation used for the current year. F-6 Dairy Mart Convenience Stores, Inc. and Subsidiaries 2. ACCOUNTS AND NOTES RECEIVABLE: A summary of accounts and notes receivable as of February 3, 1996 and January 28, 1995 is as follows:
1996 1995 - - -------------------------------------------------------------------------------------------------- (in thousands) Franchise accounts receivable........................................ $ 4,349 $ 5,067 Franchise notes receivable........................................... 3,134 3,010 Marketing allowances and other....................................... 6,483 8,543 ----------------------- 13,966 16,620 Less allowance for doubtful accounts and notes receivable............ 1,847 1,728 ----------------------- Net accounts and notes receivable.................................... 12,119 14,892 Less noncurrent notes receivable (included in other assets).......... 2,367 2,494 ----------------------- Current accounts and notes receivable................................ $ 9,752 $ 12,398 ==================================================================================================
The carrying amount of current accounts and notes receivable approximates fair value because of the short maturity of those receivables. The fair value of the Company's noncurrent notes receivable is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of February 3, 1996, the fair value of the noncurrent notes receivable exceeded the carrying value of $2,367,000 by approximately $87,000. As of January 28, 1995, the fair value of the noncurrent notes receivable exceeded the carrying value of $2,494,000 by approximately $140,000. ________________________________________________________________________________ 3. INVENTORY: A summary of inventory as of February 3, 1996, January 28, 1995 and January 29, 1994 is as follows:
1996 1995 1994 - - -------------------------------------------------------------------------------------------------- (in thousands) Inventory valued at FIFO cost.............................. $25,435 $30,800 $30,852 LIFO reserve............................................... (4,507) (4,756) (4,583) ------------------------------------ Inventory primarily valued at LIFO cost.................... $20,928 $26,044 $26,269 ==================================================================================================
The LIFO reserve reflects the difference between stating the inventory at historical LIFO cost and the more current FIFO cost. Had the FIFO method been used, cost of goods sold would have been increased by $249,000 in 1996, decreased by $173,000 in 1995 and increased by $825,000 in 1994. Loss per share would have been increased by $.03 in 1996, reduced by $.02 in 1995 and earnings per share would have have been decreased by $.09 in 1994, had the FIFO method been used. During 1996 and 1995, the Company liquidated certain LIFO inventory that was carried at lower costs prevailing in prior years. The effect of the liquidation was to decrease net loss by approximately $488,000 ($.09 per share) and $56,000 ($.01 per share) in 1996 and 1995, respectively. During 1994, the Company liquidated certain LIFO inventory that was carried at higher costs prevailing in prior years. The effect of the liquidation was to decrease net income by approximately $45,000 ($.01 per share). F-7 Dairy Mart Convenience Stores, Inc. and Subsidiaries 4. PROPERTY AND EQUIPMENT: A summary of property and equipment as of February 3, 1996 and January 28, 1995 is as follows:
1996 1995 - - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Land and improvements.......................................................................... $ 9,529 $ 9,180 Building and leasehold improvements............................................................ 32,970 31,370 Equipment...................................................................................... 73,686 59,358 Assets under capital leases.................................................................... 3,432 2,632 ---------------------------- 119,617 102,540 Less accumulated depreciation and amortization................................................. (39,230) (31,962) ---------------------------- Property and equipment, net.................................................................... $ 80,387 $ 70,578 - - -----------------------------------------------------------------------------------------------------------------------------
Accumulated depreciation and amortization, as presented above, includes accumulated amortization of assets under capital leases of $1,937,000 and $1,617,000 as of February 3, 1996 and January 28, 1995, respectively. - - -------------------------------------------------------------------------------- 5. INTANGIBLE ASSETS: A summary of intangibles as of February 3, 1996 and January 28, 1995 is as follows:
1996 1995 - - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Goodwill....................................................................................... $ 13,874 $ 13,865 Franchise and operating rights................................................................. 10,144 10,144 ---------------------------- 24,018 24,009 Less accumulated amortization.................................................................. (6,741) (6,048) ---------------------------- Intangible assets, net......................................................................... $ 17,277 $ 17,961 - - -----------------------------------------------------------------------------------------------------------------------------
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 30 years. The Company assesses the recoverability of these intangibles by determining whether the amortization of the goodwill and franchise and operating rights over the remaining lives can be recovered through projected future operating results. The Company's management anticipates a return to profitability in fiscal year 1997 and therefore no provision for impairment was recorded in any period. During 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets". The statement establishes accounting standards for the impairment of long-lived assets to be held and used and for long-lived assets to be disposed of. The Company is continuing to assess the impact of adopting SFAS No. 121 which is required in fiscal 1997, however, management believes adoption of this statement will not have a material adverse effect on the Company's financial position or results of operations. F-8 Dairy Mart Convenience Stores, Inc. and Subsidiaries 6. LONG-TERM OBLIGATIONS: The Company had the following long-term obligations as of February 3, 1996:
Interest Maturity February 3, 1996 ------------------------------------ Rate (Fiscal Year) Current Long-Term Total - - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Senior subordinated notes (Series A Notes)................. 10.25% 2005 $ - $ 75,000 $ 75,000 Senior subordinated notes (Series B Notes), net of original issue discount of $1,584.................................. 10.25% 2005 - 11,916 11,916 Revolving credit facility.................................. Various 2000 - - - Real estate mortgage notes payable......................... 6.25%-12.0 1998-2012 293 5,174 5,467 Small Business Administration debentures................... 6.9%-9.6% 1998-2006 - 4,230 4,230 Equipment financing........................................ Various 1998-2000 720 1,505 2,225 Capital leases, net of interest and executory costs of $643................................................... Various 1998-2009 417 1,626 2,043 ------------------------------------- $ 1,430 $ 99,451 $ 100,881 - - ---------------------------------------------------------------------------------------------------------------------------------
In March 1994, the Company issued $75,000,000 principal amount of 10.25% senior subordinated notes (the "Series A Notes") due March 15, 2004. The proceeds received from the sale of the Series A Notes, net of offering costs of $2,298,000, were used to repay the entire outstanding indebtedness under the then existing bank term loan and bank revolving loan and to redeem in full the Company's 14.25% subordinated debentures due November, 2000. In connection with this transaction, the Company paid a premium of 2.8%, or $761,000, related to the redemption of the 14.25% subordinated debentures and recorded a charge of $844,000 representing the write-off of the remaining deferred financing costs related to the indebtedness repaid. The Company accounted for the total of the premium paid and the charge for deferred financing costs as an extraordinary loss of $928,000, net of related income tax benefit of $677,000, in the fiscal year ended January 29, 1994. In December 1995, the Company issued an additional $13,500,000 principal amount of 10.25% senior subordinated notes (the "Series B Notes") due March 15, 2004. The proceeds received from the sale of the Series B Notes were used primarily to purchase the interests held by the former Chairman of the Board of Directors and certain of his affiliates in DM Associates (see Notes 9 and 14). The Indenture pursuant to which the Company issued the Series A Notes was amended and restated to apply to the Series B Notes. In conjunction with the issuance of the Series B Notes, the Company issued to the purchasers of the Series B Notes warrants to purchase 1,215,000 shares of Class A Common Stock of the Company. In addition, the Company issued to the holders of the Series A Notes warrants to purchase 500,000 shares of the Class A Common Stock of the Company. The warrants may be exercised any time during the next six years. The initial exercise price of the warrants is $6.95 per share, but the exercise price may be adjusted to 110% of the market price of the Company's Class A Common Stock one year after the issuance of the warrants, if such adjustment results in a decrease of the exercise price. The exercise price will also be adjusted upon the occurrence of various events, including stock dividends and issuances of Common Stock by the Company for a per share price less than the exercise price of the warrants or less than the current market value of the Company's Class A Common Stock. The Series A and Series B Notes,(collectively, the "Notes") are redeemable, at the option of the Company, after March 15, 1999 at rates starting at 104.75% of principal amount reduced annually through March 15, 2002 at which time they become redeemable at 100% of principal amount. The terms of the Notes may restrict, among other things, the payment of dividends and other distributions, investments, the repurchase of capital stock and the making of certain other restricted payments by the Company and its subsidiaries, the incurrence of additional indebtedness and new operating lease obligations by the Company or any of its subsidiaries, and certain mergers, consolidations and dispositions of assets. Additionally, according to the terms of the Notes, if a change of control occurs, as defined, each holder of Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof. In April 1996, the Company entered into a new $30,000,000 senior revolving credit facility which provides for the availability initially of up to $20,000,000 of aggregate extensions of credit, of which up to $15,000,000 will be available for the issuance of letters of credit. The outstanding balance is due and payable on April, 30, 1999; however, the Company may extend such due date for up to two additional one-year periods, with the consent of the lenders. Revolving credit loans under the credit agreement bear interest, at the Company's option, at an applicable margin over the agent bank's base rate or the LIBOR rate. The applicable margin, if any, is based upon the ratio of consolidated indebtedness to consolidated EBITDA, as defined below. The credit agreement also provides for a commitment fee of 1/2% on any unused portion of the revolving credit facility. Among other restrictions, the credit agreement contains financial covenants relating to specified levels of: indebtedness to earnings before interest expense, taxes, depreciation and amortization (EBITDA); EBITDA to interest expense; earnings before interest expense, taxes, depreciation, amortization and rent, less taxes paid in cash to interest expense, rent expense and principal payments required to be made on indebtedness; and the maintenance of a minimum net worth. In connection with the credit agreement, the Company granted a security interest in substantially all of its non-real estate assets and pledged as collateral the shares of capital stock of certain subsidiary corporations of the Company. The Company is limited in the amount of cash dividends that it may pay and the amount of capital stock and subordinated indebtedness that it may repurchase by applicable covenants contained in the senior revolving credit facility and Notes. As of February 3, 1996, taking into account such limitations, the Company would not have been able to pay cash dividends. As of February 3, 1996 and January 28, 1995, the fair value of the real estate mortgage notes payable and Small Business Administration debentures approximated the carrying amount. As of February 3, 1996, the fair value of the Series B Notes, net of original issue discount, approximated the carrying amount. As of February 3, 1996 and January 28, 1995, the fair value of the Series A Notes was $65,500,000 and $56,250,000, respectively. F-9 Dairy Mart Convenience Stores, Inc. and Subsidiaries As of February 3, 1996, maturities on long-term obligations for the next five years, were as follows:
- - ------------------------------------------------------------------------------------------------------------------------------------ February 3, Fiscal Year 1996 - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1997...................................................................................................................... $1,430 1998...................................................................................................................... 1,412 1999...................................................................................................................... 2,226 2000...................................................................................................................... 4,262 2001...................................................................................................................... 333 - - ------------------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------------------
7. OPERATING LEASES: The Company leases operating properties, including store locations and office space, under various lease agreements expiring through 2020. Certain of these locations are sublet to the Company's franchisees. The future minimum lease payments related to these properties are included in the following summary. A summary of future minimum lease payments and sublease receipts as of February 3, 1996 is as follows:
Net Operating Operating Operating Payable/Receivable in Fiscal Year Ending Leases Subleases Leases - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 1997........................................................................................... $14,704 $ 2,980 $11,724 1998........................................................................................... 11,761 2,375 9,386 1999........................................................................................... 9,086 1,642 7,444 2000........................................................................................... 6,876 966 5,910 2001........................................................................................... 4,597 550 4,047 Thereafter..................................................................................... 19,627 452 19,175 ----------------------------------- Total.......................................................................................... $66,651 $ 8,965 $57,686 - - -----------------------------------------------------------------------------------------------------------------------------------
Rental expense for all operating leases was as follows:
1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Leases....................................................................................... $15,297 $15,321 $14,803 Less subleases............................................................................... 4,169 4,631 4,396 ------------------------------------- Net.......................................................................................... $11,128 $10,690 $10,407 - - ------------------------------------------------------------------------------------------------------------------------------------
F-10 8. FEDERAL AND STATE INCOME TAXES: The benefit from (provision for) income taxes for the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994 was as follows:
1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------ (in thousands) Current benefit (provision) Federal............................................. 495 2,015 (188) State and local..................................... (148) (346) (447) -------------------------------------------------- Total current benefit (provision)................. 347 1,669 (635) -------------------------------------------------- Deferred benefit (provision) Federal............................................. 2,101 3,423 115 State and local..................................... 772 1,737 (111) -------------------------------------------------- Total deferred benefit (provision)................ 2,873 5,160 4 -------------------------------------------------- Total benefit (provision)............................. 3,220 6,829 (631) ============================================================================================================
The Company is subject to minimum state taxes in excess of statutory state income taxes in many of the states in which it operates. These minimum taxes are included in the current provision for state and local income taxes. In addition, the Company records a reduction in the provision (increase in the benefit) for income taxes for the benefit to be realized from targeted jobs credits in the year in which they arise. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate follows:
Percent of Pretax Income -------------------------------------------------- 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------ Statutory federal income tax rate..................... 34 % 34 % (34) (Increase) decrease from: State income tax benefit (provision), net of federal tax effect................................. 5 5 (24) Nondeductible expenses and amortization of acquired assets.................................... (5) (1) (8) Targeted jobs credit................................ 1 2 27 Regulatory audit settlement......................... - (2) - Other............................................... - - (3) --------------------------------------------------- Effective income tax rate............................. 35 % 38 % (42) =============================================================================================================
F-11 In November 1994, the Company reached an agreement with the Internal Revenue Service to settle certain disputed items, primarily related to the deductibility of certain intangible assets associated with prior acquisitions. The impact of the settlement required the Company to pay approximately $1,587,000, of which $681,000 represents pretax interest charges (see Note 14), and to reduce the deductibility of the remaining basis of certain intangible assets by $3,300,000. The Company reflected the impact of this settlement through the fiscal 1995 tax benefit and adjusted deferred tax assets and liabilities accordingly. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) as of February 3, 1996 and January 28, 1995 were as follows:
1996 1995 - - -------------------------------------------------------------------------------------------------------------- (in thousands) Capitalized leases......................................................... 182 182 Depreciation and amortization.............................................. (13,307) (13,337) Vacation accrual........................................................... 324 310 Inventory (LIFO)........................................................... (1,337) (1,582) Reserve for asset valuations............................................... 803 744 Insurance reserves not deductible for tax purposes........................ 1,989 2,091 Income deferred for financial statement purposes........................... 365 127 Reserve for closed stores and renovations.................................. 937 1,649 Accrued restructuring and severance reserves............................... 875 607 Financial statement expenses deferred for tax purposes..................... 379 477 Writedown of non-operating properties...................................... 1,591 1,455 Divestiture of dairy manufacturing and distribution operations............. 124 997 Tax credits and net operating loss carryforwards........................... 9,927 6,272 Other...................................................................... 460 447 --------------------------------- Net deferred tax asset (liability)......................................... 3,312 439 ==============================================================================================================
As of February 3, 1996, the Company had alternative minimum tax credits aggregating $330,000 which carryforward indefinitely for federal income tax purposes. These credits can be used in the future to the extent that the Company's regular tax liability exceeds its liability calculated under the alternative minimum tax method. In addition, the Company had $1,979,000 of targeted jobs credit carryforwards that expire, if unused, from fiscal 2007 to 2011 and $518,000 of foreign tax credit carryforwards that expire, if unused, in fiscal 1997 to 2001. The Company and its subsidiaries file a consolidated federal income tax return but generally file separate state income tax returns. As of February 3, 1996, the Company had regular federal income tax net operating loss carryforwards of $15,903,000 which expire, if unused, from fiscal 2009 to 2011 and net operating loss carryforwards for state income tax purposes of $25,641,000 which expire, if unused from fiscal 1997 to 2011. Realization of the net operating loss carryforwards is dependent on generating sufficient taxable income prior to the expiration of the operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, would be reduced in the near term if management's estimate of future taxable income during the carryforward period are reduced. No valuation allowance for deferred tax assets was provided as of February 3, 1996 and January 28, 1995. F-12 Dairy Mart Convenience Stores, Inc. and Subsidiaries 9. CAPITAL STOCK: In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under the SRP, each holder of Class A and Class B Common Stock was declared a dividend of one Preferred Stock Purchase Right (the "Rights"). The Rights are to purchase one one-hundredth (1/100) of a share of Series A Junior Preferred Stock at a price of $30 subject to certain adjustments. The Rights are exercisable under certain circumstances, and expire on January 19, 2006. In December 1995, the Company completed the purchase of the interests of the former Chairman of the Board of Directors and certain of his affiliates in DM Associates (see Note 6). Under the terms of this agreement, the Company purchased for $10,000,000 all of the former Chairman's interest in DM Associates, which entity owns 1,858,743 shares of the Company's Class B Common Stock. The former Chaiman's interest in DM Associates included a limited partnership interest and a promissory note from DM Associates secured by 1,220,000 shares of the Company's Class B Common Stock. As a result, the amount paid has been reflected as a reduction of stockholders' equity in the accompanying balance sheets. 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 (see Note 6). 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, 1,052,611 shares remained available for issuance as of February 3, 1996. As of February 3, 1996, January 28, 1995 and January 29, 1994, the Company held 521,625 shares of Class A Common Stock and 175,957 shares of Class B Common Stock as treasury shares. ________________________________________________________________________________ 10. STOCK OPTION PLANS, GRANTS AND WARRANTS: The Company adopted Stock Option Plans in 1983, 1985 and 1990 providing for the granting of options to employees 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 177,887, 158,363 and 100,500 in fiscal 1996, 1995 and 1994, respectively. As of February 3, 1996, the Company had available for grant under the 1990 Plan options to purchase 41,893 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, including options for 97,500 and 160,500 in fiscal 1996 and 1995, respectively, which are not part of a specific plan. In January 1996, the Company adopted a Stock Option and Incentive Award Plan (the "Award Plan") and a non-qualified Stock Option Plan for Outside Directors ("Outside Directors Plan"). The Award Plan provides for the granting of options to employees up to a total of 650,000 shares of either Class A or Class B Common Stock. As of February 3, 1996 the Company had granted options for 82,500 shares of the Company's Class A Stock under the Award Plan. The Outside Directors Plan provides for an option to purchase 3,500 shares of the Company's Class A Common Stock to all non-employee directors and an option of 3,500 shares annually thereafter for a period of ten years. The maximum number of shares reserved for issuance under this plan is 50,000. The Company granted 17,500 non-qualified stock options to Outside Directors in fiscal year 1996. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock issued to Employees". The Company has elected to remain with the accounting in Opinion No. 25 and is required to make pro forma disclosures of net income, as if the fair value based method of accounting defined in the statement, had been applied. The Company is required to adopt this new accounting standard on February 4, 1996. A summary of activity for all stock options during the fiscal year ended February 3, 1996 is as follows:
- - --------------------------------------------------------------------------------------------------------------------------- Options Net Options Options Outstanding Options Outstanding Exercisable Plan or Fiscal Stock Option January 28, Granted Options February 3, February 3, Year Type Price 1995 (Lapsed) Exercised 1996 1996 - - --------------------------------------------------------------------------------------------------------------------------- Incentive Stock Options: 1983 Plan Class B $5.50 5,250 (5,250) - - - 1985 Plan Class A $2.75 to $2.88 384,125 28,080 (7,875) 404,330 178,606 1990 Plan Class A $2.75 to $2.88 134,063 40,607 (8,750) 165,920 75,860 1995 Plan Class A $5.50 - 82,500 - 82,500 - - - --------------------------------------------------------------------------------------------------------------------------- Total Incentive Stock Options 523,438 145,937 (16,625) 652,750 254,466 - - --------------------------------------------------------------------------------------------------------------------------- Non-qualified Stock Options: 1986 Class B $4.00 6,750 (6,750) - - - 1987 Class A $8.80 10,000 - - 10,000 10,000 1991 Class A $4.60 5,000 - - 5,000 5,000 1995 Class B $5.50 10,000 - - 10,000 10,000 1995 Class A $4.60 to $7.25 140,000 - - 140,000 140,000 1996 Class A $2.75 to $2.88 - 97,500 - 97,500 97,500 1996 Class A $4.00 to $5.75 10,500 17,500 - 28,000 10,500 - - --------------------------------------------------------------------------------------------------------------------------- Total Non-qualified Stock Options 182,250 108,250 - 290,500 273,000 - - --------------------------------------------------------------------------------------------------------------------------- Total Stock Options 705,688 254,187 (16,625) 943,250 527,466 ===========================================================================================================================
In January 1996, the Company awarded, pursuant to the Award Plan, restricted stock grants consisting of an aggregate of 100,000 shares of the Company's Class A Common Stock. The restricted shares will vest equally over a three year period if the closing price of the Company's Class A Common Stock, as reported on the NASDAQ National Market System for a consecutive ten day period, is equal to at least $9.00 in the first year, $11.00 in the second year and $13.00 in the third year from the date of the grant. In December 1995, the Company issued warrants to purchase 1,715,000 shares of Class A Common Stock which may be exercised at any time during the next six years (see Notes 6 and 14) at an exercise price of $6.95 per share at February 3, 1996. The issuance of the warrants were recorded as an increase in paid-in- capital totalling approximately $2,281,000. F-13 Dairy Mart Convenience Stores, Inc. and Subsidiaries 11. GASOLINE OPERATIONS: A summary of gasoline operations for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 is as follows:
- - -------------------------------------------------------------------------------- 1996 1995 1994 - - -------------------------------------------------------------------------------- (in thousands) Gasoline gallons sold.......................... 212,832 206,441 206,365 Gasoline revenues.............................. $226,505 $210,541 $206,155 Cost of gasoline sold.......................... 201,980 186,462 180,835 Depreciation................................... 2,461 2,080 2,025 Capital expenditures........................... 7,585 3,702 952 Net book value of gasoline equipment........... 19,054 13,068 11,300 - - --------------------------------------------------------------------------------
________________________________________________________________________________ 12. 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. No discretionary contributions to this plan were made in fiscal 1996 or 1995 and the Company recorded a provision of $100,000 for contributions under this plan in fiscal 1994. Effective January 1, 1993, the profit sharing plan was amended pursuant to section 401(k) of the Internal Revenue Code enabling eligible employees to contribute up to 15% of their annual compensation to the plan, with the Company matching 25% of such contributions up to 6% of the employees' annual compensation. Matching contributions from the Company for fiscal years 1996, 1995 and 1994 were $128,000, $163,000 and $181,000, respectively. The Company does not offer any additional postretirement and postemployment benefits to its employees. ________________________________________________________________________________ 13. COMMITMENTS AND CONTINGENCIES: As of February 3, 1996, the Company was contingently liable for outstanding letters of credit amounting to $13,475,000. The Company was 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 $97,000 as of February 3, 1996. In consideration of these guarantees, the Company participates with the lending institutions in the interest paid on these obligations which are secured by inventory and equipment owned by the convenience store operators. The Company has certain environmental contingencies related to the ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures related to its gasoline operations. In the ordinary course of business, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from existing and previously operated retail gasoline facilities. The Company accrues its estimate of all costs to be incurred for assessment and remediation for known releases. These accruals are adjusted if and when new information becomes known. Due to the nature of such releases, the actual costs of assessment and remediation may vary significantly from year to year. As of February 3, 1996 and January 28, 1995, the Company had recorded an accrual of $1,890,000 and $2,300,000, respectively, for such costs. The Company is entitled to reimbursement of a portion of the above costs from various state environmental trust funds based upon compliance with the terms and conditions of such funds. As of February 3, 1996 and January 28, 1995, the Company had recorded a reimbursement receivable of $1,137,000 and $1,031,000, respectively. For the fiscal years ended February 3, 1996, January 28, 1995 and January 29, 1994, the Company recorded a provision for environmental expenses of $1,048,000, $1,160,000 and $343,000, respectively. Additionally, under current federal and state regulatory programs, the Company will be obligated by December 1998 to upgrade or replace most of its existing underground storage tanks ("USTs"). The Company presently estimates that it will be required to make capital expenditures related to the upgrading or replacing of USTs ranging from approximately $10.0 to $12.0 million in the aggregate through December 1998, which capital expenditures could be reduced for locations which may be closed in lieu of the capital costs of compliance. The Company's estimate of costs to be incurred for environmental assessment and remediation and for UST upgrading and other regulatory compliance are based on factors and assumptions that could change due to modifications of regulatory requirements, detection of unanticipated environmental conditions or other unexpected circumstances. Due to the nature of such information, the actual costs incurred may vary from their estimates, and the ongoing costs of assessment and remediation activities may vary significantly from year to year. In fiscal 1989, the Company entered into agreements for the wholesale supply of various grocery items to its Northeast and Midwest region stores. Under the supply agreement, the Company is obligated to annually purchase a minimum amount of merchandise for a period of ten years. The level of purchases was achieved during the first eight 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 has been named as a nominal defendant, along with those persons who were directors of the Company in fiscal 1996, in two shareholder derivative actions. The plaintiffs allege, among other things, that in connection with the settlement of the dispute between the former Chairman of the Board of Directors and certain of his affiliates and the Company's management with respect to control of the Company, the directors violated their fiduciary duty to the Company and its stockholders, violated provisions of Delaware corporate law and wasted corporate assets. The plaintiffs seek, among other things, a declaration that the current structure of the general partner of DM Associates is invalid and that certain voting rights, with respect to the Class B Common Stock held by DM Associates should be vested in the Company. DM Associates owns approximately 60% of the total voting power of both classes of the Company's Common Stock. The Company is contesting these claims and at this time is not able to determine what the outcome of this litigation will be. The Company is party to a number of other 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 future results of operations or financial position. F-14 Dairy Mart Convenience Stores, Inc. and Subsidiaries 14. NONRECURRING CHARGES: A summary of nonrecurring charges for fiscal years ended February 3, 1996 and January 28, 1995 is as follows:
1996 1995 - - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Costs and expenses related to settlement agreement with stockholder................................. $ 6,487 $ - Costs to divest of dairy manufacturing and distribution operations.................................. 1,313 2,500 Administrative severance, settlement and related costs.............................................. 1,211 2,800 Regulatory and administrative fees and expenses..................................................... 1,287 1,216 Writedown of non-operating properties to net realizable value....................................... 1,000 3,584 Costs of store closings and restructuring........................................................... 902 3,900 -------------------------- Total nonrecurring charges..................................................................... $12,200 $14,000 - - ---------------------------------------------------------------------------------------------------------------------------------
During fiscal 1996, the Company recorded nonrecurring charges of $5,822,000 related to the settlement agreement with a former stockholder. These costs and expenses consist of legal fees, execution of non-compete and other agreements and reimbursement of certain fees and expenses incurred by the former stockholder in connection with activities relating to the Company. In addition, the Company issued warrants to holders of the Company's Series A Notes to purchase 500,000 shares of the Company's Class A Common Stock, in order to obtain the consent from such holders for the Company to purchase the interests held by the former stockholder and a waiver of certain alleged events of default under the terms of the Series A Notes. The issuance of the warrants resulted in a nonrecurring charge of $665,000. During fiscal 1996 and 1995, the Company recorded nonrecurring charges of $1,313,000 and $2,500,000, respectively, for costs associated with the sale and closing of its manufacturing and distribution operations. During fiscal 1996, the Company recorded a nonrecurring charge of $1,211,000 relating to the severance and other related costs associated with the termination of an officer of the Company. During fiscal 1995, the Company recorded nonrecurring charges of $2,800,000 for costs, including legal expenses, associated with the removal of the Company's former President and Chief Executive Officer, and the settlement of legal disputes arising therefrom and severance and other personnel related costs associated with a reduction in other administrative support positions by the Company. During fiscal 1996, the Company incurred $1,287,000 in nonrecurring regulatory and administrative fees and expenses which consisted primarily of financing fees incurred to amend the Company's senior revolving credit facility with respect to the purchase of a stockholder's interest in DM Associates including the issuance of the Series B Notes (see Note 6). During fiscal 1995, the Company incurred $535,000 in duplicative interest expense and in administrative fees associated with the Company's financing activities. Interest expense, net of interest income, and fees were incurred due to the issuance of the Company's Series A Notes on March 5, 1994, the retirement of the Company's 14.25% subordinated debentures on April 4, 1994 and a subsequent amendment of the Company's senior revolving credit facility (see Note 6). In addition, in fiscal 1995, the Company reached agreement with the Internal Revenue Service to settle certain disputed items. The terms of the settlement required the Company to pay $681,000 of interest charges (see Note 8). During fiscal 1996 and 1995, the Company recorded nonrecurring charges of $1,000,000 and $3,584,000, respectively, for the writedown of non-operating office and plant facilities to net realizable value in conjunction with the anticipated sale of these properties. During fiscal 1996 and 1995, the Company recorded nonrecurring charges of $902,000 and $3,900,000, respectively, for costs associated with the sale or closing initiated in fiscal 1995, of 143 of its retail convenience stores and the closing of 81 of its retail gasoline facilities in fiscal 1995. Such costs relate, in part, to disposal of equipment, inventory and leases associated with closed stores and the removal of underground storage tanks associated with the closed gasoline facilities. F-15 EX-10.1 2 CREDIT AGREEMENT Exhibit 10.1 ================================================================================ CREDIT AGREEMENT AMONG DAIRY MART CONVENIENCE STORES, INC., THE BANKS FROM TIME TO TIME PARTIES HERETO AND BANK OF BOSTON CONNECTICUT AS AGENT $30,000,000 REVOLVING CREDIT FACILITY DATED AS OF APRIL 24, 1996 ================================================================================ TABLE OF CONTENTS -----------------
Page SECTION 1. DEFINITIONS.............................................................. 1 1.1 Defined Terms........................................................... 1 1.2 Other Definitional Provisions.......................................... 16 1.3 Change in Accounting Principles........................................ 16 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS......................................... 17 2.1 Revolving Credit Commitments........................................... 17 2.2 Designation of Interest Rates; LIBOR Interest Periods.................. 17 2.3 Interest Rates and Payment Dates....................................... 17 2.4 Procedure for Borrowing................................................ 19 2.5 Conversion and Continuation Options.................................... 19 2.6 Minimum Amounts and Maximum Number of Tranches......................... 20 2.7 Revolving Credit Notes................................................. 20 2.8 Fees................................................................... 20 2.9 Termination or Reduction of Revolving Credit Commitments............... 20 2.10 Optional Prepayments................................................... 20 2.11 Mandatory Prepayments; Cash Collateralizations......................... 21 2.12 Computation of Interest and Fees....................................... 21 2.13 Inability to Determine Interest Rate................................... 22 2.14 Pro Rata Treatment and Payments........................................ 22 2.15 Extension of Termination Date.......................................... 23 2.16 Annual CleanDown of Revolving Credit Loans............................. 23 2.17 Illegality............................................................. 24 2.18 Requirements of Law.................................................... 24 2.19 Taxes.................................................................. 25 2.20 Indemnity.............................................................. 27 SECTION 3. LETTERS OF CREDIT....................................................... 27 3.1 L/C Commitment......................................................... 27 3.2 Procedure for Issuance of Letters of Credit............................ 28 3.3 Fees, Commissions and Other Charges.................................... 28 3.4 Reimbursement Obligation of the Company................................ 29 3.5 L/C Draws and Reimbursements........................................... 29 3.6 Obligations Absolute................................................... 30 3.7 Letter of Credit Payments.............................................. 31 3.8 Application............................................................ 31
- ii - SECTION 4. REPRESENTATIONS AND WARRANTIES.......................................... 31 4.1 Financial Condition.................................................... 31 4.2 No Change.............................................................. 32 4.3 Corporate Existence; Compliance with Law............................... 32 4.4 Corporate Power, Authorization; Enforceable Obligations................ 32 4.5 No Legal Bar........................................................... 33 4.6 No Material Litigation................................................. 33 4.7 No Default............................................................. 33 4.9 Intellectual Property.................................................. 34 4.10 No Burdensome Restrictions............................................. 34 4.11 Taxes.................................................................. 34 4.12 Federal Regulations.................................................... 34 4.13 ERISA.................................................................. 35 4.14 Investment Company Act; Other Regulations.............................. 35 4.15 Subsidiaries........................................................... 35 4.16 Purpose of Loans....................................................... 35 4.17 Environmental Matters.................................................. 36 4.18 Security Documents..................................................... 36 4.19 Company Senior Indebtedness............................................ 37 SECTION 5. CONDITIONS PRECEDENT.................................................... 37 5.1 Conditions to Initial Extension of Credit.............................. 37 5.2 Conditions to Each Extension of Credit................................. 40 SECTION 6. AFFIRMATIVE COVENANTS................................................... 41 6.1 Financial Statements................................................... 41 6.2 Certificates; Other Information........................................ 42 6.3 Payment of Obligations................................................. 43 6.4 Conduct of Business and Maintenance of Existence....................... 43 6.5 Maintenance of Property; Insurance..................................... 43 6.6 Inspection of Property; Books and Records; Discussions................. 43 6.7 Notices................................................................ 44 6.8 Environmental Laws..................................................... 45 6.9 Additional Designated Subsidiaries..................................... 45 6.10 Further Assurances..................................................... 46 SECTION 7. NEGATIVE COVENANTS...................................................... 46 7.1 Financial Condition Covenants.......................................... 46 7.2 Limitation on Indebtedness............................................. 48 7.3 Limitation on Liens.................................................... 49 7.4 Limitation on Guarantee Obligations.................................... 50
-iii- 7.5 Limitations on Fundamental Changes..................................... 50 7.6 Limitation on Sale of Assets........................................... 51 7.7 Limitation on Restricted Payments...................................... 51 7.8 Limitation on Capital Expenditures..................................... 51 7.9 Limitation on Investments, Loans and Advances.......................... 52 7.10 Limitation on Optional Payments and Modifications of Debt Instruments.. 54 7.11 Transactions with Affiliates........................................... 54 7.12 Sale and Leaseback..................................................... 54 7.13 Corporate Documents; Name/Location of Assets........................... 54 7.14 Fiscal Year............................................................ 55 7.15 Limitation on Negative Pledge Clauses.................................. 55 SECTION 8. EVENTS OF DEFAULT....................................................... 55 SECTION 9. THE AGENT............................................................... 59 9.1 Appointment............................................................ 59 9.2 Delegation of Duties................................................... 59 9.3 Exculpatory Provisions................................................. 59 9.4 Reliance by Agent...................................................... 59 9.5 Notice of Default...................................................... 60 9.6 NonReliance on Agent and Other Banks................................... 60 9.7 Indemnification........................................................ 60 9.8 Agent in Its Individual Capacity....................................... 61 9.9 Successor Agent........................................................ 61 SECTION 10. MISCELLANEOUS.......................................................... 61 10.1 Amendments and Waivers................................................. 61 10.2 Notices................................................................ 62 10.3 No Waiver; Cumulative Remedies......................................... 63 10.4 Survival of Representations and Warranties............................. 63 10.5 Payment of Expenses and Taxes.......................................... 63 10.6 Successors and Assigns; Participations; Purchasing Banks............... 64 10.7 Adjustments; Setoff.................................................... 67 10.8 Counterparts........................................................... 67 10.9 Severability........................................................... 67 10.10 Integration............................................................ 68 10.11 Governing Law.......................................................... 68 10.12 Submission To Jurisdiction; Waivers.................................... 68 10.13 Acknowledgments........................................................ 68 10.14 WAIVERS OF JURY TRIAL; COMMERCIAL TRANSACTIONS......................... 69
-iv- SCHEDULES SCHEDULE I - Commitments; Addresses SCHEDULE II - Long-Term Commitments SCHEDULE III - Recent Acquisitions SCHEDULE IV - Recent Changes and Distributions SCHEDULE V - ERISA Matters SCHEDULE VI - Subsidiaries SCHEDULE VIIA - Environmental Matters SCHEDULE VIIB - Litigation SCHEDULE VIII - Indebtedness SCHEDULE IX - Liens SCHEDULE X - Management Loans and Advances SCHEDULE XI - Tax Audits SCHEDULE XII - UCC Filing Locations EXHIBITS EXHIBIT A - Form of Revolving Credit Note EXHIBIT B - Form of Subsidiary Guarantee EXHIBIT C - Form of Company Pledge Agreement EXHIBIT D - Form of Subsidiary Pledge Agreement EXHIBIT E - Intentionally Deleted EXHIBIT F - Form of Assignment and Acceptance EXHIBIT G - Form of Opinions of Counsel to the Company and its Subsidiaries EXHIBIT H - Form of Company Security Agreement EXHIBIT I- Form of Subsidiary Security Agreement -v- CREDIT AGREEMENT CREDIT AGREEMENT dated as of April 24, 1996 by and among DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation (the "Company"), the banks and other financial institutions listed on Schedule I to this Agreement (collectively, together with any banks or financial institutions from time to time parties to this Agreement, the "Banks") and BANK OF BOSTON CONNECTICUT, a bank organized under the laws of the State of Connecticut , as agent for the Banks hereunder (in such capacity, the "Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company has requested the Banks severally to extent credit to the Company in an aggregate principal amount not to exceed $30,000,000 at any time outstanding, the proceeds of which will be used for the purposes hereinafter set forth; WHEREAS, of the $30,000,000 of aggregate extensions of credit to be made available to the Company hereunder, up to $15,000,000 of such extensions of credit shall be available under the L/C Commitments (as hereinafter defined); and WHEREAS, the Banks are willing to extend such credit upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall ------------- have the following meanings: "Affiliate": of a Person (the "Primary Person"), (a) any other Person --------- (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, the Primary Person or (b) any Person who is a director or officer (i) of the Primary Person, (ii) of any Subsidiary of the Primary Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, directly or indirectly, (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Aggregate Outstanding Extensions of Credit": as to any Bank at any time, ------------------------------------------ an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Bank then outstanding, and (b) the product of such Bank's Commitment Percentage times the L/C Obligations then outstanding. "Agreement" this Credit Agreement, as amended, supplemented or otherwise --------- modified from time to time. "Alternate Base Rate" the higher of (i) the rate of interest per annum ------------------- publicly announced from time to time by the Agent as its "base rate" in effect at its principal office (the Alternate Base Rate not being intended to be the best or lowest rate of interest charged by the Agent in connection with extensions of credit to debtors) or (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/100 of 1%). Any change in the Alternate Base Rate shall be effective as of the opening of business on the effective day of such change in the Alternate Base Rate. "Alternate Base Rate Loans" loans the rate of interest applicable to which ------------------------- is based upon the Alternate Base Rate. "Applicable Margin" at any time, for Alternate Base Rate Loans or LIBOR ----------------- Loans, as the case may be, a rate per annum equal to the rate set forth below opposite the applicable ratio of Consolidated Indebtedness to Consolidated EBITDA for the period of four consecutive fiscal quarters ending on FQED immediately preceding such time:
============================================================================== Ratio of Consolidated Indebtedness Applicable Margin to Consolidated for Alternative Applicable Margin Level EBITDA Base Rate Loans for LIBOR Loans ============================================================================== I Less than 3.00 to 1.00 0.00% 2.00% - - ------------------------------------------------------------------------------ II Less than 3.50 to 1.00, but greater than or equal to 3.00 to 1.00 0.00% 2.25% - - ------------------------------------------------------------------------------ III Less than 4.00 to 1.00, but greater than or equal to 3.50 to 1.00 0.00% 2.50% - - ------------------------------------------------------------------------------ IV Greater than or equal to 4.00 to 1.00 0.25% 2.75% ==============================================================================
-2- provided, however, that notwithstanding the foregoing, until the Company - - -------- ------- delivers to the Agent the certificates required by section 6.2(b) hereof following the completion of the Company's fiscal year ending approximately January 31, 1997, the Applicable Margin for Alternate Base Rate Loans and the Applicable Margin for LIBOR Loans shall be not less than that set forth in Level III above. "Application" an application in such form as the Issuing Bank may specify ----------- from time to time, requesting the Issuing Bank to issue a Letter of Credit. "Assignment and Acceptance" an Assignment and Acceptance, substantially in ------------------------- the form of Exhibit F. "Available Revolving Credit Commitment" as to any Bank at any time, an ------------------------------------- amount equal to the excess, if any, of (a) the amount of such Bank's Revolving Credit Commitment over (b) such Bank's Aggregate Outstanding Extensions of Credit. "Borrowing Date" any Business Day specified in a notice pursuant to -------------- subsection 2.4 as a date on which the Company requests the Banks to make Loans hereunder. "Business Day" a day other than Saturday, Sunday or other day on which ------------ commercial banks in Hartford, Connecticut are authorized or required by law to close. "Capital Expenditures" any payment made directly or indirectly for the -------------------- purpose of acquiring, constructing or improving fixed assets, real property or equipment which in accordance with GAAP would be added as a net debit (after giving effect to any credits) to the fixed asset account of the Person making such expenditure, including, without limitation, amounts paid or payable under any conditional sale or other title retention agreement. "Capital Stock" any and all shares, interests, participations or other ------------- equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Equivalents" (a) securities issued or directly and fully guaranteed ---------------- or insured by the United States Government or any agency or instrumentality thereof, (b) certificates of deposit and eurodollar time deposits with maturities of six months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any Bank or with any domestic commercial bank having capital and surplus in excess of $100,000,000, (c) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (a) and (b) entered into with any financial institution meeting the qualifications specified in clause (b) above, and (d) commercial paper issued by any Bank or the parent corporation of any Bank and commercial paper of any other issuer rated at least A-1 or the equivalent thereof by Standard & Poor's Corporation or at least P-1 or the equivalent -3- thereof by Moody's Investors Service, Inc. and in each case maturing within six months after the date of acquisition. "Cash Collateral Account" as defined in Section 8. ----------------------- "Change of Control" the occurrence of any of the following events: (i) any ----------------- "person" or "group" (as such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), 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" or "group" (as such terms are used in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended); provided that the foregoing shall not include the granting of Liens permitted by this Agreement; (iv) the Permitted Holders cease to control at least 10% of the total voting power of the Company; (v) 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) 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 voting power of the Voting Stock of the surviving corporation immediately after such transaction; or (vi) neither Robert B. Stein nor Gregory G. Landry shall any longer be a member of the Company's senior management; provided that, in respect of clause (i) of this definition, prior to September 13, 1997, none of DM Associates, any of its general partners or any of the general partners of such general partners shall be deemed to be a "group" or "person" owning more than 50% of the total voting power of the Voting Stock of the Company solely due to such entity's beneficial ownership of shares of the Company held by DM Associates. "Clean-Down Period" the period commencing on May 15 and ending on September ----------------- 15 of each year during the Commitment Period. "Closing Date" April 24, 1996. ------------ "Code" the Internal Revenue Code of 1986, as amended from time to time. ---- -4- "Collateral" the collective reference to the Collateral, as such term is ---------- defined in each of the Company Security Agreement, the Company Pledge Agreement, the Subsidiary Security Agreements and the Subsidiary Pledge Agreement. "Commitment Percentage" as to any Bank at any time, the percentage set --------------------- forth opposite such Bank's name on Schedule I of this Agreement with respect to such Bank. "Commitment Period" the period from and including the date hereof to but ----------------- not including the Termination Date or such earlier date on which the Commitments shall terminate as provided herein. "Commitments" the collective reference to the Revolving Credit Commitments ----------- and the L/C Commitments. "Commonly Controlled Entity" an entity, whether incorporated or not, which -------------------------- is under common control with the Company within the meaning of Section 4001 of ERISA or is part of a group which includes the Company and which is treated as a single employer under Section 414 of the Code. "Company Pledge Agreement" the Pledge Agreement, substantially in the form ------------------------ of Exhibit C, made by the Company in favor of the Agent for the ratable benefit of the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Company Security Agreement" the Company Security Agreement, substantially -------------------------- in the form of Exhibit H, to be executed and delivered by the Company, as the same may be amended, supplemented or otherwise modified from time to time. "Consolidated EBITDAR" for any period, Consolidated EBITDA for such period -------------------- plus Consolidated Rent Expense for such period. "Consolidated EBITDA" for any period, Consolidated Net Income for such ------------------- period plus the aggregate amounts deducted in determining such Consolidated Net Income in respect of (a) income taxes (b) Consolidated Interest Expense, (c) depreciation expense and (d) the expense associated with amortization of intangible and other assets. "Consolidated Indebtedness" at a particular date, all Indebtedness of the ------------------------- Company and its consolidated Subsidiaries which by its terms matures more than one year after the date of calculation, and any other Indebtedness of the Company and its consolidated Subsidiaries maturing within one year from such date which is renewable or extendable at the option of the obligor to a date more than one year from such date, including, in any event, the Revolving Credit Loans. "Consolidated Interest Expense" for any period, interest expense of the ----------------------------- Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. -5- "Consolidated Net Income" for any period, the consolidated net income (or ----------------------- loss) of the Company and its Subsidiaries for such period determined in accordance with GAAP; provided that there shall be excluded from the calculation thereof any non-operating gains or losses (e.g., extraordinary or unusual gains or losses, gains or losses from discontinuance of operations, gains or losses arising from the sale or disposition by the Company or any Subsidiary of any asset, the issuance of any debt or equity securities, and other non-recurring gains or losses). There shall be excluded from the calculation of Consolidated Net Income any net income or loss arising with respect to (i) any permitted Joint Venture Investment, except that the aggregate amount of cash actually distributed to the Company in respect of such Permitted Joint Venture Investment during such period as a dividend or other distribution shall be included in the calculation thereof, or (ii) the sale or disposition of any Franchise Asset or any inventory of the Company or any Subsidiary. "Consolidated Net Worth" at a particular date, all amounts which would be ---------------------- included under shareholders' equity on a consolidated balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP as at such date. "Consolidated Rent Expense" for any period, the aggregate rental ------------------------- obligations of the Company and its Subsidiaries determined on a consolidated basis payable in respect of such period under leases of real and/or personal property (net of principal receipts from sub-leases thereof, and excluding taxes, insurance, maintenance and similar expenses which the lessee is obligated to pay under the terms of said leases), regardless of whether such obligations are reflected as liabilities or commitments on a consolidated balance sheet of the Company and its consolidated Subsidiaries or in the notes thereto; provided, that with respect to Financing Leases, the rental obligations referred to herein shall not include any portion thereof included in the interest expense of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Contractual Obligation" as to any person, any provision of any security ---------------------- issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default" any of the events specified in Section 8, regardless of whether ------- any requirement for the giving of notice, the lapse of time, or both, or any other conditions, has been satisfied. "Designated Subsidiary" a Subsidiary listed on Part A of Schedule VI. --------------------- "DM Associates" DM Associates Limited Partnership, a Connecticut limited ------------- partnership. "Dollars" and "$" dollars in lawful currency of the United States of ------- - America. "Environmental Laws" any and all Federal, state, local or municipal laws, ------------------ rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental -6- protection matters, including without limitation, Hazardous Materials, as now or may at any time hereafter be in effect. "ERISA" the Employee Retirement Income Security Act of 1974, as amended ----- from time to time. "Event of Default" any of the events specified in Section 8, provided that ---------------- -------- any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Extension" as defined in subsection 2.15. --------- "Federal Funds Effective Rate" at any time shall mean a fluctuating ---------------------------- interest rate per annum equal to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds Brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Financing Lease" any lease of property, real or personal, the obligations --------------- of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "FinOp" Financial Opportunities, Inc., a Kentucky corporation that is a ----- Subsidiary and a small business investment company licensed by the SBA. "FQED" the end date of any fiscal quarter in any fiscal year of the ---- Company. "Franchise Assets" all real and personal property of the Company or any ---------------- Subsidiary sold or otherwise transferred to any franchisee of the Company or such Subsidiary pursuant to the company's on-going franchise program, in the ordinary course of such program and pursuant to customary documentation of the Company or such Subsidiary for such purpose. "Franchisee Guarantees" Guarantee Obligations of the Company or any --------------------- Subsidiary guaranteeing indebtedness of a franchisee of the Company with respect to the Company's on-going franchise program, which Guarantee Obligations are reflected on the consolidated financial statements of the Company and its consolidated Subsidiaries or in the notes thereto. "FYED" the end date of the Company's fiscal year designated with such term, ---- being the Saturday closest to January 31 in the calendar year designated with such term; thus FYED 1996 shall mean the Saturday closest to January 31, 1996, which shall be the date on which the Company's 1996 fiscal year shall end. -7- "GAAP" generally accepted accounting principles in the United States of ---- America in effect from time to time. "Governmental Authority" any nation or government, any state or other ---------------------- political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation" as to any Person (the "guaranteeing person"), any -------------------- obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit), to induce the creation of which obligation the guaranteeing person has issued a reimbursement, counter indemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any indebtedness, leases, dividends or other obligations (the "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether contingent or not, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligations of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that -------- ------- the term "Guarantee Obligation" shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (x) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (y) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Company in good faith. "Hazardous Materials" any hazardous materials, hazardous wastes, hazardous ------------------- constituents, hazardous or toxic substances, petroleum products (including crude oil or any fraction thereof), defined or regulated as such in or under any Environmental Law. "Indebtedness" of any Person at any date, (a) all indebtedness of such ------------ Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations of such person in respect of acceptances issued or created for the account of such Person, and (d) all liabilities secured by any Lien on any property -8- owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "Initial Funding Date" as defined in subsection 2.1. -------------------- "Insolvency" with respect to any Multiemployer Plan, the condition that ---------- such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent" pertaining to a condition of insolvency. --------- "Insurance Subsidiary" D.M. Insurance, Ltd., a Bermuda corporation. -------------------- "Interest Payment Date" (a) as to any Alternate Base Rate Loan, each FQED --------------------- to occur while such Loan is outstanding, (b) as to any LIBOR Loan having a LIBOR Interest Period of three months or less, the last day of such LIBOR Interest Period, and (c) as to any LIBOR Loan having a LIBOR Interest Period longer than three months, each day which is three months or a whole multiple thereof, after the first day of such LIBOR Interest Period and the last day of such LIBOR Interest Period. "Interest Rate Agreement" any interest rate swap agreement, interest rate ----------------------- collar agreement, currency exchange agreement, or other similar agreement or arrangement entered into by the Company, in order to hedge or minimize risk with respect to the fluctuation of interest rates, with (i) any of the Banks parties hereto or (ii) a financial institution with a minimum long-term indebtedness rating of at least A- by Standard & Poor's Corporation and at least A3 by Moody's Investors Service, Inc. "Issuing Bank" Bank of Boston Connecticut, in its capacity as issuer of any ------------ Letter of Credit. "L/C Commitment" $15,000,000. -------------- "L/C Fee" as defined in subsection 3.3(a). ------- "L/C Obligations" at any time, an amount equal to the sum of (a) the --------------- aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (B) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to subsection 3.5. "L/C Participants" the collective reference to all the Banks other than the ---------------- Issuing Bank. "Letters of Credit" as defined in subsection 3.1(a). ----------------- "Letter of Credit Rate" for each Letter of Credit, at any time, a rate per --------------------- annum equal to the rate set forth below opposite the applicable ratio of Consolidated Indebtedness to Consolidated -9- EBITDA for the period of four consecutive fiscal quarters ending on the FQED immediately preceding such time:
====================================================================== Ratio of Consolidated Indebtedness to Consolidated Level EBITDA Letter of Credit Rate ====================================================================== Less than 3.00 to I 1.00 2.00% - - ---------------------------------------------------------------------- II Less than 3.50 to 1.00, but greater than or equal to 3.00 to 1.00 2.25% - - ---------------------------------------------------------------------- III Less than 4.00 to 1.00, but greater than or equal to 3.50 to 1.00 2.50% - - ---------------------------------------------------------------------- IV Greater than or equal to 4.00 to 1.00 2.75% ======================================================================
provided, however, that, notwithstanding the foregoing, until the Company delivers to the Agent the certificates required by Section 6.2(b) hereof following the completion of the Company's fiscal year ending approximately January 31, 1997, the Letter of Credit Rate shall be not less than that set forth in Level III above. "LIBOR Base Rate" with respect to each day during each LIBOR Interest --------------- Period, the rate per annum equal to the rate at which the Agent is offered Dollar deposits at or about 10:00 A.M., Eastern time, two Business Days prior to the beginning of such LIBOR Interest Period in the London interbank market where the eurodollar and foreign currency and exchange operations in respect of its LIBOR Loans are then being conducted for delivery on the first day of such LIBOR Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such LIBOR Interest Period. "LIBOR Interest Period" any one (1), two (2), three(3) or six (6) month --------------------- period selected by the Company in respect to any LIBOR Loan pursuant to subsections 2.2, 2.4 or 2.5 of this Agreement. -10- "LIBOR Reserve Requirements" for any day as applied to a LIBOR Loan, the -------------------------- aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding maintained by a member bank of such System. "LIBOR Loans" Loans the rate of interest applicable to which is based upon ----------- the LIBOR Rate. "LIBOR Rate" with respect to each day during each LIBOR Interest Period, a ---------- rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): LIBOR Base Rate ------------------------- 1.00 - LIBOR Reserve Requirements "Lien" any mortgage, pledge, hypothecation, assignment, security interest, ---- deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Loan" any loan made by any Bank pursuant to this Agreement. ---- "Loan Documents" this Agreement, the Notes, the Applications, the -------------- Subsidiary Guarantee, the Pledge Agreements, the Subsidiary Security Agreements and the Company Security Agreement, together with any and all other instruments, documents and agreements executed and delivered by the Company or the Designated Subsidiaries from time to time in connection with the indebtedness evidenced by this Agreement and the Notes, as the same may hereafter be amended, restated or modified, from time to time. "Material Adverse Effect" a material adverse effect on (a) the business, ----------------------- operations, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, (b) the ability of the Company or any Designated Subsidiary to perform its obligations under the Loan Documents to which it is a party or (c) the validity or enforceability of this Agreement, the Notes or any of the other Loan Documents or the rights or remedies of the Agent or the Banks hereunder or thereunder. "Minimum Consolidated Net Worth" (i) as at the first FQED to occur in ------------------------------ fiscal year 1997: $8,000,000; (ii) as at the second FQED to occur in fiscal year 1997: $10,000,000; (iii) as at the third -11- FQED to occur in fiscal year 1997: $11,000,000; (iv) as at the fourth FQED to occur in fiscal year 1997: $10,500,000; and (v) as at any FQED to occur after fiscal year 1997: $10,500,000 plus 50% of cumulative Consolidated Net Income earned after the end of the Company's fiscal year ending approximately January 31, 1997. "Multiemployer Plan" a Plan which is a multiemployer plan as defined in ------------------ Section 4001(a)(3) of ERISA. "Net Cash Proceeds" (a) when used in respect of any sale or other ----------------- disposition of assets that is not an issuance of debt securities of the Company or any Subsidiary, the gross proceeds received by the Company or such Subsidiary from such sale or disposition less (i) all reasonable legal, title, recording and transfer tax expenses, commissions and other customary fees and expenses incurred, and all other federal, state and local taxes assessed, in connection therewith, (ii) the principal amount of, premium, if any, and interest on any indebtedness (other than the Loans and the Reimbursement Obligations) which is secured by the asset sold or otherwise disposed of and which is required to be repaid in connection with such sale or other disposition of assets and (iii) amounts to be provided by the Company or such Subsidiary as a reserve, in accordance with GAAP, against any liabilities associated with any such sale or other disposition of assets and retained by such Person after such sale or other disposition of assets, including, without limitation, pension and other post- employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with such sale or other disposition of assets and (b) when used in respect of the issuance of any debt securities of the Company or any Subsidiary, the gross proceeds received by the Company or such Subsidiary from such issuance less all legal expenses, commissions and other fees and expenses incurred and all federal, state and local taxes assessed in connection therewith. "Notes" the collective reference to the Revolving Credit Notes. ----- "Participants" as defined in subsection 10.6(b). ------------ "PBGC" the Pension Benefit Guaranty Corporation established pursuant to ---- Subtitle A of Title IV of ERISA. "Permitted Holders" the collective reference to DM Associates, Robert B. ----------------- Stein or Gregory G. Landry and their respective Related Parties. "Permitted Joint Venture Investment" investments in corporations, ---------------------------------- partnerships or joint ventures (other than Subsidiaries) which investments do not require investment by the Company of cash equity in excess of $50,000 in the aggregate; provided, that for the purpose of determining the amount of cash -------- equity invested, investments by the Company of the proceeds of any fees or other amounts received by the Company in connection with such investment shall not be deemed to be cash equity. -12- "Person" an individual, partnership, corporation, business trust, joint ------ stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan" at a particular time, any employee benefit plan which is covered by ---- ERISA and in respect of which the Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreements" the Company Pledge Agreement and the Subsidiary Pledge ----------------- Agreements. "POS Program Expenses" those expenses incurred in connection with the -------------------- acquisition or installation by the Company or any Subsidiary of cash registers, personal computers and other inventory management equipment, and any licenses of intellectual property in connection therewith. "Purchasing Banks" as defined in subsection 10.6(c). ---------------- "Register" as defined in subsection 10.6(d). -------- "Regulation U" Regulation U of the Board of Governors of the Federal ------------ Reserve System. "Reimbursement Obligation" the obligation of the Company to reimburse the ------------------------ Issuing Bank pursuant to subsection 3.5 for amounts drawn under Letters of Credit. "Reimbursing Bank" as defined in subsection 2.14(a). ---------------- "Related Party" with respect to each Permitted Holder, (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 of 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). "Reorganization" with respect to any Multiemployer Plan, the condition that -------------- such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event" any of the events set forth in Section 4043(b) of ERISA, ---------------- other than those events as to which the thirty day notice period is waived in accordance with subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. (S) 2615. "Required Banks" at any time, Banks the Commitment Percentages of which -------------- aggregate greater than 50%. -13- "Requirement of Law" as to any Person, the Certificate of Incorporation and ------------------ By-Laws or other organizations or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" the chief executive officer or the president or other ------------------- executive officer of the Company or, with respect to financing matters, the chief financial officer or other executive officer of the Company. "Revolving Credit Commitment" as to any Bank, the obligation of such Bank --------------------------- to make Revolving Credit Loans to the Company hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Bank's name on Schedule I under the caption, "Commitment Amount". "Revolving Credit Loans" any loans, advances or other disbursements by ---------------------- Agent, or any or all of the Banks to or for the account of the Company under the Revolving Credit Commitments (including without limitation, amounts paid in respect of any draft under any Letter of Credit) or in respect of any amounts due and not paid by the Company in accordance with subsection 10.5. "Revolving Credit Note" as defined in subsection 2.7. --------------------- "Sale/Leaseback Transaction" as defined in subsection 7.12. -------------------------- "SBA" the United States Small Business Administration or any regulatory --- body succeeding to all or any of the functions thereof. "Security Documents" the Pledge Agreements, the Subsidiary Security ------------------ Agreements and the Company Security Agreement. "Senior Subordinated Indenture" the indenture among the Company, certain of ----------------------------- its Subsidiaries, as guarantors, and First Bank National Association, as trustee, pursuant to which the Company issued its 10.25% Senior Subordinated Notes due 2004 in the aggregate original principal amount of $75,000,000, and subsequently issued its 10.25% Senior Subordinated Notes, Series B, due 2004 in the aggregate original principal amount of $13,500,000 -- as such Senior Subordinated Indenture may, with the prior written consent of the Banks, be amended, supplemented or otherwise modified from time to time. "Senior Subordinated Notes" the 10.25% Senior Subordinated Notes due 2004 ------------------------- in the original principal amount of $75,000,000 and the Senior Subordinated Notes due 2004, Series B, in the original principal amount of $13,500,000 issued pursuant to the Senior Subordinated Indenture -- -14- as such Notes may, with the prior written consent of the Banks, be amended, modified, supplemented, renewed or extended from time to time. "Single Employer Plan" any Plan which is covered by Title IV of ERISA, but -------------------- which is not a Multiemployer Plan. "Subsequently Acquired Subsidiary" any Subsidiary acquired by the Company -------------------------------- or any Designated Subsidiary pursuant to subsection 7.9(i) if the assets or revenues of such Subsequently Acquired Subsidiary are considered, in the reasonable judgment of the Agent and the Banks, material in relation to the consolidated assets or consolidated revenues of the Company and its consolidated Subsidiaries (as shown from the most recent financial statements delivered pursuant to subsection 6.1). "Subsidiary" as to any Person, a corporation, partnership or other entity ---------- of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Subsidiary Guarantee" the Guarantee, substantially in the form of Exhibit -------------------- B, made by each Designated Subsidiary in favor of the Agent for the ratable benefit of the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Pledge Agreement" the Pledge Agreement, substantially in the --------------------------- form of Exhibit D, made by each Designated Subsidiary in favor of the Agent for the ratable benefit of the Banks, as the same may be amended, supplemented or otherwise modified from time to time. "Subsidiary Security Agreement" a Subsidiary Security Agreement, ----------------------------- substantially in the form of Exhibit I, to be executed and delivered by each Designated Subsidiary, as the same may be amended, supplemented or otherwise modified from time to time. "Successor Agent" any Bank or any bank, depository or financial --------------- institution, trust company, bank and trust company having capital and surplus in excess of $100,000,000 and acceptable to the remaining Bank or Banks and to the Company, the Company's consent not to be unreasonably withheld or delayed. "Termination Date" April 30, 1999, or such later date to which the ---------------- Termination Date may be extended in accordance with subsection 2.15. -15- "Tranche" the collective reference to LIBOR Loans having LIBOR Interest ------- Periods which begin on the same date and end on the same later date (whether such Loans shall originally have been made on the same day or not). "Transferee" as defined in subsection 10.6(f). ---------- "Type" as to any Loan, its nature as an Alternate Base Rate Loan or a LIBOR ---- Loan. "Uniform Customs" the Uniform Customs and Practice for Documentary Credits --------------- (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "Voting Stock" with respect to a corporation, all classes of Capital Stock ------------ then outstanding of such corporation normally entitled to vote in elections of directors. 1.2 Other Definitional Provisions. ----------------------------- (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Company and its Subsidiaries not defined in subsection 1.1 and accounting terms partly defined in subsection 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 1.3 Change in Accounting Principles. Except as otherwise provided ------------------------------- herein, any changes in GAAP which are hereafter made and adopted by the Company with the agreement of its independent certified public accountants shall not affect the method of calculation of any of the financial covenants, standards or terms found in subsection 1.1 or Section 7. -16- SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. Subject to the terms and conditions ---------------------------- and hereof, provided that no Default or Event of Default shall have occurred and be continuing, each Bank severally agrees to make Revolving Credit Loans to the Company from time to time on or after the date each of the conditions precedent set forth in subsection 5.1 has been satisfied or waived by the Required Banks (the "Initial Funding Date") and continuing throughout the Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of such Bank's Available Revolving Credit Commitment; provided, however, that the Company's aggregate borrowings hereunder at any one time (giving effect to all Revolving Credit Loans outstanding at such time and to all Letters of Credit outstanding at such time) shall not exceed $20,000,000 until such time as (i) Consolidated Net Income during the immediately preceding period of four consecutive fiscal quarters ending on any FQED shall have been not less than $19,500,000 or (ii) the Required Banks shall have waived in writing further compliance with such requirement. From and after the Initial Funding Date and continuing throughout the Commitment Period the Company may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing in accordance with the terms and conditions hereof. 2.2 Designation of Interest Rates; LIBOR Interest Periods. ----------------------------------------------------- (a) The Revolving Credit Loans may from time to time be (i) LIBOR Loans, (ii) Alternate Base Rate Loans or (iii) a combination thereof, as determined by the Company and notified to the Agent in accordance with subsections 2.4 and 2.5. In the event the Company fails to designate the Type of all or any portion of a Loan (whether initially or upon expiration of a LIBOR Interest Period), the per annum rate of interest applicable thereto shall be or become the rate of interest applicable to Alternate Base Rate Loans. (b) The Company may not select a LIBOR Interest Period pursuant to subsections 2.2(a), 2.5 or otherwise, if (i) an Event of Default has occurred and is continuing, or (ii) such LIBOR Interest Period would expire on a day after the Termination Date. If any LIBOR Interest Period would otherwise end on a day that is not a Business Day, such LIBOR Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such LIBOR Interest Period into another calendar month in which event such LIBOR Interest Period shall end on the immediately preceding Business Day. If any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) such LIBOR Interest Period shall end on the last Business Day of a calendar month. 2.3 Interest Rates and Payment Dates. -------------------------------- (a) Each LIBOR Loan shall bear interest, during the applicable LIBOR Interest Period, at a rate per annum equal to the applicable LIBOR Rate plus the Applicable Margin. The Applicable -17- Margin for each LIBOR Loan shall be determined based upon the calculations submitted to the Banks pursuant to subsection 6.1(b) and shall be effective as of the first day of the fiscal quarter next following the date such calculations are submitted to the Banks. Any change in such Applicable Margin as a consequence of the Bank's review of the aforesaid calculation after the effective date of such Applicable Margin shall be retroactively applied to the first day such Applicable Margin became effective. In the event the Applicable Margin for a LIBOR Loan can not be determined at any time because the Company's financial statements for the immediately preceding fiscal quarter are not available at such time, the Applicable Margin for each LIBOR Loan shall be presumed to be the same as the Applicable Margin for such LIBOR Loans as of the last FQED for which the Company's financial statements were available. (b) Each Alternate Base Rate Loan shall bear interest for so long as it is outstanding and unpaid at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin. (c) If all or a portion of the principal amount of any Loan or any interest payable thereon shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum (the "Default Rate") which is equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this subsection plus 3% from the date of such non-payment until such amount is paid in full (after, as well as before, judgment). (d) Interest shall be payable in arrears on each Interest Payment Date; provided that interest accruing at the Default Rate pursuant to subsection - - -------- 2.3(c) shall be payable on demand. In the event the rate of interest applicable to any LIBOR Loan decreases as a consequence of a decrease in the Applicable Margin with respect thereto, the Company shall be entitled to apply the difference between the amount of interest paid and the amount of interest due (after giving effect to such reduction) as a credit against the next installment of interest due hereunder. In the event the rate of interest applicable to any LIBOR Loan increases as a consequence of an increase in the Applicable Margin with respect thereto, the Company shall pay the difference between the amount of interest paid and the amount of interest due (after giving effect to such increase) on the next Interest Payment Date. (e) In the event the total amount of any payment of principal or interest or amounts due in respect of any Reimbursement Obligation or of any fee required to be paid under this Agreement is not received by Agent or Issuing Bank, as the case may be, within ten (10) days following the due date of such payment, the Company shall, in addition to and together with such payment, pay to Agent or Issuing Bank, as the case may be, a late charge equal to five percent (5%) of the total amount of such payment or amount due; provided, such late charge shall not be payable in respect of any overdue payment in the event Borrower was entitled to an Advance in the amount of such payment under the provisions of subsection 2.1 at the time such payment became due, Borrower duly requested such Advance in compliance with the requirements of the Credit Agreement, and the Banks failed to provide such Advance without cause -18- 2.4 Procedure for Borrowing. The Company may borrow under the Revolving ----------------------- Credit Commitments on or after the Initial Funding Date during the Commitment Period on any Business Day by giving the Agent irrevocable notice (which notice must be received by the Agent prior to (x) 12:00 p.m., Eastern time, at least three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially LIBOR Loans, or (y) 12:00 p.m., Eastern time, on the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) the Type of the requested borrowing and (iv) if the borrowing is to be entirely or partly of LIBOR Loans, the amounts and LIBOR Interest Periods thereof. Each borrowing under the Revolving Credit Commitments shall be in an amount equal to (A) in the case of Alternate Base Rate Loans, $100,000 or a whole multiple thereof (or, if the then Available Revolving Credit Commitments are less than $100,000, such lesser amount) or (B) in the case of LIBOR Loans, $100,000 or a whole multiple thereof. Upon receipt of any such notice from the Company, the Agent shall promptly notify each Bank thereof. Each Bank will make the amount of its pro rata share (based on its Commitment Percentage) of each borrowing available to the Agent for the account of the Company at the office of the Agent specified in subsection 10.2 prior to 2:00 p.m., Eastern time, on the Borrowing Date requested by the Company in funds immediately available to the Agent. Such borrowing will then be made available to the Company by the Agent crediting the account of the Company on the books of such office with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. 2.5 Conversion and Continuation Options. ----------------------------------- (a) The Company may elect from time to time to convert LIBOR Loans to Alternate Base Rate Loans by giving the Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of LIBOR -------- Loans may only be made as of the last day of a LIBOR Interest Period with respect thereto. The Company may elect from time to time to convert Alternate Base Rate Loans to LIBOR Loans by giving the Agent at least three Business Days' prior irrevocable notice of such election, which notice shall specify the length of the initial LIBOR Interest Period or LIBOR Interest Periods therefor. Upon receipt of any such notice the Agent shall promptly notify each Bank thereof. All or any part of outstanding LIBOR Loans and Alternate Base Rate Loans may be converted as provided herein, provided that no Loan may be converted into a LIBOR Loan when any Event of Default has occurred and is continuing or the Agent has or the Required Banks have determined pursuant to subsection 2.13 that such a conversion is not appropriate. (b) The Company may elect to continue all or any portion of any LIBOR Loan upon the expiration of the designated LIBOR Interest Period in respect of such LIBOR Loan by giving the Agent at least three Business Days' prior irrevocable notice of such election; provided that no LIBOR Loan may be -------- continued as such when any Event of Default has occurred and is continuing or the Agent has or the Required Banks have determined pursuant to subsection 2.13 that such a continuation as a LIBOR Loan is not appropriate. The Company shall specify in the aforesaid notice the amount to be continued as a LIBOR Loan and the LIBOR Interest Period with respect thereto in accordance with subsection 2.2. -19- 2.6 Minimum Amounts and Maximum Number of Tranches. All borrowings, ---------------------------------------------- conversions and continuations of Loans hereunder and all selections of LIBOR Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the LIBOR Loans comprising each Tranche shall be equal to $100,000 or a whole multiple thereof and so that there shall not be more than 5 Tranches at any one time outstanding. 2.7 Revolving Credit Notes. The Revolving Credit Loans made by each ---------------------- Bank shall be evidenced by a promissory note of the Company, substantially in the form of Exhibit A with appropriate insertions as to payee, date and principal amount (a "Revolving Credit Note"), payable to the order of such Bank and in a principal amount equal to the amount of the initial Revolving Credit Commitment of such Bank. Each Bank is hereby authorized to record the date, Type and amount of each Revolving Credit Loan made by such Bank, each continuation thereof, each conversion of all or a portion thereof to another Type, the date and amount of each payment or prepayment of principal thereof and, in the case of LIBOR Loans, the length of each LIBOR Interest Period and LIBOR Rate with respect thereof, on the schedule annexed to and constituting a part of its Revolving Credit Note, and any such recordation shall constitute prima facie ----- ----- evidence of the accuracy of the information so recorded. Each Revolving Credit Note shall (x) be dated the Closing Date, (y) be stated to mature on the Termination Date and (z) provide for the payment of interest in accordance with subsection 2.3. 2.8 Fees. The Company agrees to pay to the Agent for the account of ---- each Bank a commitment fee for the period from and including the date hereof to the Termination Date, computed at the rate of 1/2 of 1% per annum on the average daily amount of the Available Revolving Credit Commitment of such Bank during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the Termination Date or such earlier date as the Revolving Credit Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. 2.9 Termination or Reduction of Revolving Credit Commitments. The -------------------------------------------------------- Company shall have the right, upon not less than three Business Days' notice to the Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Revolving Credit Commitments; provided that no such termination or -------- reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the aggregate principal amount of the Revolving Credit Loans then outstanding, when added to such Bank's Commitment Percentage of the L/C Obligations, would exceed the Revolving Credit Commitments then in effect. Any such reduction shall be in an amount not less than $1,000,000 or integral multiples of $250,000 in excess thereof, and shall reduce permanently the Revolving Credit Commitments then in effect. 2.10 Optional Prepayments. The Company may at any time and from time to -------------------- time, prepay the Revolving Credit Loans, in whole or in part, without premium or penalty, upon at least three Business Days' irrevocable notice, in the case of prepayment of any Revolving Credit Loans which -20- are LIBOR Loans, or upon irrevocable notice (which notice must be received by 1:00 P.M., Eastern time, on or before the proposed date of prepayment), in the case of prepayments of any Revolving Credit Loans which are Alternate Base Rate Loans, to the Agent, specifying the date and amount of prepayment and whether the prepayment is of LIBOR Loans, Alternate Base Rate Loans or a combination thereof, and, in each case if a combination thereof, the amount allocable to each; provided that, if a LIBOR Loan is prepaid other than at the end of the -------- LIBOR Interest Period applicable thereto, the Company shall also pay any amounts required to be paid pursuant to subsection 2.20. Upon receipt of any such notice the Agent shall promptly give notice thereof to each Bank. If any such notice is given by the Company, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments of the Revolving Credit Loans shall be in an aggregate principal amount of $100,000 or a whole multiple in excess thereof. 2.11 Mandatory Prepayments; Cash Collateralizations. ---------------------------------------------- (a) Immediately upon the occurrence of any public issuance or private placement of any debt securities of the Company or any Subsidiary (other than indebtedness incurred pursuant to Section 7.2 and other than renewals or refinancings of the indebtedness evidenced by the Senior Subordinated Notes or of indebtedness or debt securities issued and outstanding as of the date hereof so long as the outstanding principal amount of such indebtedness is not increased by such renewal or refinancing) the Company shall make or cause to be made a prepayment on the Loans equal to 100% of the Net Cash Proceeds received therefor. (b) If, at any time or from time to time, the Company makes as "Asset Disposition" (as defined under the Senior Subordinated Indenture), the Company shall, within 210 days from the date of such Asset Disposition (or such longer period permitted under the Senior Subordinated Indenture), apply all of the Net Cash Proceeds from such Asset Disposition to either or both of (in the sole discretion of the Company) (i) the prepayment of the Loans, or (ii) an investment in "fixed assets" (as defined under GAAP) in the same or substantially similar line of business as defined in the Senior Subordinated Indenture as the assets that were the subject of such Asset Disposition, provided that, notwithstanding the foregoing, (A) up to $1,000,000 of the Net Cash Proceeds received in any fiscal year from any such Asset Dispositions shall not be subject to this subsection 2.11(b) and (B) no application of the Net Cash Proceeds resulting from any such Asset Dispositions pursuant to this paragraph shall be necessary until the aggregate amount of such Net Cash Proceeds (above the aforesaid $1,000,000) equals or exceeds $5,000,000 at any time after the date hereof. 2.12 Computation of Interest and Fees. Interest on the Alternate Base -------------------------------- Rate Loans, Letter of Credit commissions and commitment fees shall be calculated on the basis of a 365-day year for the actual days elapsed. Interest on the LIBOR Loans shall be calculated on the basis of a 360-day year for the actual days elapsed. The Agent shall as soon as practicable notify the Company and the Banks of each determination of a LIBOR Rate. Any change in the interest rate on a Loan resulting from a change in the Alternate Base Rate or the LIBOR Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The -21- Agent shall as soon as practicable notify the Company and the Banks of the effective date and the amount of each such change in interest rate. Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.13 Inability to Determine Interest Rate. If prior to the first day of ------------------------------------ any LIBOR Interest Period: (a) the Agent shall have determined (which determination shall be conclusive and binding upon the Company) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Rate for such LIBOR Interest Period, or (b) the Agent shall have received notice from the Required Banks that the LIBOR Rate determined or to be determined for such LIBOR Interest Period will not adequately and fairly reflect the cost to such Banks (as conclusively certified by such Banks) of making or maintaining their affected Loans during such LIBOR Interest Period, the Agent shall give telecopy or telephonic notice thereof to the Company and the Banks as soon as practicable thereafter. If such notice is given (x) any LIBOR Loans requested to be made on the first day of such LIBOR Interest Period shall be made as Alternate Base Rate Loans, (y) any Loans that were to have been converted on the first day of such LIBOR Interest Period to LIBOR Loans shall be converted to or continued as Alternate Base Rate Loans, and (z) any outstanding LIBOR Loans shall be converted, on the first day of such LIBOR Interest Period, to Alternate Base Rate Loans. Until such notice has been withdrawn by the Agent, no further LIBOR Loans shall be made or continued as such, nor shall the Company have the right to convert Loans to LIBOR Loans. 2.14 Pro Rata Treatment and Payments. ------------------------------- (a) Unless the Agent shall have been notified in writing by any Bank prior to a Borrowing Date that such Bank will not make the amount that would constitute its Commitment Percentage of the borrowing on such date available to the Agent, the Agent may assume that such Bank (a "Reimbursing Bank") has made such amount available to the Agent on such Borrowing Date, and the Agent or any Bank may (but shall not be obligated), in reliance upon such assumption, make available to the Company a corresponding amount. If such amount is made available to the Agent on a date after such Borrowing Date, the Reimbursing Bank shall pay to the Agent on demand an amount equal to the product of (i) the daily average Federal Funds Effective Rate during such period as quoted by the Agent, times (ii) the amount of such Reimbursing Bank's Commitment Percentage of such borrowing, times (iii) a fraction the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Reimbursing Bank's Commitment Percentage of such borrowing shall have become immediately available to the Agent and the denominator of which is 365. A certificate of the Agent submitted to any Reimbursing Bank -22- with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If a Reimbursing Bank's Commitment Percentage of such borrowing is not in fact made available to the Agent by such Reimbursing Bank within three Business Days of such Borrowing Date, the Agent shall be entitled to recover such amount, with interest thereon at the rate per annum applicable to Alternate Base Rate Loans hereunder, on demand, from such Reimbursing Bank or the Company in such order and manner as Agent may determine in its discretion. (b) Each borrowing of Revolving Credit Loans by the Company from the Banks hereunder shall be made by the Banks pro rata in accordance with the respective Commitment Percentage of such Banks. Each payment by the Company on account of the principal of and interest on the Revolving Credit Loans, any commitment fee hereunder and any reduction of the Commitments of the Banks shall be payable to the Banks pro rata in accordance with the respective Commitment Percentages of the Banks; provided that in the event the Agent or any Bank pursuant to subsection 2.14(a) makes available to the Company a Reimbursing Bank's Commitment Percentage of a requested borrowing, the Agent or such Bank providing such funding shall be entitled to receive all payments that would otherwise be payable to such Reimbursing Bank until such time as the Agent or such Bank, as the case may be, shall have received an amount equal to the amount so funded on behalf of such Reimbursing Bank, together with interest thereon as provided in subsection 2.14(a). All payments (including prepayments) to be made by the Company hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 p.m., Eastern time, on the due date thereof to the Agent, for the account of the Banks, at the Agent's office specified in subsection 10.2, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Banks promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.15 Extension of Termination Date. By the date which is one year and 90 ----------------------------- days prior to the initial Termination Date (and if the initial Termination Date has been extended pursuant to this subsection, by the date which is one year and 90 days prior to the Termination Date as so extended by the first Extension), the Company may notify the Agent of its desire to extend the Termination Date, each such Extension consisting of one additional year (each, an "Extension"), and its request that the Banks approve such Extension, whereupon the Agent shall promptly notify the Banks of such request. The Agent shall notify the Company of the decision of the Banks (to be made in the Banks' sole discretion) with respect thereto not later than 60 days after the Agent's receipt of the request for such Extension. If all of the Banks agree to the requested Extension, the Termination Date shall be so extended. 2.16 Annual Clean-Down of Revolving Credit Loans. For a period of at ------------------------------------------- least 30 consecutive days during the Clean-Down Periods occurring during the fiscal years set forth below, -23- the aggregate principal amount of Revolving Credit Loans outstanding at all times during such 30-day period shall not exceed the amount set forth opposite the respective fiscal years:
Maximum Revolving Credit Fiscal Years Loans Outstanding ------------ ------------------------ 1997 $10,000,000 1998 5,000,000 1999 0
2.17 Illegality. Notwithstanding any other provision herein, if the ---------- adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Bank to make or maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of such Bank hereunder to make LIBOR Loans, continue LIBOR Loans as such and convert Alternate Base Rate Loans to LIBOR Loans shall forthwith be canceled and (b) such Bank's Loans then outstanding as LIBOR Loans, if any, shall be converted automatically to Alternate Base Rate Loans on the respective last days of the then current LIBOR Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current LIBOR Interest Period with respect thereto, the Company shall pay to such Bank such amounts, if any, as may be required pursuant to subsection 2.20. 2.18 Requirements of Law. ------------------- (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Bank with any request or directive (whether having the force of law or not) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Bank to any tax of any kind whatsoever with respect to this Agreement, any Note or any LIBOR Loan made by it, or change the basis of taxation of payments to such Bank in respect thereof (except for Non-Excluded Taxes covered by subsection 2.19 and changes in the rate of tax on the overall net income of such Bank); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Bank which is not otherwise included in the determination of the LIBOR Rate hereunder; or (iii) shall impose on such Bank any other condition; -24- and the result of any of the foregoing is to increase the cost to such Bank, by an amount which such Bank deems to be material, of making, converting into, continuing or maintaining LIBOR Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Company shall promptly pay such Bank, upon its demand, any additional amounts necessary to compensate such Bank for such increased cost or reduced amount receivable. If any Bank becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Company, through the Agent, of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by such Bank, through the Agent, to the Company shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) If any Bank shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Bank or any corporation controlling such Bank with any request or directive regarding capital adequacy (whether having the force of law or not) from any Governmental Authority made subsequent to the date hereof does or shall have the effect or reducing the rate of return on such Bank's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, after submission by such Bank to the Company (with a copy to the Agent) of a written request therefore, the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. 2.19 Taxes. ----- (a) All payments made by the Company under this Agreement and the Notes shall be made free and clear of, and without deduction or withholding for or on account of any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Agent or any Bank as a result of a present or former connection between the Agent or such Bank and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Agent or such Bank having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or the Notes). If any such non- excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Agent or any Bank hereunder or under the Notes, the amounts so payable to the Agent or such Bank shall be increased to the extent necessary to yield to the Agent or such Bank (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the -25- Notes, provided, however, that the Company shall not be required to increase any -------- ------- such amounts payable to any Bank that is not organized under the laws of the United States of America or a state thereof if such Bank fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Company, as promptly as possible thereafter the Company shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by the Company showing payment thereof. If the Company fails to pay any Non- Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Company shall indemnify the Agent and the Banks for any incremental taxes, interest or penalties that may become payable by the Agent or any Bank as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Bank that is not incorporated under the laws of the United States of America or a state thereof shall: (i) deliver to the Company and the Agent (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Company and the Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Agent. unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Company and the Agent. Such Bank shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Bank or a Participant pursuant to subsection 10.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Bank from which the related participation shall have been purchased. -26- 2.20 Indemnity. The Company agrees to indemnify each Bank and to hold --------- each Bank harmless from any loss or expense which such Bank may sustain or incur as a consequence of (a) default by the Company in making a borrowing of, conversion into or continuation of LIBOR Loans after the Company has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Company in making any prepayment after the Company has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of LIBOR Loans on a day which is not the last day of an LIBOR Interest Period with respect thereto. Such indemnification may include, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds obtained to fund or maintain a LIBOR Loan during any LIBOR Interest Period, which any Bank may incur as a consequence of such failure to borrow, convert or continue, as the case may be. A certificate by Agent as to the amount of such loss, expense or increased costs shall, when submitted to the Company, be conclusive, in the absence of manifest error, unless the Company shall have provided the Agent with written notice of the Company's objection to all or any portion of such certificate not later than ten (10) days after the date on which such certificate is submitted to the Company. Any such LIBOR Loan shall not be deemed paid or satisfied until all such additional amounts are paid. Agent agrees to provide the Company with such information as the Company may reasonably request with respect to the calculation of any such losses or expenses. The covenant contained in this subsection 2.20 shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. -------------- (a) Subject to the terms and conditions hereof, the Issuing Bank, in reliance on the agreements of the other Banks set forth in subsection 3.5(a), agrees to issue standby letters of credit for the account of the Company and its Designated Subsidiaries on any Business Day on or after the Initial Funding Date until the date which is five Business Days prior to the end of the Commitment Period in such form as may be approved from time to time by the Issuing Bank (all such letters of credit outstanding on the date hereof and all letters of credit to be issued hereunder, together with all extensions, renewals and replacements thereof, are herein collectively referred to as the "Letters of Credit"); provided that the Issuing Bank shall have no obligation to issue any Letter of Credit if at the time of such issuance a Default exists or an Event of Default has occurred and is continuing or if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the Available Revolving Credit Commitment would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars, (ii) expire no later than the Termination Date and (ii) expire no later than a date one year after its issuance. Each Letter of Credit shall be issued as credit support for (x) insurance and vendor financial obligations, (y) performance bonds issued on behalf of the Company or any Designated Subsidiary in its ordinary course of business, or (2) other similar financial support for obligations of the Company. -27- (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of the Issuing Bank's principal place of business. (c) The Issuing Bank shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Bank or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 3.2 Procedure for Issuance of Letters of Credit. The Company may from ------------------------------------------- time to time request that the Issuing Bank issue a Letter of Credit by delivering to the Issuing Bank at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Bank, and such other certificates, documents and other papers and information as the Issuing Bank may request. Upon receipt of any Application, the Issuing Bank will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Bank be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereof) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Issuing Bank and the Company. The Issuing Bank shall furnish a copy of such Letter of Credit to the Company and the other Banks promptly following the issuance thereof. 3.3 Fees, Commissions and Other Charges. ----------------------------------- (a) The Company shall pay to the Agent a letter of credit facility fee (the "L/C Fee"), upon issuance of a Letter of Credit, in an amount equal to the product of (i) the face amount of such Letter of Credit, times (ii) the applicable Letter of Credit Rate, times (iii) the term of such Letter of Credit, expressed as a fraction equal to the number of days of such term divided by three hundred sixty-five (365). The applicable Letter of Credit Rate shall be determined based upon the calculations submitted to the Banks pursuant to subsection 6.1(b) and shall be effective as of the first day of the fiscal quarter next following the date such calculations are submitted to the Banks. Any change in the applicable Letter of Credit Rate as a consequence of the Banks' review of the aforesaid calculation after the effective date of such Letter of Credit Rate shall be retroactively applied to the first day such Letter of Credit Rate became effective. In the event that the Letter of Credit Rate can not be determined at any time because the Company's financial statements for the immediately preceding fiscal quarter are not available at such time, the Letter of Credit Rate shall be presumed to be the same as the Letter of Credit Rate as of the last FQED for which the Company's financial statements were available. Any change in the L/C Fee as a consequence of a change in the Letter of Credit Rate shall be effective as of the date of such change in the Letter of Credit Rate. Any increase or reduction in the L/C Fee as a consequence of an increase or reduction in the Letter of Credit Rate, as the case may be, shall be credited against or deducted from the next L/C Fee, as the case may be. In the event any Letter of Credit is terminated or the available credit thereunder is permanently reduced prior to the stated expiry date thereof, the Company shall be entitled to a rebate -28- of that portion of the L/C Fee paid with respect to such Letter of Credit which is allocable pro rata to the portion of the Letter of Credit that has been terminated or reduced, as the case may be, as determined by the Issuing Bank. Each L/C Fee payable under this subsection 3.3 shall be shared ratably among the Banks in accordance with their respective Commitment Percentages. (b) In addition to the L/C Fees, the Company shall pay or reimburse the Issuing Bank for such normal and customary costs and expenses as are incurred or charged by the issuing Bank in issuing, processing, effecting payment under, amending or otherwise administering any Letter of Credit. (c) The Agent shall, promptly following its receipt thereof, distribute to the Issuing Bank and the L/C Participants all fees and commissions received by the Agent for their respective accounts pursuant to this subsection. 3.4 Reimbursement Obligation of the Company. The Company agrees to --------------------------------------- reimburse the Issuing Bank on each date on which the Issuing Bank notifies the Company of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Bank for the amount of (a) such draft so paid and (b) any taxes (other than income taxes), fees, charges or other costs or expenses incurred by the Issuing Bank in connection with such payment. Each such payment shall be made to the Issuing Bank at its address for notices specified herein in Dollars and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Company under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding Loans which were then overdue under subsection 2.3. Each drawing under any Letter of Credit shall constitute a request by the Company to the Agent for the borrowing pursuant to subsection 2.1 of Revolving Credit Loans in the amount of such drawing and any reimbursement made by an L/C Participant pursuant to subsection 3.5 shall constitute a Revolving Credit Loan pursuant to subsection 2.3. 3.5 L/C Draws and Reimbursements. ---------------------------- (a) Each L/C Participant unconditionally and irrevocably agrees with the Issuing Bank that, if a draft is paid under any Letter of Credit for which the Issuing Bank is not reimbursed in full by the Company in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Bank upon demand at the Issuing Bank's address for notices specified herein an amount equal to such L/C Participant's Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed through participation or otherwise. In furtherance of the foregoing, the Issuing Bank irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Bank to issue Letter of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Bank, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Commitment Percentage in the Issuing Bank's obligations -29- and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Bank thereunder. (b) If any amount required to be paid by any L/C Participant to the Issuing Bank pursuant to subsection 3.5(a) in respect of any unreimbursed portion of any payment made by the Issuing Bank under any Letter of Credit is paid to the Issuing Bank within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Bank on demand an amount equal to the product of (1) such amount, times (2) the daily average Federal ----- Funds Effective Rate, as quoted by the Issuing Bank, during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Bank, times (3) a fraction the numerator of ----- which is the number of days that elapse during such period and the denominator of which is 365. If any such amount required to be paid by any L/C Participant pursuant to subsection 3.4(a) is not in fact made available to the Issuing Bank by such L/C Participant within three Business Days after the date such payment is due, the Issuing Bank shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum equal to the Alternate Base Rate. A certificate of the Issuing Bank submitted to any L/C Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. (c) Whenever, at any time after the Issuing Bank has made payment under any Letter of Credit and has received from any L/C Participant its share of such payment in accordance with subsection 3.5(a), the Issuing Bank receives any payment related to such Letter of Credit (whether directly from the Company or otherwise, including proceeds of collateral applied thereto by the Issuing Bank), or any payment of interest on account thereof, the Issuing Bank will distribute to such L/C Participant its share thereof; provided, however, that in -------- ------- the event that any such payment received by the Issuing Bank shall be required to be returned by the Issuing Bank, such L/C Participant shall return to the Issuing Bank the portion thereof previously distributed by the Issuing Bank to it. 3.6 Obligations Absolute. The Company's obligations under this Section -------------------- 3 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Company may have or have had against the Issuing Bank or any beneficiary of a Letter of Credit. The Company also agrees with the Issuing Bank that the Issuing Bank shall not be responsible for, and the Company's Reimbursement Obligations under Subsection 3.4 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Company and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Company against any beneficiary of such Letter of Credit or any such transferee. The Issuing Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Issuing Bank's gross negligence or willful misconduct. The Company agrees that any action taken or omitted by the Issuing Bank -30- under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of Connecticut, shall be binding on the Company and shall not result in any liability of the Issuing Bank to the Company. 3.7 Letter of Credit Payments. If any draft shall be presented for ------------------------- payment under any Letter of Credit, the Issuing Bank shall promptly notify the Company and the Banks of the date and amount thereof. The responsibility of the Issuing Bank to the Company in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. 3.8 Application. To the extent that any provision of any Application ----------- related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Banks to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit the Company hereby represents and warrants to the Agent and each Bank that: 4.1 Financial Condition. ------------------- (a) The consolidated balance sheet of the Company and its consolidated Subsidiaries as at January 28, 1995 and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year ended on such date, reported on by Arthur Andersen LLP, copies of which have heretofore been furnished to each Bank, are complete and correct and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at December 30, 1995 and the related unaudited consolidated statements of operations and retained earnings for the eleven-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Bank, are complete and correct and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations for the eleven-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). The unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at approximately January 27, -31- 1996 and the related unaudited consolidated statements of operations and earnings for the twelve-month period ended on such date, copies of which have heretofore been furnished to each Bank are complete and correct in all material respects and have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods. (b) Except as set forth on Schedule II, neither the Company nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to in subsection 4.1(a), any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the financial statements referred to in subsection 4.1(a) or in the notes thereto. (c) Except as set forth on Schedule III, during the period from January 28, 1995 to and including the date hereof there has been no sale, transfer or other disposition by the Company or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Company and its consolidated Subsidiaries at January 28, 1995. 4.2 No Change. Since January 28, 1995, (a) except as set forth on --------- Schedule IV, there has been no development or event nor any prospective development or event which has had or could have a Material Adverse Effect and (b) except as set forth on Schedule IV or as permitted by this Agreement, no dividends or other distributions have been declared, paid or made upon the Capital Stock of the Company or any of its Subsidiaries nor has any of the Capital Stock of the Company been redeemed, retired, purchased or otherwise acquired for value by the Company or any of its Subsidiaries. 4.3 Corporate Existence; Compliance with Law. Each of the Company and ---------------------------------------- each Designated Subsidiary (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged in each jurisdiction where the failure to have such power, authority or right would have a Material Adverse Effect, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except where the failure so to qualify could not have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, have a Material Adverse Effect. 4.4 Corporate Power, Authorization; Enforceable Obligations. The ------------------------------------------------------- Company has the corporate power and authority, and the legal right, to make, deliver and perform this Agreement, the -32- Notes, each Application and the other Loan Documents to which it is a party, to borrow hereunder and to grant the Liens pursuant to the Security Documents to which it is a party and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and the Notes, the grant of the Liens pursuant to the Security Documents to which it is a party and the execution, delivery and performance of this Agreement, the Notes, each Application and each other Loan Document to which it is a party. No consent or authorization of, filing with or other action by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder, the grant of the Liens pursuant to the Security Documents or the execution, delivery, performance, validity or enforceability of this Agreement, the Notes, each Application or any other Loan Document except that prior authorization of the SBA is required for any exercise of remedies under the Subsidiary Pledge Agreement with respect to the FinOp common stock pledged thereunder and under the Company Pledge Agreement with respect to the common stock of CONNA Corporation pledged thereunder. This Agreement and each other Loan Document to which the Company is a party (except the Notes) has been, and each Note will be, duly executed and delivered on behalf of the Company. This Agreement and each other Loan Document to which the Company is a party (except the Notes) constitutes, and each Note when executed and delivered will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4.5 No Legal Bar. The execution, delivery and performance of this ------------ Agreement, the Notes, each Application and each other Loan Document, the grant of the Liens pursuant to the Security Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Company or of any Designated Subsidiary and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. 4.6 No Material Litigation. No litigation, investigation or proceeding ---------------------- of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any Designated Subsidiary or against any of its or their respective properties or revenues (a) with respect to this Agreement, the Notes, any Application or any other Loan Document or any of the transactions contemplated hereby or thereby or (b) which could have a Material Adverse Effect, except with respect to matters described on Schedule VII. 4.7 No Default. Neither the Company nor any Designated Subsidiary is in ---------- default under or with respect to any of its Contractual Obligations or Capital Stock in any respect which could have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. -33- 4.8 Ownership of Property; Liens. Each of the Company and each ---------------------------- Designated Subsidiary has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to all its other property except for any defect in title thereto or leasehold interest therein which could not in the aggregate have a Material Adverse Effect, and none of the property owned or leased by the Company or any Designated Subsidiary is subject to any Lien except as permitted by subsection 7.3 or which could not in the aggregate have a Material Adverse Effect. 4.9 Intellectual Property. The Company and each Designated Subsidiary --------------------- owns, or is licensed to use, all trademarks, trade names, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not have a Material Adverse Effect (the "Intellectual Property"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Company know of any valid basis for any such claim which could or might have a Material Adverse Effect. The use of such Intellectual Property by the Company and each Designated Subsidiary does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not have a Material Adverse Effect. 4.10 No Burdensome Restrictions. No Requirement of Law or Contractual -------------------------- Obligation of the Company or any Designated Subsidiary has a Material Adverse Effect. 4.11 Taxes. Each of the Company and its Subsidiaries has filed or caused ----- to be filed all tax returns which, to the knowledge of the Company, are required to be filed (the "Tax Returns") and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Company or its Subsidiaries, as the case may be) where the failure to so file such Tax Returns or to pay such taxes could or might have a Material Adverse Effect; no tax Lien has been filed, and, to the knowledge of the Company, no claim is being asserted, with respect to any such tax, fee or other charge. Schedule XI sets forth a complete and correct list of all audits concerning any Tax Return that are being conducted by any Governmental Authority or are otherwise in progress on the Closing Date. 4.12 Federal Regulations. No part of the proceeds of any Loans will be ------------------- used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors. If requested by any bank or the Agent, the Company will furnish to the Agent and each Bank a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U. -34- 4.13 ERISA. No Reportable Event has occurred during the five-year period ----- prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The present value of all accrued benefits under each Single Employer Plan maintained by the Company or any Commonly Controlled Entity (based on those assumptions used to fund the Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Company nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan except as set forth on Part A of Schedule V, and neither the Company nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Company or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made, except as set forth on Part B of Schedule V. No such Multiemployer Plan is in Reorganization or insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Company and each Commonly Controlled Entity for post-retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits. 4.14 Investment Company Act; Other Regulations. Neither the Company nor ----------------------------------------- any Subsidiary (other than FinOp) is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). Neither the Company, FinOp nor any Designated Subsidiary is subject to regulation under the 1940 Act or any Federal or State statute or regulation which limits its ability to incur Indebtedness. 4.15 Subsidiaries. All the Subsidiaries of the Company (other than the ------------ Designated Subsidiaries) are listed on Part B of Schedule VI. The assets owned by the Designated Subsidiaries on the Closing Date represent in the aggregate at least 90% of the total assets of the Company and its Subsidiaries as shown on the audited consolidated balance sheet as at January 28, 1995 referred to in subsection 4.1(a). The revenues of the Designated Subsidiaries represent in the aggregate at least 90% of the revenues of the Company and its Subsidiaries as shown on the audited consolidated statement of operations and retained earnings for the period ended January 28, 1995 referred to in subsection 4.1(a). 4.16 Purpose of Loans. The proceeds of the Loans shall be used by the ---------------- Company for the working capital needs of the Company, including, without limitation, financing any Reimbursement Obligations, capital expenditures, and financing any other general corporate purposes of the Company or any Designated Subsidiary in the ordinary course of the Company's or such Subsidiary's business. -35- 4.17 Environmental Matters. To the best knowledge of the Company, --------------------- each of the representations and warranties set forth in paragraphs (a) through (e) of this subsection is true and correct with respect to each parcel of real property heretofore or now owned or operated by the Company or any Subsidiary (the "Properties"), except as set forth on Schedule VII and except to the extent that the facts and circumstances giving rise to any such failure to be so true and correct could not have a Material Adverse Effect: (a) The Properties do not contain, and have not previously contained, in, on, or under, including, without limitation, the soil and groundwater thereunder, any Hazardous Materials. (b) The Properties and all operations and facilities at the Properties are in compliance with all Environmental Laws, and there is no Hazardous Materials contamination or violation of any Environmental Law which could interfere with the continued operation of any of the Properties or impair the fair saleable value of any thereof. (c) Neither the Company nor any of its Subsidiaries has received any complaint, notice of violation, alleged violation, investigation or advisory action or of potential liability or of potential responsibility regarding environmental protection matters or permit compliance with regard to the Properties, nor is the Company aware that any Governmental Authority is contemplating delivering to the Company or any of its Subsidiaries any such notice. (d) Hazardous Materials have not been generated, treated, stored, disposed of, at, on or under any of the Properties, nor have any Hazardous Materials been transferred from the Properties to any other location. (e) There are no governmental, administrative or judicial proceedings pending or contemplated under any Environmental Laws to which the Company or any of its Subsidiaries is or will be named as a party with respect to the Properties, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any of the Properties. 4.18 Security Documents. ------------------ (a) The provisions of each Pledge Agreement are effective to create in favor of the Agent for the ratable benefit of the Banks a legal, valid and enforceable security interest in all right, title and interest of the pledgor in the Collateral as described therein. Each Pledge Agreement constitutes a fully perfected first lien on, and security interest in, all right, title and interest of the pledgor in the Collateral described therein. (b) The provisions of the Company Security Agreement are effective to create in favor of the Agent for the ratable benefit of the Banks a legal, valid and enforceable security interest in all right, title and interest of the Company in the Collateral as described therein. Except where failure -36- to file would not have a material effect on Agent's ability to effectively realize on the Collateral, as a whole, the Company Security Agreement constitutes a fully perfected first lien on, and security interest in, all right, title and interest of the Company in the Collateral described therein, and no Uniform Commercial Code financing statements have been filed by any other Person with respect to such Collateral other than as may be filed in connection with this Agreement and except as described on Schedule IX hereto. (c) The provisions of each of the Subsidiary Security Agreements are effective to create in favor of the Agent for the ratable benefit of the Banks a legal, valid and enforceable security interest in all right, title and interest of such Subsidiary in the Collateral as described therein. Except where failure to file would not have a material effect on Agent's ability to effectively realize on the Collateral, as a whole, each Subsidiary Security Agreement constitutes a fully perfected first lien on, and security interest in, all right, title and interest of such Subsidiary in the Collateral described therein, and no Uniform Commercial Code financing statements have been filed by any other Person with respect to such Collateral other than as may be filed in connection with this Agreement and except as described on Schedule IX hereto. 4.19 Company Senior Indebtedness. The extensions of credit under this --------------------------- Agreement, the Notes and each Application will be, and are hereby designated as, Company Senior Indebtedness under and as defined in the Senior Subordinated Indenture. SECTION 5. CONDITIONS PRECEDENT 5.1 Conditions to Initial Extension of Credit. The agreement of each ----------------------------------------- Bank to make the initial extension of credit requested to be made by it is subject to the satisfaction of the following conditions precedent: (a) Agreement, Notes. The Agent shall have received (i) with a ---------------- counterpart for each Bank, this Agreement, executed and delivered by a duly authorized officer of the Company, and (ii) for the account of each Bank, a Revolving Credit Note conforming to the requirements hereof and executed by a duly authorized officer of the Company. (b) Other Loan Documents. The Agent shall have received, with a -------------------- counterpart for each Bank, (i) the Subsidiary Guarantee, executed and delivered by a duly authorized officer of each Designated Subsidiary, (ii) the Company Pledge Agreement, executed and delivered by a duly authorized officer of the Company, (iii) the Subsidiary Pledge Agreement, executed and delivered by a duly authorized officer of each Designated Subsidiary, (iv) a Subsidiary Security Agreement, executed and delivered by a duly authorized officer of each Subsidiary, and (v) the Company Security Agreement, executed and delivered by a duly authorized officer of the Company. (c) Satisfaction of Existing Credit Agreement Indebtedness. The Agent ------------------------------------------------------ shall have received, with a copy for each Bank, a certificate, dated on or before the Closing Date, executed by -37- a duly authorized officer of the Company certifying that, on or before the Closing Date, the Company shall have paid in full all indebtedness of the Company outstanding under that Credit Agreement originally dated February 25, 1994 (as amended and restated on December 27, 1995) with Society National Bank, as agent, other than the indebtedness represented by the letters of credit described on Schedule VIII, each of which has the benefit of the Letter of Credit issued on the Closing Date by the Agent. (d) Pledged Stock; Stock Powers. The Agent shall have received (A) --------------------------- certificates representing the stock pledged pursuant to each Pledge Agreement, together with an undated stock power executed in blank for each such certificate, and (B) the Acknowledgments and Consents attached as exhibits to each Pledge Agreement, in each case executed and delivered by a duly authorized officer of the relevant issuer. (e) UCC Filings. All documents (including, without limitation, ----------- financing statements) required to be filed in respect of the Company Security Agreement in order to create in favor of the Agent for the ratable benefit of the Banks a perfected, first priority security interest in the Collateral described therein with respect to which a security interest may be perfected by filing under the Uniform Commercial Code shall have been properly filed in each office listed on Schedule XII. The Agent shall have received acknowledgment copies of all such filings (or, in lieu thereof, other evidence satisfactory to it that all such filings have been made); and the Agent shall have received evidence that all necessary filing fees and all taxes or other expenses related to such filings have been paid in full. (f) Corporate Proceedings. The Agent shall have received, with a --------------------- counterpart for each Bank, a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of the Company and each Designated Subsidiary authorizing (i) the execution, delivery and performance of the Loan Documents to which it is a party, (ii) with respect to the Company, the grant of the Liens pursuant to the Security Documents to which it is a party, and (iv) with respect to each Designated Subsidiary, the grant of the Liens pursuant to the Security Documents to which it is a party, in each case certified by the Secretary or an Assistant Secretary of the Company or such Designated Subsidiary at the Closing Date, which certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded and shall be in form and substance satisfactory to the Agent. (g) Incumbency Certificates. The Agent shall have received a ----------------------- certificate dated the Closing Date, of the Secretary or an Assistant Secretary of the Company and each Designated Subsidiary as to the incumbency and signature of the officer or officers signing the Loan Documents to which such Person is a party, together with evidence of the incumbency of such Secretary or Assistant Secretary. (h) Corporate Documents. The Agent shall have received, with a ------------------- counterpart for each Bank, true and complete copies of the certificate of incorporation and by-laws of the Company and -38- each Designated Subsidiary, certified at the Closing Date as complete and correct copies thereof, by the Secretary or an Assistant Secretary of the Company or such Designated Subsidiary. (i) Good Standing Certificates. The Agent shall have received, with a -------------------------- copy for each Bank, copies of certificates dated as of a recent date from the Secretary of State or other appropriate authority of such jurisdiction, evidencing the good standing of the Company and each Designated Subsidiary. (j) Financial Statements. The Agent shall have received, with copies -------------------- for each Bank, copies of the financial statements referred to in subsection 4.1 and all other documents requested by the Agent in connection with its completion of a testing and review of the assets and liabilities of the Company and its Subsidiaries. (k) Lien Searches. The Agent shall have received the results of a ------------- recent search by a Person satisfactory to the Agent, of Uniform Commercial Code and other filings which may have been filed with respect to the personal property of the Company or any Designated Subsidiaries in those locations of which the Agent notifies the Company prior to the Closing Date. (l) Litigation. No suit, action, investigation, inquiry or other ---------- proceeding (including, without limitation, the enactment or promulgation of a statute or rule) by or before any arbitrator or any Governmental Authority shall be formally instituted or threatened and no preliminary or permanent injunction or restraining order by a state or federal court shall have been entered or threatened (i) in connection with any Loan Document or any of the transactions contemplated hereby or thereby or (ii) which, in the reasonable opinion of the Banks, could have a Material Adverse Effect. (m) No Violation. The consummation of the transactions contemplated by ------------ this Agreement, the Notes, each Application and the other Loan Documents shall not contravene, violate or conflict with, nor involve the Agent or any Bank in any violation of, any Requirement of Law. (n) Fees. The Agent and each Bank shall have received the fees to be ---- received by it on the Closing Date referred to in subsection 2.8 and the Agent shall have received a closing fee in the amount of $400,000 and an agency fee in the amount of $20,000, and the fees and disbursements of Day, Berry & Howard, special counsel for the Agent, shall have been paid in full on the Closing Date. Annually on the anniversary of the Closing Date the Company shall pay to the Agent an annual agency fee of $20,000. (o) Legal Opinions. The Agent shall have received, with a counterpart -------------- for each Bank, the executed legal opinions of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to the Company and its Subsidiaries, and Gregory Wozniak, General Counsel to the Company and its Subsidiaries, each dated the Closing Date and substantially in the form of Exhibit G-1 and G-2. respectively, with such changes thereto as the Agent shall approve. Such legal opinions shall cover -39- such other matters incident to the transactions contemplated by this Agreement as the Agent may reasonably require. (p) Consents, Licenses and Approvals. The Agent shall have received, -------------------------------- with a counterpart for each Bank, a certificate, dated the Closing Date, executed by a duly authorized officer of the Company stating that all consents, authorizations, notices and filings necessary or advisable in connection with the financings contemplated by this Agreement and the continuing operations of the Company, have been obtained and are in full force and effect, except where the failure to obtain such consents, authorizations, notices or filings could not have a Material Adverse Effect. 5.2 Conditions to Each Extension of Credit. The agreement of each Bank -------------------------------------- to make any extension of credit requested to be made by it on any date (including, without limitation, its initial extension of credit) is subject to the satisfaction on the Initial Funding Date and on such borrowing date of the following conditions precedent: (a) Representations and Warranties. Each of the representations and ------------------------------ warranties made by the Company and each Subsidiary in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date; provided that, with respect to extensions of credit made after the Initial Funding Date, Guarantee Obligations incurred after the Initial Funding Date and in accordance with the terms of this Agreement shall not be deemed a breach of the representation and warranty set forth in subsection 4.1(b) to the extent that such Guarantee Obligations are not described in the financial statements described in subsection 4.1(a). (b) No Default. No Default or Event of Default shall have occurred and ---------- be continuing on such date or after giving effect to the extension of credit requested to be made on such date. (c) Additional Documents. The Agent shall have received each additional -------------------- document, instrument, legal opinion or item of information reasonably requested by it, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Company or any Subsidiary may be a party. (d) Additional Matters. All corporate and other proceedings, and all ------------------ documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Agent, and the Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by and Letter of Credit issued on behalf of the Company hereunder shall constitute a representation and warranty by the Company as of the date of such Loan or Letter of Credit that the conditions contained in this subsection 5.2 have been satisfied. -40- SECTION 6. AFFIRMATIVE COVENANTS The Company hereby agrees that, so long as the Commitments remain in effect, any Note or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Bank or the Agent hereunder, the Company shall and (except in the case of delivery of financial information, reports and notices) shall cause each of its Subsidiaries to: 6.1 Financial Statements. Furnish to each Bank: -------------------- (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such year and the related consolidated statements of operations and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Arthur Andersen LLP or other independent certified public accountants of nationally recognized standing not unacceptable to the Required Banks; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such quarter, (i) the related unaudited consolidated statement of operations and retained earnings of the Company and its consolidated Subsidiaries, for such quarter and the portion of the fiscal year through the end of such quarter, and the related unaudited consolidated statement of cash flows of the Company and its consolidated Subsidiaries for the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of the Company and its consolidated Subsidiaries (subject to normal year-end audit adjustments) and (ii) a statement setting forth the aggregate amount of Capital Expenditures made by the Company and its consolidated Subsidiaries during such fiscal period (which aggregate amount shall separately specify the total amount of Capital Expenditures consisting of cash and the total amount of Capital Expenditures consisting of Financing Leases and other non-cash financings), in each case, certified by a Responsible Officer as being fairly stated in all material respects when, in the case of the financial statements delivered pursuant to clause (i) above, considered in relation to the consolidated financial statements of the Company and its consolidated Subsidiaries (subject to normal year-end audit adjustments); and (c) as soon as available, but in any event not later than 45 days after the last day of each of the 12 fiscal periods of each fiscal year of the Company (other than the last such fiscal period in each such fiscal year), the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of such fiscal period and the related unaudited consolidated statement of operations and retained earnings of the Company and its consolidated Subsidiaries for such fiscal -41- period and the portion of the fiscal year of the Company through the end of such fiscal period, setting forth in each case in comparative form the figures for the previous year; all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 6.2 Certificates; Other Information. Furnish to each Bank: ------------------------------- (a) concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) (i) concurrently with the delivery of each of the financial statements referred to in subsections 6.1(a) and 6.1(b), a certificate of a Responsible Officer (which certificate shall set forth, in detail, all interim and preparatory figures and calculations used in determining the Company's satisfaction of its covenants and agreements contained in subsection 7.1) stating that, to the best of such Officer's knowledge, each of the Company and its Subsidiaries during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement, the Notes and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a certificate of a Responsible Officer setting forth the aggregate Net Cash Proceeds received by the Company and any of its Subsidiaries during the preceding fiscal year, the portion thereof which has been reinvested by the Company or its Subsidiaries in fixed or capital assets or POS Program Expenses, the portion thereof which has been applied by or on behalf of the Company to make any mandatory prepayment in accordance with subsection 2.11 and any remaining balances in respect of such Net Cash Proceeds which have not been so reinvested or applied; (c) if delivered, as soon thereafter as practicable but in no event later than fifteen days after receipt, a copy of the letter, if any, addressed to the Company, of the certified public accountants who prepared the financial statements referred to in subsection 6.1(a) for such fiscal year and otherwise referred to as a "management letter"; (d) as soon as available, but in any event within 30 days after the end of each fiscal year of the Company, a copy of (i) the projections by the Company of the operating budget and cash flow budget of the Company and its Subsidiaries for the succeeding three (3) fiscal years and (ii) the projected consolidated balance sheet of the Company and its consolidated subsidiaries as at the last day of each of such three (3) succeeding fiscal years. Such projections and projected balance sheet -42- to be accompanied by a certificate of a Responsible Officer to the effect that such projections and projected balance sheet have been prepared on the basis of sound financial planning practice and that such Officer has no reason to believe they are incorrect or misleading in any material respect; (e) within five days after the same are sent, copies of all financial statements and reports which the Company sends to its stockholders, and within five days after the same are filed, copies of all financial statements and reports which the Company may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (f) promptly, such additional financial and other information as any Bank may from time to time reasonably request. 6.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or ---------------------- before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Company or its Subsidiaries, as the case may be or except where the failure to pay, discharge or otherwise satisfy could not have a Material Adverse Effect. 6.4 Conduct of Business and Maintenance of Existence. Continue to ------------------------------------------------ engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to subsection 7.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, have a Material Adverse Effect. 6.5 Maintenance of Property; Insurance. (a) Keep all property useful ---------------------------------- and necessary in its business in good working order and condition except where the failure to do so could not have a Material Adverse Effect; (b) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to each Bank, upon written request, full information as to the insurance carried; provided that a program of self- insurance maintained by the Company and its Subsidiaries with respect to certain product liability, workers' compensation, environmental liability, public liability, accident and health and property insurance risks shall comply with the requirements of subsection 6.5(b) so long as adequate reserves in connection with such self-insurance program are taken and maintained in accordance with GAAP and such program is otherwise reasonably satisfactory to the Agent. 6.6 Inspection of Property; Books and Records; Discussions. Keep proper ------------------------------------------------------ books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and -43- activities; and permit representatives of any Bank, upon reasonable notice to the Company, to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Company and its Subsidiaries with officers and employees of the Company and its Subsidiaries and with its independent certified public accountants. 6.7 Notices. Promptly give notice to the Agent and each Bank of: ------- (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Company or any of its Subsidiaries, or (ii) litigation, investigation or proceeding which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, would have a Material Adverse Effect; (c) any litigation or proceeding affecting the Company or any of its Subsidiaries in which the amount involved is $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought which individually or in the aggregate could or might have a Material Adverse Effect; provided that the Company shall not be required to give notice of any such litigation or proceeding if the Company has reasonably determined, after consultation with counsel, that the possibility is remote that such litigation or proceeding will result in a judgment of $1,000,000 or more or in injunctive or similar relief against the Company or its Subsidiaries; (d) the following events, as soon as possible and in any event within 30 days after the Company knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Company or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; (e) as soon as the Company knows or has reason to know that it or any Subsidiary has become liable for remediation and/or environmental compliance expenses and/or fines, penalties or other charges which, in the aggregate, are in excess of $2,500,000 at any one time outstanding (net of all reimbursements in respect of such amounts from any state trust funds which have been or are reasonably expected to be made to the Company or its Subsidiaries and have been recognized as a receivable or may properly be set off as a credit against such liabilities in accordance with GAAP); and -44- (f) a material adverse change in the business, operations, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Company proposes to take with respect thereto. 6.8 Environmental Laws. ------------------ (a) Comply with, and insure compliance by all tenants and subtenants, if any, with, all Environmental Laws and obtain and comply with and maintain, and ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, except to the extent that failure to do so could not have a Material Adverse Effect; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws, except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings could not have a Material Adverse Effect; (c) Defend, indemnify and hold harmless the Agent and the Banks, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of or noncompliance with any Environmental Laws by the Company or any of its Subsidiaries, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, attorney's and consultant's fees, investigation and laboratory fees, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. (d) Prepare and deliver, at least as frequently as once each fiscal quarter, to the Agent and to each other Bank, a report setting forth a summary, as of the end of such fiscal quarter, of (i) the gross amount of all sums accrued in respect of any remediation required by applicable Environmental Laws, (ii) all reimbursements in respect of such amounts from any state trust funds which have been or are reasonably expected to be made to the Company or its Subsidiaries and have been recognized as a receivable or may properly be set off as a credit against the cost of such remediation under GAAP and (iii) the net amount of all sums accrued in respect of such remediation costs. 6.9 Additional Designated Subsidiaries. If, at any time following the ---------------------------------- delivery of the financial statements referred to in subsections 6.1(a) and (b), the Company cannot (x) represent and -45- warrant to the Agent and the Banks as to the matters set forth in either the second or third sentences of subsection 4.15 because a Subsidiary or certain Subsidiaries not named a Designated Subsidiary on the Closing Date causes the Designated Subsidiaries to fail to reach the percentage threshold set forth in either of such sentences or (y) pursuant to the provisions of Section 4.14 of the Senior Subordinated Indenture, is required to cause one or more of its Subsidiaries to become an additional "Guarantor" (as defined in the Senior Subordinated Indenture) (in either case, an "Undesignated Subsidiary"), then as soon as possible and in any event concurrently with any actions taken in respect thereof under the Senior Subordinated Indenture or within 15 days after the delivery of such financial statements, (a) the Company shall deliver to the Agent, with a counterpart for each Bank, (i) a supplement to the Subsidiary Guarantee, satisfactory in form and substance to the Agent, whereby such Undesignated Subsidiary guarantees the Obligations (as defined in the Subsidiary Guarantee and subject to the Maximum Guaranteed Amount, as defined therein, with respect to such Undesignated Subsidiary) and agrees to be bound by the terms and conditions of the Subsidiary Guarantee, (ii) the Capital Stock of any such Undesignated Subsidiary, pledged and delivered by the holder thereof pursuant to a supplement to the pledge agreement to which such holder is a party, duly authorized, executed and delivered by such holder and otherwise in form and substance satisfactory to the Agent, (iii) a Subsidiary Security Agreement, satisfactory in form and substance to the Agent, executed by such Undesignated Subsidiary, and (iv) an opinion of counsel to such Undesignated Subsidiary and such pledgor addressed to the Agent and the Banks and covering such matters as the Agent may reasonably request and (b) Schedule VI shall be deemed amended to include the name of such Undesignated Subsidiary. 6.10 Further Assurances. Execute and deliver such additional financing ------------------ statements, continuations of financing statements and other documents as Agent shall reasonably request to perfect and maintain perfected Agent's security interest in the Collateral. SECTION 7. NEGATIVE COVENANTS The Company hereby agrees that, so long as the Commitments remain in effect, any Note or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Bank or the Agent hereunder, the Company shall not, and (except with respect to subsection 7.1) shall not permit any of its Subsidiaries to, directly or indirectly: 7.1 Financial Condition Covenants. ----------------------------- (a) Funded Debt to Consolidated EBITDA. For any period of four ---------------------------------- consecutive fiscal quarters ending on any FQED to occur during any "Test Period" set forth below, permit the ratio of (i) Consolidated Indebtedness at the end of such period to (ii) Consolidated EBITDA for such period to be more than the ratio set forth opposite such Test Period: -46-
Test Period Ratio ----------- ----- Closing Date through 2nd 4.25 to 1.00 FQED of fiscal year 1997 Commencement of 3rd fiscal 4.00 to 1.00 quarter of fiscal year 1997 through FQED of 4th fiscal quarter of fiscal year 1997 Fiscal year 1998 3.75 to 1.00 Fiscal year 1999 and thereafter 3.25 to 1.00
(b) EBITDA to Interest Expense. For any period of four consecutive -------------------------- fiscal quarters ending on any FQED to occur during any "Test Period" set forth below, permit the ratio of (i) Consolidated EBITDA for the applicable period to (ii) Consolidated Interest Expense for such period to be less than the ratio set forth opposite such Test Period:
Test Period Ratio ----------- ----- Closing Date through 2nd FQED of fiscal year 1998 2.00 to 1.00 Commencement of 3rd fiscal quarter of fiscal year 1998 through 1st FQED of fiscal year 1999 2.25 to 1.00 Commencement of 2nd fiscal quarter of fiscal year 1999 and thereafter 2.50 to 1.00
-47- (c) Fixed Charge Coverage. For any period of four consecutive fiscal --------------------- quarters ending on any FQED to occur during any "Test Period" set forth below, permit the ratio of (i) Consolidated EBITDAR minus the amount of any federal, state and local income taxes levied by a Governmental Authority on the revenues of the Company which are actually paid by the Company or its consolidated Subsidiaries in cash during such period, to (ii) Consolidated Interest Expense, plus all principal payments required to be made during the period on account of any Consolidated Indebtedness, plus the amount of any Consolidated Rent Expense during the period, to be less than the ratio set forth opposite such Test Period:
Test Period Ratio ----------- ----- Fiscal year 1997 1.20 to 1.00 Fiscal year 1998 1.30 to 1.00 Fiscal year 1999 1.40 to 1.00 and thereafter
(d) Maintenance of Net Worth. Permit Consolidated Net Worth of the ------------------------ Company to be less than the Minimum Consolidated Net Worth. 7.2 Limitation on Indebtedness. Create, incur, assume or suffer to -------------------------- exist any Indebtedness, except: (a) Indebtedness in respect of the Loans, the Notes and the Letters of Credit and other obligations of the Company and its Designated Subsidiaries under the Loan Documents; (b) Indebtedness of the Company to any Designated Subsidiary and of any Designated Subsidiary to the Company or any other Designated Subsidiary; (c) Indebtedness outstanding on the Closing Date and listed on Schedule VIII; provided that no letter of credit listed on Schedule VIII shall remain -------- outstanding beyond its stated date of termination; (d) any Indebtedness of the Company or any Designated Subsidiary incurred after the Closing Date to finance the acquisition, improvement or construction of fixed or capital assets or POS Program Expenses (whether pursuant to a loan, a Financing Lease or otherwise), including any Indebtedness incurred in connection with any transaction permitted under subsection 7.3(g); (e) Indebtedness of FinOp to the SBA incurred in connection with the Company's on-going franchise program, in an aggregate amount not exceeding $20,000,000 at any one time outstanding; and -48- (f) Indebtedness under any Interest Rate Agreement. 7.3 Limitation on Liens. Create, incur, assume or suffer to exist any ------------------- Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings; provided that adequate reserves with respect thereto are maintained on the books of the Company or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Company or such Subsidiary; (f) Liens in existence on the Closing Date listed on Schedule IX, securing Indebtedness permitted by subsection 7.2(c); provided that no such Lien is expanded to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Company or a Designated Subsidiary permitted by subsection 7.2(d); provided that (i) such Liens shall be -------- created promptly upon the acquisition, improvement or completion of the construction of such fixed or capital asset or the incurrence of such POS Program Expense, as the case may be (and in any event no later than the earlier of (A) twelve months from the date on which the construction of such fixed or capital asset is completed or such POS Program Expense is incurred, and (B) 24 months from the date on which the real estate, on which such fixed or capital asset is located, was purchased by the Company, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased, (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property, and (v) there shall be no Liens on any of the following types of collateral, as those terms are defined in Title 42a of the Connecticut General Statutes: inventory, -49- accounts or general intangibles (except Liens on general intangibles that result from the granting of a mortgage, equipment lease financing or other equipment financing arrangement); and (h) Liens created under the Security Documents. 7.4 Limitation on Guarantee Obligations. Create, incur, assume or ----------------------------------- suffer to exist any Guarantee Obligation except: (a) the Subsidiary Guarantee; (b) Guarantee Obligations arising from the issuance of the Letters of Credit issued pursuant to this Agreement and any Application issued for the account of the Company or any Designated Subsidiary in the ordinary course of its business, not to exceed an aggregate face amount and unreimbursed obligations of the L/C Commitment at any one time outstanding; (c) Guarantee Obligations arising with respect to the Franchisee Guarantees or under the Senior Subordinated Indenture; and (d) Guarantee Obligations arising as a result of guarantees by the Company of any Indebtedness of a consolidated Subsidiary that would appear as a liability on a consolidated balance sheet of the Company and its consolidated Subsidiaries. 7.5 Limitations on Fundamental Changes. Enter into any merger, ---------------------------------- consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Company may be merged or consolidated with or into the Company (provided that the Company shall be the continuing or surviving corporation) or with or into any one or more wholly-owned Designated Subsidiaries of the Company (provided that the wholly-owned Designated Subsidiary or Designated Subsidiaries shall be the continuing or surviving corporation and shall be a member of the Company's consolidated group for financial reporting and tax purposes); (b) any wholly-owned Designated Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or any other wholly-owned Designated Subsidiary of the Company; and (c) any Subsidiary which is not a Designated Subsidiary (i) may be merged or consolidated with or into any other Subsidiary (provided that if it is merged or consolidated with a Designated Subsidiary, the continuing or surviving entity must be the Designated Subsidiary) and -50- (ii) may liquidate, wind up or dissolve itself (provided, in the case of clause (ii) only, that the Required Banks consent to such action (which consent will not be unreasonably withheld)). 7.6 Limitation on Sale of Assets. Convey, sell, lease, assign, transfer ---------------------------- or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, except: (a) the sale of inventory in the ordinary course of business; (b) as permitted by subsection 7.5(b); and (c) Asset Dispositions (as defined in the Senior Subordinated Indenture), such dispositions being subject to the provisions of subsection 2.11(b) hereof, if applicabl e. 7.7 Limitation on Restricted Payments. Except as permitted by Section --------------------------------- 7.9 hereof, (i) declare or pay any dividend or make any distribution in respect of the Company's or any Subsidiary's Capital Stock (except (A) dividends or distributions payable solely in the Company's or a Subsidiary's Capital Stock, (B) options, warrants or other rights to purchase the Capital Stock of the Company or a Subsidiary, (C) stock dividends or distributions payable from a Subsidiary to the Company so long as any such stock dividend is pledged by the Company pursuant to the Pledge Agreement to which the Company is a party, and (D) non-stock dividends or distributions payable solely to the Company or to a Subsidiary which has executed and delivered to the Agent a Subsidiary Guarantee), or (ii) purchase, redeem or otherwise acquire or retire for value, or set apart assets for a sinking or other analogous fund for the benefit of, any Capital Stock of the Company or any Subsidiary, either directly or indirectly, whether in cash or property or in obligations of the Company or any Subsidiary (collectively, a "Restricted Payment") unless no Event of Default will occur as a result of such Restricted Payment and such Restricted Payment, when aggregated with all other Restricted Payments made since February 3, 1996 and any repurchase by the Company of Senior Subordinated Notes (unless required by the Senior Subordinated Indenture to be repurchased from the Net Cash Proceeds of an Asset Disposition), made since February 3, 1996, would not exceed the sum of (x) 50% of Consolidated Net Income accrued on a cumulative basis from February 3, 1996 to the end of the most recent fiscal quarter ending prior to the date of the proposed Restricted Payment (treating such period as a single accounting period), (y) the aggregate net proceeds received by the Company from any Person other than a Subsidiary as a result of the issuance of Capital Stock of the Company or as a result of a capital contribution from any shareholders of the Company, 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) of any Indebtedness of the Company convertible into or exchangeable for Capital Stock of the Company. 7.8 Limitation on Capital Expenditures. Make or commit to make (by way ---------------------------------- of the acquisition of securities of a Person or otherwise) any Capital Expenditures (excluding any expenses incurred in connection with normal replacement and maintenance programs properly charged to -51- current operations) in the aggregate for the Company and its Subsidiaries during any of the fiscal years of the Company set forth below in an amount in excess of that set forth opposite such fiscal year:
MAXIMUM CAPITAL --------------- FISCAL YEAR EXPENDITURES ----------- ------------ 1997 $28,500,000 Each fiscal year thereafter $28,000,000
provided, however, that in the event the Company and its Subsidiaries shall make - - -------- Capital Expenditures in any fiscal year of less than the maximum amount set forth above, an amount equal to the difference between such maximum amount and the actual Capital Expenditures made during such fiscal year shall be available (in addition to the maximum amount stated above) to the Company for Capital Expenditures during (but only during) the immediately following fiscal year. 7.9 Limitation on Investments, Loans and Advances. Make any advance, --------------------------------------------- loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (each, an "Investment"), any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) Investments in Cash Equivalents; (c) loans and advances to employees of the company or its Subsidiaries in the ordinary course of business in an aggregate amount for the Company and its Subsidiaries not to exceed $1,500,000 in the aggregate or $500,000 for any one employee, at any one time outstanding (including the principal amount of the loans listed on Schedule X hereto); (d) Investments by the Company in its Subsidiaries and investments by a Designated Subsidiary in the Company and in other Designated Subsidiaries (other than, in either case, any investments in FinOp); provided that any Designated Subsidiary making an investment or receiving the proceeds thereof is a member of the company consolidated group for financial reporting and tax purposes; (e) Investments after the date hereof by the Company or any Designated Subsidiary in FinOp in an aggregate amount of up to $2,500,000; -52- (f) Investments by the Insurance Subsidiary of its statutory or regulatory reserves in accordance with the laws of the jurisdiction of its incorporation; (g) Investments of amounts held in depositary accounts in financial institutions geographically proximate to the location of the Company's or a Subsidiary's retail operations; provided that such amounts are withdrawn from such accounts and deposited into the Company's cash concentration account at least once during each seven-day period; (h) Investments as a result of stock repurchases permitted by subsection 7.7; (i) Investments by the Company or any Designated Subsidiary (other than a Permitted Joint Venture Investment) in any Person not a Subsidiary on the Closing Date; provided that (i) any such Investment (whether made in one transaction or a series of transactions) does not exceed $2,000,000 (inclusive of commissions, fees and other transaction costs, but not including any portion of the Investments with respect to which the consideration is the capital stock of the Company), (ii) all such Investments made after the Closing Date do not exceed $5,000,000 in the aggregate (inclusive of commissions, fees and other transaction costs, but not including any portion of the Investments with respect to which the consideration is the capital stock of the Company), (iii) any such acquired Person that is a Subsequently Acquired Subsidiary executes and delivers to the Agent, with a counterpart for each Bank, a supplement to the Subsidiary Guarantee, satisfactory in form and substance to the Agent, whereby such Subsequently Acquired Subsidiary guarantees the Obligations (as defined in the Subsidiary Guarantee subject to the Maximum Guaranteed Amount, as defined therein, with respect to such Subsequently Acquired Subsidiary) and agrees to be bound by the terms and conditions of the Subsidiary Guarantee, (iv) the Capital Stock of any such acquired Person is pledged and delivered by the holder thereof pursuant to a supplement to the Pledge Agreement to which such holder is a party, duly authorized, executed and delivered by such holder and otherwise in form and substance satisfactory to the Agent, (v) any such acquired Person executes a Subsidiary Security Agreement, in form and substance satisfactory to the Agent, and (vi) in connection with the matters contemplated by the foregoing clauses (iii), (iv) and (v) the Person executing such supplement contemporaneously therewith causes to be delivered an opinion of counsel to such Person so executing such supplement and such pledgor, addressed to the Agent and the Banks and covering such matters as the Agent may request. Notwithstanding the foregoing, the Company or any Subsidiary shall not make any Investment any Person which exceeds one percent of the voting power represented by the Capital Stock then outstanding of such Person if the Board of Directors or other governing body of such Person has disapproved or recommended against any such Investment or refused to negotiate or terminated negotiations with the Company or such Subsidiary; and (i) Permitted Joint Venture Investments. -53- 7.10 Limitation on Optional Payments and Modifications of Debt --------------------------------------------------------- Instruments. (a) Make any optional payment or prepayment on or redemption of - - ----------- any Indebtedness other than Indebtedness under this Agreement and the repayment of the indebtedness evidenced by the Company's existing Credit Agreement with Society National Bank n/k/a Key Bank, including, without limitation (except to the extent permitted by subsection 7.7), the Senior Subordinated Notes; (b) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of the Senior Subordinated Notes or the Senior Subordinated Indenture, including, without limitation, any amendment to the subordination provisions thereof; or (c) amend, modify or change, or consent or agree to any amendment, modification or change to, any of the terms relating to the payment or prepayment of principal of or interest on any Indebtedness (other than Indebtedness pursuant to this Agreement or the Senior Subordinated Notes), other than, with respect to the Indebtedness described in the foregoing clauses (b) and (c), any such amendment, modification or change the primary effect of which would extend the maturity or reduce the amount of any payment of principal thereof or the primary effect of which would reduce the rate or extend the date for payment of interest thereon. 7.11 Transactions with Affiliates. Enter into any transaction, ---------------------------- including, without limitation, any purchase, sale, Lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is not otherwise prohibited under this Agreement, is in the ordinary course of the Company's or such Subsidiary's business (including in connection with the Company's on-going franchise program) and is upon fair and reasonable terms no less favorable to the Company or such Subsidiary, a the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate. 7.12 Sale and Leaseback. Enter into any arrangement with any Person ------------------ providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Company or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Company or such Subsidiary (a "Sale/Leaseback Transaction") unless (a) the proceeds received therefrom are not required by subsections 2.11 and 7.6 to be applied to prepay the Loans, or (b) the proceeds received therefrom are applied, if so required under subsections 2.11 and 7.6, to prepay the Loans in accordance with such subsections. 7.13 Corporate Documents; Name/Location of Assets. (a) Amend its -------------------------------------------- Certificate of Incorporation (except to increase the number of authorized shares of common stock) or (b) do any of the following, unless, in each case, it shall provide the Agent with at least 30 days prior written notice of such action: (i) change its corporate name; (ii) change the location of its inventory or equipment; (iii) change the location of the office where it maintains its records pertaining to its accounts; (iv) change the location of its existing places of business or open any new places of business; or (v) change the location of its chief executive office; provided, however, that anything herein to the contrary notwithstanding (A) in the alternative, with respect to store openings and closings, the Company may satisfy the requirements of this subsection by submitting to the Agent, on a quarterly basis, a list of all stores opened and closed, and (B) with respect to moving Collateral, -54- no notice need be provided pursuant to this subsection so long as either (i) the Company or a Subsidiary, as the case may be, executes and delivers to the Agent a Uniform Commercial Code financing statement appropriate for filing to perfect the Agent's security interest in the Collateral in its new location, or (ii) the Agent has previously filed a Uniform Commercial Code financing statement which perfects the Agent's security interest in the Collateral in its new location. As used herein, "inventory," "equipment" and accounts have the respective meanings ascribed to them in Title 42a of the Connecticut General Statutes. In the event that the Company sells or franchises a store or any Collateral contained therein to a purchaser or franchisee in the ordinary course of the Company's business, the Agent shall, provided no Event of Default has occurred and is continuing, promptly execute and deliver to the Company appropriate Uniform Commercial Code termination statements terminating the Agent's security interest in such store or Collateral. 7.14 Fiscal Year. Permit the fiscal year of the Company to end on a ----------- day other than on the Saturday closest to January 31 of each calendar year. 7.15 Limitation on Negative Pledge Clauses. Enter into any agreement, ------------------------------------- other than (i) as permitted by this Agreement and (ii) any industrial revenue bonds, purchase money or other mortgages, the Senior Subordinated Indenture or a lease the obligations of which are required in accordance with GAAP to be capitalized on a balance sheet of the Company (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), with any Person other than the Banks pursuant hereto which prohibits or limits the ability of the Company or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. SECTION 8. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Company shall fail to pay any principal of any Note or any Reimbursement Obligation when due in accordance with the terms thereof or hereof; or the Company shall fail to pay any interest on any Note or any Reimbursement Obligation, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Company or any Subsidiary in any Loan Document to which the Company or such Subsidiary is a party or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Company shall default in the observance or performance of any agreement contained in Section 6 (other than subsection 6.7) and Section 7; or -55- (d) The Company shall default in the observance or performance of any other agreement contained in this Agreement (other than as provided in paragraphs (a) through (c) of this subsection), and such default shall continue unremedied for a period of 30 days after the earlier of (i) an officer of the Company becomes aware of such default or (ii) notice of such default to the Company by Agent or any Bank; or (e) Any Subsidiary shall default in the observance or performance of any agreement contained in any Loan Document to which it is a party, and such default shall continue unremedied for a period of 30 days after the earlier of (i) an officer of any such Subsidiary becomes aware of such default or (ii) notice of such default to such Subsidiary by Agent or any Bank; or (f) The Company or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Notes) which has an aggregate principal amount in excess of $500,000, individually or in the aggregate, or in the payment of any Guarantee Obligation under which the maximum liability of the Company or such Subsidiary exceeds $500,000, individually or in the aggregate, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (g) (i) The Company or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief' of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Company or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Company or any of its Subsidiaries shall take any action -56- in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i),(ii), or (iii) above, or (v) the Company or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (h) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether waived or not, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Banks, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Company or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Banks is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Company and its Subsidiaries taken as a whole; or (i) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries involving in the aggregate a liability (to the extent not paid or covered by insurance) of $1,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (j) If at any time the Company or all or any of its Subsidiaries shall become liable for remediation and/or environmental compliance expenses and/or fines, penalties or other charges which, in the aggregate, are in excess of $3,000,000 at any one time outstanding (net of all reimbursements in respect of such amounts from any state trust funds which have been or are reasonably expected to be made to the Company or its Subsidiaries and have been recognized as a receivable or may properly be set off as a credit against such liabilities under GAAP); or (k) A Change of Control shall have occurred; or (l) The Subsidiary Guarantee or any other Guarantee Obligation in respect of the Company's Indebtedness hereunder 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 Person having a Guarantee Obligation in respect of the Company's Indebtedness hereunder, including without limitation each Designated Subsidiary (or any Person acting on behalf of any such Person) shall deny or disaffirm such Guarantee Obligation. -57- then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (g) above with respect to the Company, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, regardless of whether the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) and the Notes shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Banks, the Agent may, or upon the request of the Required Banks, the Agent shall, by notice to the Company declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Banks, the Agent may, or upon the request of the Required Banks, the Agent shall, by notice of default to the Company, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, regardless of whether the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, the Company shall at such time deposit in a cash collateral account to be opened by the Agent (the "Cash Collateral Account") an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. The Company hereby grants to the Agent, for the benefit of the Issuing Bank and the L/C Participants, a security interest in the Cash Collateral Account and all amounts from time to time on deposit therein to secure all obligations of the Company in respect of such Letters of Credit under this Agreement and the other Loan Documents. The Company shall execute and deliver to the Agent, for the account of the Issuing Bank and the L/C Participants, such further documents and instruments as the Agent may request to evidence the creation and perfection of such security interest in the Cash Collateral Account. Amounts held in the Cash Collateral Account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Company hereunder and under the Notes. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Company hereunder and under the Notes shall have been paid in full, the balance, if any, in the Cash Collateral Account shall be returned to the Company. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. -58- SECTION 9. THE AGENT 9.1 Appointment. Each Bank hereby irrevocably designates and appoints ----------- Bank of Boston Connecticut as the Agent of such Bank under this Agreement and the other Loan Documents, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. 9.2 Delegation of Duties. The Agent may execute any of its duties under -------------------- this Agreement and the other Loan Documents by or through agents or attorneys- in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 9.3 Exculpatory Provisions. Neither the Agent nor any of its officers, ---------------------- directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Banks for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in this Agreement or any other Loan Document or any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the Notes or any other Loan Document or for any failure of the Company to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company. 9.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be ----------------- fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate or it shall first be indemnified to its satisfaction by the Banks against any and all liability -59- and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes and the other Loan Documents in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks and all future holders of the Notes. 9.5 Notice of Default. The Agent shall not be deemed to have knowledge ----------------- or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Banks. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Banks; provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. 9.6 Non-Reliance on Agent and Other Banks. Each Bank expressly ------------------------------------- acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by the Agent to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and credit worthiness of the Company and made its own decision to make its Loans hereunder and enter into this Agreement. Each Bank also represents that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself, and keep itself informed, as to the business, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Company which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.7 Indemnification. The Banks agree to indemnify the Agent in its --------------- capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), ratably according to the respective amounts of their original Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without -60- limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Notes and all other amounts payable hereunder. 9.8 Agent in Its Individual Capacity. The Agent and its Affiliates may -------------------------------- make loans to, accept deposits from and generally engage in any kind of business with the Company as though the Agent were not the Agent hereunder and under the other Loan Documents. With respect to its Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit issued or participated in by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" shall include the Agent in its individual capacity. 9.9 Successor Agent. The Agent may resign as Agent upon 10 days' notice --------------- to the Banks. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Required Banks shall appoint a Successor Agent, whereupon such Successor Agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such Successor Agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation as Agent, the provisions of this subsection shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. SECTION 10. MISCELLANEOUS 10.1 Amendments and Waivers. Neither this Agreement, any Note, any ---------------------- other Loan Document nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. With the written consent of the Agent and the Required Banks, the Agent and the Company may, from time to time, enter into written amendments, supplements or modifications hereto and to the Notes and the other Loan Documents for the purpose of adding any provisions to this Agreement, the Notes or the other Loan Documents or changing in any manner the rights of the Banks or of the Company hereunder or thereunder or waiving, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of this Agreement, the Notes or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (a) reduce the amount or extend the maturity of any Note or any installment thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce -61- any fee payable to any Bank hereunder, or change the amount of any Bank's Commitment, in each case without the consent of the Bank affected thereby, or (b) amend, modify or waive any provision of this subsection or reduce the percentage specified in the definition of Required Banks, or consent to the assignment or transfer by the Company of any of its rights and obligations under this Agreement and the other Loan Documents or release any of the Collateral, in each case without the written consent of the Agent and all the Banks, or (c) amend, modify or waive any provision of Section 9 without the written consent of the then Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Banks and shall be binding upon the Company, the Banks, the Agent and all future holders of the Notes. In the case of any waiver, the Company, the Banks and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes and any other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 10.2 Notices. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing (including by telecopy, telegraph or telex), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, or, in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answer back received, addressed as follows in the case of the Company and the Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Company: Dairy Mart Convenience Stores, Inc. One Vision Drive Enfield, Connecticut 06082 Attention: Gregory G. Landry Telephone: (860) 741-4502 Telecopy: (860) 741-4467 The Agent: Bank of Boston Connecticut 100 Pearl Street Hartford, Connecticut 06103 Attention: Scott S. Barnett Telephone: (860) 727-6557 Telecopy: (860) 727-6575 provided that any notice, request or demand to or upon the Agent or the Banks pursuant to subsections 2.4, 2.5, 2.9, 2.14 or 2.15 shall not be effective until received. -62- 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no ------------------------------ delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4 Survival of Representations and Warranties. All representations ------------------------------------------ and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes. 10.5 Payment of Expenses and Taxes. The Company agrees, within 15 days ----------------------------- after demand, (a) to pay or reimburse the Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the Notes and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the fees and disbursements of counsel to the Agent, (b) to pay or reimburse each Bank and the Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the other Loan Documents and any such other documents, including, without limitation, fees and disbursements of counsel to the Agent and to the several Banks, and (c) to pay, indemnify, and hold each Bank and the Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents, and (d) to pay, indemnify and hold each Bank harmless from any and all fees, costs and expenses incurred by any such Bank after the occurrence and throughout the continuance of an Event of Default in connection with any inspection or examination pursuant to subsection 6.6, and (e) to pay, indemnify, and hold each Bank and the Agent (and their respective directors, officers, employees and agents) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Notes, the other Loan Documents and any such other documents (all the foregoing, collectively, the "indemnified liabilities"); provided, that the Company shall have no obligation hereunder to the Agent or any Bank with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of the Agent or any such Bank (or any of their respective directors, officers, employees or agents), (ii) legal proceedings commenced against the Agent or any such Bank by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such, or (iii) legal proceedings commenced, against the Agent or any -63- such Bank by any other Bank or by any Transferee. The agreement in this subsection shall survive repayment of the Notes and all other amounts payable hereunder. 10.6 Successors and Assigns; Participations; Purchasing Banks. -------------------------------------------------------- (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Banks, the Agent, all future holders of the Notes and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Bank. (b) Without the consent of the Company, any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities (other than any entity which, to the knowledge of such Bank, is a competitor of the Company or an Affiliate of such a competitor ("Participants")) participating interests in any Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank hereunder and under the other Loan Documents. In the event of any such sale by a Bank of participating interests to a Participant, such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the holder of any such Note for all purposes under this Agreement and the other Loan Documents, and the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and the other Loan Documents. The Company agrees that if amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set off in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or any Note; provided that such Participant shall only be entitled to such right of set off if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Banks the proceeds thereof as provided in subsection 10.7. The Company also agrees that each Participant shall be entitled to the benefits of subsections 2.16, 2.17, 2.18, 2.19 and 10.5 with respect to its participation in the Commitments and the Loans outstanding from time to time; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred by such transferor Bank to such Participant had no such transfer occurred. (c) Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to any Bank or any affiliate thereof and, with the consent of the Agent and (so long as no Event of Default has occurred and is continuing) the Company if a Purchasing Bank (as hereinafter defined) is not then a Bank party to this Agreement (which shall not be unreasonably withheld), to one or more additional banks or financial institutions ("Purchasing Banks") all or any part of its rights and obligations under this Agreement and the Notes -64- in the minimum principal amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof, pursuant to an Assignment and Acceptance executed by such Purchasing Bank, such transferor Bank (and, in the case of a Purchasing Bank that is not then a Bank or an affiliate thereof, by the Company and the Agent) and delivered to the Agent for its acceptance and recording in the Register. Upon such execution, delivery, acceptance and recording, from and after the effective date of such Assignment and Acceptance, (x) the Purchasing Bank thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder with a Commitment as set forth therein, and (y) the transferor Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party hereto). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Bank and the resulting adjustment of the appropriate Commitment Percentages arising from the purchase by such Purchasing Bank of all or a portion of the rights and obligations of such transferor Bank under this Agreement and the Notes. On or prior to the effective date of such Assignment and Acceptance, the Company shall execute and deliver to the Agent in exchange for the Revolving Credit Note a new Revolving Credit Note to the order of such Purchasing Bank in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the transferor Bank has retained a Commitment hereunder, new Notes to the order of the transferor Bank in an amount equal to the Commitment retained by it hereunder. Such new Notes shall be dated the Closing Date, and shall otherwise be in the form of the Notes replaced thereby. The Notes surrendered by the transferor Bank shall be returned by the Agent to the Company marked "canceled". (d) The Agent shall maintain at its address referred to in subsection 10.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Loans owing to, each Bank from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Banks may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by a transferor Bank and Purchasing Bank (and, in the case of a Purchasing Bank that is not then a Bank or an affiliate thereof, by the Company and the Agent) together with, if such Purchasing Bank is not then a Bank hereunder, payment by the transferor Bank and/or the Purchasing Bank of a registration and processing fee of $2,500, the Agent shall (i) promptly accept such Assignment and Acceptance, and (ii) on the effective date of such Assignment and Acceptance, record the information contained therein in the Register and give notice of such acceptance and recordation to the Banks and the Company. -65- (f) The Company authorizes each Bank to disclose to any Participant or Purchasing Bank (each, a "Transferee") and any prospective Transferee any and all financial information in such Bank's possession concerning the Company and its affiliates which has been delivered to such Bank by or on behalf of the Company pursuant to this Agreement or which has been delivered to such Bank by or on behalf of the Company in connection with such Bank's credit evaluation of the Company and its affiliates prior to becoming a party to this Agreement; provided, that, prior to receiving such information, such Transferee shall agree to hold in confidence all confidential material or proprietary information obtained by such Transferee with respect to the Company's business operations that is plainly marked by the provider of such material or information as confidential or proprietary except (a) to the extent that the production of such information is required pursuant to any statute, ordinance, regulation, rule or order or any subpoena or any governmental authority or by reason of any bank regulation in connection with any bank examination, (b) to the extent already publicly disclosed and (c) that any Bank shall not be prohibited from disclosing any such information to any of their agents, attorneys, accountants, consultants, participants, assignees, or prospective participants, who are aware of such Bank's covenant in this subsection and who have agreed with such Bank, for the benefit of the Company, to comply with such covenant. The Company acknowledges that Bank of Boston Connecticut intends to make assignments of its interests hereunder, and agrees to cooperate with the reasonable requests of Bank of Boston Connecticut for the purpose of providing relevant financial information to prospective Transferees, including making officers and employees of the Company available to discuss such financial information with prospective Transferees during normal business hours. (g) If, pursuant to this subsection, any interest in this Agreement or any Note is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Bank shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Bank (for the benefit of the transferor Bank, the Agent and the Company) that under applicable law and treaties no taxes will be required to be withheld by the Agent, the Company or the transferor Bank with respect to any payments to be made to such Transferee in respect of the Loans, (ii) to furnish to the transferor Bank (and, in the case of any Purchasing Bank registered in the Register, the Agent and the Company) either (A) United States Internal Revenue Service Form 4224 or United States Internal Revenue Service Form 1001 or (B) United States Internal Revenue Service Form W-8 or W-9, as applicable (wherein such Transferee claims entitlement to complete exemption from United States federal withholding tax on all interest payments hereunder), and (iii) to agree (for the benefit of the transferor Bank, the Agent and the Company) to provide the transferor Bank (and, in the case of any Purchasing Bank registered in the Register, the Agent and the Company) a new Form 4224 or Form 1001 or Form W-8 or W-9, as applicable, upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable United States laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable United States laws and regulations with regard to such withholding tax exemption. -66- (h) Nothing herein shall prohibit any Bank from pledging or assigning any Note to any Federal Reserve Bank in accordance with applicable law. 10.7 Adjustments; Set-off. -------------------- (a) Subject to the provisions of subsection 2.14(b), if any Bank (a "benefitted Bank") shall at any time receive any payment of all or part of its Loans or the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in subsection 8(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of Loans or Reimbursement Obligations owing to it, or interest thereon, then such benefitted Bank shall purchase for cash from the other Bank such portion of such other Bank's Loans or the Reimbursement Obligations owing to it, or shall provide such other Bank with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each of the other Banks; provided however, that if all or any portion of such excess payment or benefits - - -------- ------- is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Company agrees that each Bank so purchasing a portion of another Bank's Loan or the Reimbursement Obligations owing to it may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Bank were the direct holder of such portion. (b) In addition to any rights and remedies of the Banks provided by law, each Bank shall have the right, without prior notice to the Company, any such notice being expressly waived by the Company to the extent permitted by applicable law, upon any amount becoming due and payable by the Company hereunder or under the Notes (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Bank to or for the credit or the account of the Company. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided that -------- the failure to give such notice shall not affect the validity of such set-off and application. 10.8 Counterparts. This Agreement may be executed by one or more of ------------ the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Company and the Agent. 10.9 Severability. Any provision of this Agreement which is prohibited ------------ or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or -67- unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10 Integration. This Agreement represents the agreement of the ----------- Company, the Agent and the Banks with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Bank relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 10.11 Governing Law. This Agreement and the Notes and the rights and ------------- obligations of the parties under this Agreement and the Notes shall be governed by, and construed and interpreted in accordance with, the laws of the State of Connecticut. 10.12 Submission To Jurisdiction; Waivers. The Company hereby ----------------------------------- irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of Connecticut, the courts of the United States of America for the District of Connecticut, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Company at its address set forth in subsection 10.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any special, exemplary, punitive or consequential damages. 10.13 Acknowledgments. The Company hereby acknowledges that: --------------- -68- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Notes and the other Loan Documents; (b) neither the Agent nor any Bank has any fiduciary relationship to the Company, and the relationship between Agent and Banks, on one hand, and Company, on the other hand, is solely that of debtor and creditor; and (c) no joint venture exists among the Banks or among the Company and the Banks. 10.14 WAIVERS OF JURY TRIAL; COMMERCIAL TRANSACTIONS. (A) THE COMPANY, ---------------------------------------------- THE AGENT AND THE BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENTS AND FOR ANY COUNTERCLAIM THEREIN. (B) THE COMPANY ACKNOWLEDGES THAT THE LOANS EVIDENCED HEREBY ARE COMMERCIAL TRANSACTIONS WITHIN THE MEANING OF CHAPTER 903A OF THE CONNECTICUT GENERAL STATUTES. -69- DAIRY MART CONVENIENCE STORES, INC. /s/ Gregory Wozniak By:----------------------------------------- Name: Gregory Wozniak Title: Vice President and Corporate Counsel BANK OF BOSTON CONNECTICUT, Individually and as Agent /s/ Scott S. Barnett By:------------------------------------------ Name: Scott S. Barnett Title: Vice President -70- EX-21 3 SUBSIDIARIES OF THE REGISTRANT (EXHIBIT 21) DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Dairy Mart, Inc. (a Massachusetts corporation) Dairy Mart Farms, Inc. (a Connecticut corporation) Dairy Mart East, Inc.(a Rhode Island corporation) The Lawson Company (a Delaware corporation) CONNA Corporation (a Kentucky corporation) EX-23 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8, File No. 33-8209 and File No. 33-47893. ARTHUR ANDERSEN LLP Hartford, Connecticut May 2, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS FEB-03-1996 JAN-29-1995 FEB-03-1996 12,654 0 13,966 1,847 20,928 49,457 116,185 37,293 164,938 50,025 99,451 0 0 63 9,145 164,938 722,512 571,311 413,548 145,122 0 1,220 9,661 (9,220) 3,220 (6,000) 0 0 0 (6,000) (1.12) (1.12)
EX-99 6 INFORMATION REGARDING DM ASSOCIATES & NIRENBERG TRANSACTION Exhibit 99 INFORMATION REGARDING DM ASSOCIATES AND THE NIRENBERG TRANSACTION STOCK OWNED BY DM ASSOCIATES DM Associates Limited Partnership ("DM Associates") is the owner of record of 1,858,743 shares of Class B Common Stock, representing approximately 66.8% of the issued and outstanding shares of Class B Common Stock, and 60.7% of the total voting power of both classes of the Common Stock. The general partner of DM Associates is New DM Management Associates I ("DM Management I"), which is a general partnership. The general partners of DM Management I are Robert B. Stein, Jr., Gregory G. Landry and Mitchell J. Kupperman. Pursuant to the partnership agreement of DM Associates, DM Management I has the right to vote all of the shares of Class B Common Stock owned by DM Associates. In connection with the closing of the transactions contemplated by the Nirenberg Agreement described below, the partnership agreement of DM Management I was amended to provide that a majority of the partnership interests of DM Management I determines how to vote 638,743 of the shares of Class B Common Stock owned by DM Associates, and that the remaining 1,220,000 shares of Class B Common Stock owned by DM Associates will be voted for or against any stockholder motion or proposal in the same proportion that all other shares of Class B Common Stock are voted for or against any such stockholder motion or proposal (including the 638,743 shares voted by DM Associates). In March 1992, DM Associates financed part of the purchase of its 1,858,743 shares of Class B Common Stock by obtaining a $7,100,000 loan (the "Limited Partnership Loan") from the Connecticut Development Authority ("CDA"). The Limited Partnership Loan is secured by DM Associates' pledge of 1,220,000 shares of the Class B Common Stock owned by DM Associates, representing 43.8% of the issued and outstanding shares of Class B Common Stock and 39.8% of the total voting power of both classes of Common Stock as of December 14, 1995. On September 30, 1994, FCN Properties Corporation, a corporation owned and controlled by Charles Nirenberg, purchased all of the CDA's right, title and interest in and to the Limited Partnership Loan. 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. The limited partnership agreement also requires DM Management I to consult with a certain limited partner of DM Associates before voting any shares at a meeting of the Company's shareholders or exercising any consensual rights of such shares. If DM Management I votes or exercises consensual rights of such shares in a manner in which such limited partner does not agree, the limited partner may dissolve DM Associates. As DM Associates' principal asset is its 1,858,743 shares of Class B Common Stock, if such a dissolution or sale occurs, a change in control of the Company could result. THE NIRENBERG LITIGATION On August 8, 1995, Charles Nirenberg and Mitchell Kupperman, both directors of the Company at that time, commenced an action against the Company and the Company's other directors entitled Nirenberg v. Stein, Delaware Chancery Court, New Castle County, C.A. No. 14462 (the "Nirenberg Litigation"). 19 At the time the Nirenberg Litigation was commenced, Mr. Stein, Mr. Landry, Mr. Nirenberg and Mr. Kupperman, were partners of (i) DM Management I, and (ii) New DM Management Associates II ("DM Management II"). Frank Colaccino was also a partner of DM Management II. DM Management I and DM Management II were the general partners of DM Associates. In the Nirenberg Litigation, Messrs. Nirenberg and Kupperman sought, among other things, a ruling of the Court that Messrs. Nirenberg and Kupperman, allegedly acting on behalf of DM Management I and DM Associates, had replaced by written shareholder consent two of the Company's seven current directors, Mr. Stein and John W. Everets, Jr., with two persons chosen by them. On September 13, 1995, the Court ruled that the Consent did not relate to a sufficient number of shares to remove directors, resulting in the Board of Directors of the Company continuing to be comprised of the persons who were directors prior to the execution of the Consent. In connection with the Annual Meeting that was scheduled to be held on October 31, 1995, Mr. Nirenberg nominated five Class B Directors to be elected at the Company's annual meeting of the stockholders. Mr. Nirenberg, together with Mr. Kupperman, would have been able, by virtue of holding a majority of the partnership interests of DM Management I, to elect Mr. Nirenberg's nominees at the Company's annual meeting. Mr. Nirenberg's nominees, if elected, would have constituted a majority of the Company's seven member Board of Directors. THE NIRENBERG TRANSACTION On October 30, 1995, Mr. Nirenberg, and certain of his affiliates (collectively, "Nirenberg"), entered into an Agreement, as amended on December 1, 1995 (the "Nirenberg Agreement"), with the Company, Mr. Stein and Mr. Landry, for purposes of settling the dispute between Mr. Nirenberg and the Company's management with respect to control of the Company. Pursuant to the Nirenberg Agreement, among other things, the Company purchased for $10 million (i) all of Nirenberg's limited partnership interests in DM Associates, and (ii) the promissory note of DM Associates evidencing the Limited Partnership Loan, which note is secured by a pledge of 1,220,000 shares of the Class B Common Stock owned by DM Associates. Pursuant to the Nirenberg Agreement, the Company also paid to Nirenberg $2.3 million in consideration of certain matters, including, Nirenberg's waiver of certain alleged claims against the Company, Nirenberg allowing the Company to use his name and likeness in advertising materials and Nirenberg's agreement that he will not for a period of five years compete with the Company, solicit employment of any employee of the Company, or interfere in a material manner with any material business relationship between the Company and any third party. The Company also agreed to reimburse Nirenberg for up to $850,000 of previously unreimbursed fees and expenses incurred in connection with the activities relating to the Company. Under the terms of the Nirenberg Agreement, Mr. Nirenberg withdrew as a partner of DM Management I and DM Management II. As a result, the remaining partners of DM Management I are Messrs. Stein, Landry and Kupperman, each of whom owns one-third of the partnership interests of DM Management I. The remaining partners of DM Management II dissolved DM Management II, and DM Management I is therefore the sole remaining general partner of DM Associates. Mr. Kupperman's employment with the Company was terminated on December 1, 1995. In connection with the termination of Mr. Kupperman's employment and Mr. Kupperman's waiver of certain alleged claims against the Company, the Company paid $1,036,412 to Mr. Kupperman. 20 Effective December 1, 1995, Mr. Nirenberg and Mr. Kupperman each resigned as officers and directors of the Company, and M. Howard Jacobsen and Thomas O'Brien, temporary directors appointed by the Company pursuant to the Nirenberg Agreement, also resigned as directors. Thomas W. Janes, a principal of Triumph-Connecticut Limited Partnership, a holder of the Series B Notes and Series B Warrants, as defined below, was appointed a director to fill the vacancy created by Mr. Kupperman's resignation. The Company has agreed to indemnify Nirenberg against any liability or expense incurred by them as a result of or in connection with the transactions consummated pursuant to the Nirenberg Agreement. THE FINANCING OF THE NIRENBERG TRANSACTION On December 1, 1995, the Company issued $13.5 million aggregate principal amount of its 10 1/4% Senior Subordinated Notes (Series B) due 2004 (the "Series B Notes"). The proceeds of the Series B Notes were primarily used to fund the obligations of the Company under the Nirenberg Agreement. The Series B Notes have substantially the same terms and conditions as the Company's current $75,000,000 10 1/4% Senior Subordinated Notes (Series A) due 2004 (the "Series A Notes"). The Indenture pursuant to which the Company issued the Series A Notes has been amended and restated so as to also apply to the Series B Notes. In conjunction with the issuance of the Series B Notes, the Company issued to the purchasers of the Series B Notes warrants to purchase 1,215,000 shares of the Class A Common Stock (the "Series B Warrants"). The Series B Warrants may be exercised at any time during the next 6 years. The initial exercise price of the Series B Warrants is $6.95 per share, but the exercise price may be adjusted to 110% of the market price of the Class A Common Stock one year after the issuance of the Series B Warrants, if such adjustment results in a decrease of the exercise price. The exercise price will also be adjusted upon the occurrence of various events, including stock dividends and issuances of Common Stock by the Company for a per share price less than the exercise price of the Series B Warrants or less than the then current market value of the Class A Common Stock. The Company has also agreed to register the Series B Warrants and the underlying Class A Common Stock for sale with the Securities and Exchange Commission, at the Company's expense. Failure to so register the Series B Warrants and underlying Class A Common Stock may cause the interest rate of the Series B Notes to increase in increments to a maximum rate of 11 3/4%. In addition to the Series B Warrants issued in connection with the sale of the Series B Notes, the Company issued warrants to purchase 500,000 shares of Class A Common Stock to the holders of the Series A Notes (the "Series A Warrants," and together with the Series B Warrants, the "Warrants"), in consideration of their waiving any rights that they may have had as a result of any Change of Control, as defined in the Indenture, that may have occurred, and in consideration of their agreement to certain amendments of the Indenture. The Series A Warrants have substantially the same provisions as the Series B Warrants. Contemporaneously with the consummation of the Nirenberg Agreement and the issuance of the Series B Notes, the Company's principal Credit Agreement was amended and restated. The Credit Agreement provides that the issuance of the Series B Notes and the transactions provided for in the Nirenberg Agreement will not constitute defaults under the Credit Agreement. The financial covenants in the Credit Agreement have also been amended so as to reflect the anticipated effect on the Company of the transactions provided for in the Nirenberg Agreement. 21 -----END PRIVACY-ENHANCED MESSAGE-----