-----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, HDlwbMlwVVq/NOAhRBMX74M7A03qnfkbH8+Nlsx7Bw8IEJWxnlEVbg2vc4lGyhir G35fvzaUN2USPCQPAt6tYg== 0000950152-00-003179.txt : 20000428 0000950152-00-003179.hdr.sgml : 20000428 ACCESSION NUMBER: 0000950152-00-003179 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAIRY MART CONVENIENCE STORES INC CENTRAL INDEX KEY: 0000721675 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CONVENIENCE STORES [5412] IRS NUMBER: 042497894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12497 FILM NUMBER: 609959 BUSINESS ADDRESS: STREET 1: 210 BROADWAY EAST CITY: CUYAHOGA FALLS STATE: OH ZIP: 44222 BUSINESS PHONE: 2037414444 10-K405 1 DAIRY MART CONVENIENCE STORES, INC. 10-K405 1 [photograph 2000 ANNUAL FINANCIAL REPORT DAIRY DM MART DAIRY MART CONVENIENCE STORES INCORPORATED] 2 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 JANUARY 29, 2000 [ ] 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 DAIRY MART WAY, 300 EXECUTIVE PARKWAY WEST, HUDSON, OHIO 44236 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (330)342-6600 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock (Par Value $.01) American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] As of April 21, 2000, 4,895,566 shares of Common Stock were outstanding, and the aggregate market value of Common Stock outstanding of DAIRY MART CONVENIENCE STORES, INC., held by nonaffiliates was approximately $10,769,406. 3 DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's fiscal year 2000 definitive proxy statement to be filed pursuant to Registration 14A within 120 days after the end of the Registrant's fiscal year are incorporated by reference in Part III. PART I ITEM 1. BUSINESS 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 statements relating to the Company's plans and objectives to upgrade and remodel store locations, to build new stores and increase gasoline sales, reduce the impact of under-performing stores, to sell or lease certain assets, as well as the availability of supplies of gasoline, the estimated costs for environmental remediation, successful implementation of tax planning strategies 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. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. GENERAL Dairy Mart Convenience Stores, Inc., and its subsidiaries (the "Company" or "Dairy Mart") operate one of the nation's largest regional convenience store chains. Founded in 1957, the Company operates or franchises 603 stores under the "Dairy Mart" name in seven states located in the Midwest and Southeast, of which 128 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 care aids, tobacco products, select highly consumable general merchandise, lottery tickets, money orders and select customer focused services. 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. 1 4 The Company is incorporated in Delaware and maintains its principal executive offices at One Dairy Mart Way, 300 Executive Parkway West, Hudson, Ohio 44236. The Company's telephone number is (330) 342-6600. During fiscal year 1998, the Company sold 156 convenience store and retail gasoline locations in Connecticut, Rhode Island, Massachusetts and New York to the DB Companies, Inc., a Rhode Island-based convenience store operator and gasoline wholesaler and retailer for approximately $39.1 million. STORES The Company's stores are generally located in 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. 283 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. 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 3,800 square feet and is a free-standing structure. As of January 29, 2000, the Company operated and franchised retail convenience stores in the following states:
NUMBER OF STORES --------- Ohio........................................................ 381 Kentucky.................................................... 128 Michigan.................................................... 31 Pennsylvania................................................ 30 Indiana..................................................... 16 Tennessee................................................... 13 North Carolina.............................................. 4 --- Total Stores................................................ 603 ===
The following table shows the number of Company and franchise stores that were opened or acquired, closed or sold, and transferred between Company operated and franchise operated, during the last three fiscal years:
JANUARY 29, 2000 January 30, 1999 January 31, 1998 ---------------------------- ---------------------------- ---------------------------- COMPANY FRANCHISE COMPANY FRANCHISE COMPANY FRANCHISE OPERATED OPERATED TOTAL OPERATED OPERATED TOTAL OPERATED OPERATED TOTAL -------- --------- ----- -------- --------- ----- -------- --------- ----- At beginning of period............. 477 141 618 469 158 627 543 268 811 Opened or acquired... 18 -- 18 25 -- 25 7 -- 7 Closed or sold....... (25) (8) (33) (16) (18) (34) (89) (102) (191) Transferred (net).... 5 (5) -- (1) 1 -- 8 (8) -- --- --- --- --- --- --- --- ---- ---- End of period........ 475 128 603 477 141 618 469 158 627 === === === === === === === ==== ====
2 5 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 modern environmental protection equipment. The Company evaluates the performance of each of its stores in order to determine its contribution to the Company's overall profitability. Management determines a minimum acceptable level of store performance required for a store to be eligible for on-going capital expenditures and/or lease option renewal or renegotiation. Accordingly, in fiscal year 2000, the Company closed 13 of its retail facilities because of their inability to meet the Company's economic and non-economic criteria for long-term stability and growth. An additional 20 stores were sold to independent operators in fiscal year 2000. During fiscal year 2001, management plans to accelerate the disposal of stores, through sale or closure, not meeting minimum performance standards. In addition, management plans to reduce administrative expenses accordingly. NEW STORES A major component of the Company's growth strategy is to build new stores and increase sales. During the fourth quarter of fiscal year 2000, the Company decided to slow the pace of its new store expansion program in light of current market conditions which caused in part the maturation process for new stores to be longer than originally expected. The Company considers new stores to have reached maturity when they are generating operating results which achieve an acceptable rate of return on invested capital. Accordingly, during fiscal year 2000, the Company opened 18 new stores, all of which offer gasoline through modern facilities, including credit card readers in the gasoline dispensers. The Company plans to build up to 15 new stores during fiscal year 2001. The Company believes adequate sources of financing will continue to be available to support new store development. TECHNOLOGICAL UPGRADE/RETAIL AUTOMATION IMPLEMENTATION
ACTUAL/PROJECTED COMPLETION ------------------------------------- PHASE/INITIATIVE FY' 98 FY' 99 FY' 00 FY' 01 ---------------- ------- ------- ------- ------- Phase I: POS Rollout.......................... 100% Phase II: Implement Host Accounting System..... 100% Phase III: Implement Store-Level Computer 50% 50% Systems.............................. Phase IV: Implement Centralized Automated 25% 25% 50% Pricebook............................ Phase V: Implement Evolution Initiatives * Payroll Time & Attendance.......... 100% * Automated Item Level Receiving 20% 80% Device (Percon).................... * Scanning........................... 10% 90%
3 6 Phases one, two and three provided a new foundation for store accounting and management reporting. The new host system is driven by the concept of centralized store control. This allows for the collection and distribution of more detailed and timely information from store operations and provides the basis for the formation and implementation of improved merchandising strategies. Phase four, the implementation of a centralized automated pricebook, allows for the definition of market zones and the management of a retail pricing strategy from the corporate office. The implementation of a centralized automated pricebook is expected to improve retail margins through increased accuracy of retail pricing and verification of agreed upon vendor costs. Additionally, the pricebook is expected to save data entry time, reduce data entry errors and provide greater control over store merchandise inventory. Phase five is expected to produce labor savings at both the corporate headquarters and the stores. Item level receiving is expected to allow the Company to receive inventory more timely and accurately and create credit memos in the event of an incorrect vendor cost. Scanning is expected to allow for a reduction in overall inventory levels and better merchandising of the store thereby increasing margins and reducing the overhead needed to price products. GASOLINE OPERATIONS Gasoline sales accounted for approximately 38% of total revenue in fiscal year 2000, 34% for fiscal year 1999, and 38% in fiscal year 1998. As of January 29, 2000, 283 stores sold gasoline. The Company's gasoline pricing strategy has historically been 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 and believes that there are adequate supplies of fuel available from a number of sources at competitive prices. In an effort to provide name-brand recognition, the Company entered into a long-term agreement with Chevron Products Company in August 1998, to sell branded gasoline at approximately 58 of its locations in Kentucky and Southern Indiana. The Company finished conversion of these stores during the fourth quarter of fiscal year 1999. As of January 29, 2000, the Company converted an additional 14 locations to sell Chevron branded gasoline, primarily in Kentucky. Branding the Company's gasoline assets has improved the overall quality of these assets and is considered important in attracting new customers who prefer to purchase major-oil branded gasoline. Branding also offers the Company access to the credit card base of the branding partner, whose branded customers tend to purchase higher-octane fuels that carry a higher gross profit margin. 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. In fiscal year 2000, the Company's operating results have been adversely impacted by high wholesale gasoline prices. PRODUCT SELECTION All stores generally offer more than 3,000 core food and non-food convenience items featuring well-known national brand names, as well as the Company's private label products. Food items include a 4 7 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, cappuccino, hot dogs, deli meats and deli sandwiches and similar foods. Non-food convenience items include gasoline (at 283 stores), cigarettes, health and beauty aids, publications, lottery tickets and money orders. The Company has installed branded food service, which carries a relatively higher gross profit margin, at 42 store locations, including 18 Mr. Heros(R), 14 Taco Bells(R) and 8 Subways(R). The Company has entered into an exclusive agreement with Restaurants Developers Corporation to develop Mr. Hero(R) quick-serve restaurants in selected stores in most of Ohio and all of Kentucky. Mr. Hero(R) sandwiches are well-established regional brands with strong consumer recognition in Northeastern Ohio. The Company opened 16 Mr. Hero(R) locations in fiscal year 2000. These branded food service offerings allow the Company to offer competitive, high-quality food service and increase customer traffic providing ancillary sales opportunities for gasoline and other convenience items. In recent years, the Company has altered the mix of products and services to emphasize the sale of items carrying higher profit margins. Fast food items carry higher profit margins and tend to lead to the purchase of other high profit margin products and impulse items, including salty-snacks, candy and beverages. Dairy Mart offers a number of private label products such as milk, bakery products, juices, dips and cheeses that generally carry a higher gross profit margin than the Company's average gross profit margin on comparable products. The Company signed an agreement with Coca-Cola USA Fountain in January 1999, to exclusively sell Coca-Cola fountain products in the store's fountain centers. In March 1999, the Company signed an agreement with Procter & Gamble to exclusively sell Millstone brand coffee blends in Dairy Mart stores through February 2004. Dairy Mart is the only convenience store chain in its markets selling Millstone coffee. In March 1999, the Company entered into an agreement to initially provide no-fee ATM services at all of its locations. In March 2000, the Company entered into a second one-year contract with the same service provider. Effective April 1, 2000, the Company began charging $.99 per transaction at most locations. The Company believes that the new program is competitively priced, and in fact lower than the industry average, and will continue to be a significant traffic builder. FRANCHISE OPERATIONS The Company franchises 128 stores. Franchise stores generally follow the same operating policies as Company stores, and are subject to Company supervision under franchise agreements. Company operated and franchise stores are of the same basic store design and sell substantially the same products. The Company offers two types of franchising arrangements: a "full" franchise and a "limited" franchise. Under a full franchise agreement, the franchisee purchases and owns both the merchandise inventory and the equipment located in the store and leases or subleases the store from the Company. Under a limited franchise agreement, the franchisee owns only the merchandise inventory while the Company retains ownership of the store equipment. Franchise fees are higher for limited franchisees. As of January 29, 2000, there were 46 full franchise locations and 82 limited franchise locations. 5 8 INTERNATIONAL OPERATIONS The Company conducts business outside the United States as a licensor or as a consultant. The Company is a party to three agreements with convenience store operators in South Korea, Malaysia and Aruba. As with the Company's prior international arrangements, these agreements require a specified commitment of Company personnel, but do not require any significant commitment of capital. At the end of fiscal year 2000, there were 260 stores in South Korea and 66 stores in Malaysia operating under these agreements. Both of these arrangements have expirations in fiscal year 2001. The Company does not anticipate renewing either of these arrangements after the date of their expirations. In fiscal year 2000, the Company entered into a consulting arrangement, beginning with one store, with a convenience store operator in Aruba. ADVERTISING To promote a uniform image for all stores, the Company designs and coordinates advertising for most stores to complement its marketing strategy, which is derived, in part, from market history and research. In-store, newspaper, direct-mail, special promotions, outdoor billboard and radio advertising focus on food service offerings and also feature certain specially priced items designed to attract today's time-constrained consumers in search of convenience related items, and typically include national brand items for which advertising costs are often supplemented by the national brand vendor partners. Sales promotions are generally established and maintained on a bi-weekly or monthly basis. COMPETITION The convenience store and retail gasoline industries are highly competitive. The number and type of competitors vary by location. The Company presently competes with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains. Some of the Company's competitors have greater financial resources than the Company. Key competitive factors include, among others, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing. SEASONALITY Weather conditions have a significant effect on the Company's sales, as convenience store customers are more likely to go to stores to purchase convenience goods and services, particularly higher profit margin items such as fast food items, fountain drinks and other beverages, when weather conditions are favorable. Accordingly, the Company's stores generally experience higher revenues and profit margins during the warmer weather months, which fall within the Company's second and third fiscal quarters. EMPLOYEES As of January 29, 2000, exclusive of franchisees and franchisees' employees, the Company employed, on a full-time or part-time basis, approximately 3,900 employees. The Company has not experienced any work stoppages. There are no collective bargaining agreements between the Company and any of its employees. 6 9 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. The Company has retained an outside third party to perform testing and remediation services. 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 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. Additionally, the Company records receivables based upon the estimated reimbursement 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. Because of 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 was obligated to either upgrade or replace most existing USTs it owned or operated or close them by December 22, 1998 to meet certain corrosion, overfill- and spill-protection and leak-detection requirements. The Company met this obligation prior to December 22, 1998 for all operating locations. Gasoline operations at 14 locations were closed prior to December 22, 1998. The Company has sold the locations or pulled the USTs at the unsold locations during fiscal year 2000. The Company remains responsible for specific known remediation requirements at these locations. A more complete discussion of the environmental remediation liabilities is included in the Notes to the Consolidated Financial Statements. ITEM 2. PROPERTIES Of the 603 stores in operation as of January 29, 2000, 74 store locations were owned by the Company and 529 were leased. In addition, the Company owns 10 locations and is the primary lessee for 31 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's corporate headquarters, a 47,000 square foot facility in Hudson, Ohio, is leased from a third party. In addition, the Company leases administrative offices for various regional operations. In fiscal year 2000, the Company sold its former corporate headquarters, a 77,000 square foot building and a portion of the eighty eight acres of land on which the building resides and the Company's former Northeast regional operating office building and manufacturing and processing plant located in a 33,000 square foot building. 7 10 ITEM 3. LEGAL PROCEEDINGS The Company was named as a nominal defendant, along with certain current and former directors of the Company, in two shareholder derivative actions. The two cases were consolidated as Dairy Mart Convenience Stores, Inc. Derivative Litigation in the Delaware Court of Chancery of New Castle County as consolidated C.A. No. 14713. The plaintiffs alleged, among other things, that in connection with the settlement of a dispute with respect to control of the Company between the Company's management and a shareholder, who was a former director and officer of the Company, the directors violated their fiduciary duty to the Company and its shareholders. On November 8, 1999, the parties to the litigation executed a Stipulation of Settlement ("Settlement Agreement") that provided, among other stipulations, for the following: - - The lawsuit was dismissed. - - The Company's insurance carrier was required to make a payment of $2.0 million on behalf of all the defendants to the Company, which the Company used to cover all of the attorneys' fees and expenses awarded to plaintiffs by the court. - - The Company must hold its 2000 annual meeting of its shareholders on or before May 31, 2000. The Company has selected May 25, 2000, to hold its annual meeting. The settlement agreement was conditioned upon approval by the court, which was obtained on December 13, 1999 and was also conditioned upon the Company reclassifying its Class A and Class B Common Stock into a new, single class of Common Stock. On February 8, 2000, the Company's shareholders approved the reclassification. Under the terms of the reclassification, which was effective at the open of business on February 9, 2000, each share of the former Class A Common Stock was converted into one share of the new Common Stock and each share of the former Class B Common Stock was converted into 1.1 shares of the new Common Stock. In the course of defending certain directors and officers of the Company in the Dairy Mart Convenience Stores, Inc. Derivative Litigation, the Company incurred approximately $3.9 million in legal fees. The Company expects to recover $3.0 million under the Company's director's and officer's excess liability insurance policy and as such, this amount is included in accounts receivable in the Company's Consolidated Balance Sheet as of January 29, 2000. The insurance carrier is currently disputing the claim; the Company, however, believes that it will ultimately prevail in litigation. The Company is a defendant in an action brought by a former supplier of certain dairy products to convenience stores formerly owned by the Company in Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores") entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. Dist. Ct., CT). This action was commenced on April 17, 1997, by New England Dairies, Inc. ("NED") alleging that Dairy Mart committed an anticipatory breach of a supply agreement entered into between NED and Dairy Mart on April 25, 1995 ("the Agreement"), when Dairy Mart entered into a contract with a third party to sell all company-owned and franchised convenience stores in New England, without requiring the third party purchaser to assume the Agreement. NED's complaint alleges lost profits in the amount of $3.7 million. The defendants are contesting the claims and, at this time, the Company is not able to determine what the results of this litigation will be. Trial is currently expected to take place in June or July of calendar year 2000. The Company has recognized no provision for any possible loss in the accompanying financial statements. 8 11 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET INFORMATION FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has not paid cash dividends during the last three fiscal years, and pursuant to loan covenants contained in the Company's senior revolving credit facility, as amended, is currently restricted from paying dividends and from repurchasing its capital stock. As of February 9, 2000, the Company's former Class A and Class B Common Stock were reclassified into a new, single class of Common Stock. Under terms of the reclassification, each share of the Company's former Class A Common Stock was converted into one share of the new Common Stock and each share of the former Class B Common Stock was converted into 1.1 shares of the new Common Stock. The Company's Common Stock trades on the American Stock Exchange under the symbol DMC. The following table sets forth the high and low sales prices per share of the former Class A and Class B Common Stock, as quoted on the American Stock Exchange for the last two fiscal years.
CLASS A CLASS B COMMON STOCK COMMON STOCK ------------- ------------- HIGH LOW HIGH LOW ---- ------ ----- ----- FISCAL YEAR ENDED JANUARY 29, 2000: First Quarter................................... 4 2 3/4 3 3/4 2 3/4 Second Quarter.................................. 4 3 1/2 4 3 3/8 Third Quarter................................... 5 3/8 3 3/8 5 1/2 3 3/8 Fourth Quarter.................................. 4 3/8 3 4 3/8 3 1/4
FISCAL YEAR ENDED JANUARY 30, 1999: First Quarter................................... 4 5/8 3 9/16 4 3/4 3 7/8 Second Quarter.................................. 4 1/2 3 9/16 4 3/8 3 5/8 Third Quarter................................... 4 2 7/8 4 3/8 3 Fourth Quarter.................................. 4 3/8 3 1/4 4 1/4 2 3/4
There were approximately 2,400 holders of the Company's Common Stock as of April 21, 2000. Included in this number are shares held in nominee or street names. 9 12 ITEM 6. SELECTED FINANCIAL DATA FIVE YEARS ENDED JANUARY 29, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- OPERATING RESULTS: Revenues................ $581,119 $477,047 $501,359 $585,746 $571,311 Interest expense........ 11,583 10,806 10,612 10,877 9,661 Income (loss) before income taxes......... (3,660) 175 (1,999) (2,529) (9,492) Net income (loss)....... (2,496) 25 (1,468) (1,836) (6,162) EARNINGS (LOSS) PER SHARE: Net earnings (loss) per share-basic and diluted............ (.51) .01 (.31) (.41) (1.15) BALANCE SHEET DATA: Net property and equipment............ $110,946 $ 98,829 $ 82,589 $ 89,448 $ 80,387 Total assets............ 209,799 181,331 167,647 177,805 167,188 Long-term obligations(a)....... 123,135 108,507 96,448 110,428 100,881 Stockholders' equity.... 6,869 9,257 8,988 10,214 11,459 OTHER DATA: Earnings before interest expense, income taxes, depreciation and amortization (EBITDA)(b).......... $ 21,338 $ 21,079 $ 19,319 $ 20,092 $ 12,559
- --------------- (a) Long-term obligations include the current portion of long-term obligations. (b) EBITDA is significant to the Company's calculations of its financial covenants and is defined as earnings before interest expense, income taxes and depreciation and amortization. EBITDA should not be viewed as a substitute for Generally Accepted Accounting Principles (GAAP) measurements such as net income (loss) or cash flow from operations. 10 13 FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998 (IN THOUSANDS, EXCEPT NUMBER OF LOCATIONS, GROSS PROFIT PER GALLON AND PER SHARE DATA)
2000 1999 1998 -------- -------- -------- FINANCIAL DATA: Revenues: Merchandise sales.............................. $359,906 $313,076 $306,062 Gasoline sales................................. 219,923 159,815 191,956 Other.......................................... 1,290 4,156 3,341 -------- -------- -------- Total revenues................................. $581,119 $477,047 $501,359 -------- -------- -------- Net income (loss)................................ $ (2,496) $ 25 $ (1,468) -------- -------- -------- STORE DATA: Company operated: Gross profit................................... $111,144 $103,229 $ 99,594 Average sales per store(1)..................... $ 740 $ 651 $ 590 Average gross profit per store(1).............. $ 235 $ 219 $ 200 Number of stores at year end................... 475 477 469 Franchise operated: Franchise fee.................................. $ 9,678 $ 10,255 $ 12,481 Average sales per store(1)..................... $ 642 $ 612 $ 572 Average franchise fees per store(1)............ $ 71 $ 68 $ 61 Number of stores at year end................... 128 141 158 Total stores: Gross profit................................... $120,822 $113,484 $112,075 Average sales per store(1)..................... $ 718 $ 641 $ 584 Average combined gross profit and franchise fees per store (1).......................... $ 198 $ 182 $ 160 Number of stores at year end................... 603 618 627 GASOLINE DATA: Gallons sold................................... 202,648 169,916 171,269 Gross profit................................... $ 23,141 $ 20,085 $ 21,418 Average gallons sold per location.............. 753 590 535 Gross profit per gallon........................ $ .1142 $ .1182 $ .1251 Number of gasoline locations at year end....... 283 282 293 OTHER DATA: Weighted-average number of shares in basic EPS (2)......................................... 4,869 4,823 4,749 Book value per share (3)....................... $ 1.02 $ 1.38 $ 1.32
- --------------- (1) The calculation of sales per store, gross profit per store, franchise fees per store and gasoline gallons per store is based on a weighted-average number of stores open during fiscal years 2000, 1999 and 1998, respectively. (2) The weighted-average number of shares for all periods shown reflects the impact of the 10% conversion premium on the Company's former Class B Common Stock associated with the Company's reclassification of its former Class A and Class B Common Stock into a new, single class of Common Stock. (3) The calculation utilizes total outstanding shares including the dilutive effect of stock options, stock grants and stock warrants as of January 29, 2000, January 30, 1999 and January 31,1998, respectively. 11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
PRO FORMA 2000 1999 1998 ------ ------ ----------- (UNAUDITED) Revenues............................................. $581.1 $477.0 $459.3 Cost of goods sold and expenses: Cost of goods sold................................. 435.9 339.3 333.0 Operating and administrative expenses.............. 137.3 126.7 121.9 Interest expense................................... 11.6 10.8 10.3 ------ ------ ------ 584.8 476.8 465.2 Income (loss) before income taxes.................... (3.7) 0.2 (5.9) Benefit (provision) from income taxes................ 1.2 (0.2) 1.6 ------ ------ ------ Net income (loss)............................... $ (2.5) $ 0.0 $ (4.3) Income (loss) per share......................... $(0.51) $ 0.01 $(0.93)
FISCAL YEAR 2000 RESULTS COMPARED TO FISCAL YEAR 1999 RESULTS: REVENUES Revenues for fiscal year 2000 increased $104.1 million compared to fiscal year 1999. A summary of revenues by functional area is shown below:
2000 1999 ------ ------ (IN MILLIONS) Convenience stores.......................................... $359.9 $313.0 Gasoline.................................................... 219.9 159.8 Other....................................................... 1.3 4.2 ------ ------ Total............................................. $581.1 $477.0 ====== ======
Convenience store revenues increased $46.9 million, or 15.0%, in fiscal year 2000 compared to fiscal year 1999. This increase is the result of a 11.5% increase in comparable Company operated store sales and the opening of 18 new stores during fiscal year 2000, partially offset by the closure or sale of 33 under-performing stores. Although the reduction in stores had a negative impact on revenues, it did not have a material adverse effect on results of operations. Gasoline revenues increased $60.1 million in fiscal year 2000 compared to fiscal year 1999 as a result of an increase in total gallons sold of 32.7 million, or 19.3%, and an increase in the average selling price of gasoline of 14.5 cents per gallon. Gallons of gasoline sold for comparable stores were up 4.9% from fiscal year 1999 to fiscal year 2000. All 18 new stores opened in fiscal year 2000 sell gasoline. 12 15 GROSS PROFIT Gross profit increased $7.5 million from fiscal year 1999 to fiscal year 2000. A summary of gross profit by functional area is shown below:
2000 1999 ------ ------ (IN MILLIONS) Convenience Stores.......................................... $120.8 $113.4 Gasoline.................................................... 23.1 20.1 Other....................................................... 1.3 4.2 ------ ------ Total............................................. $145.2 $137.7 ====== ======
Convenience store gross profit increased by $7.4 million in fiscal year 2000 compared to fiscal year 1999. The increase in store gross profit was a result of the increase in convenience store sales, as described above, partially offset by a decrease in overall convenience store gross profit margin. Convenience store gross profit margin decreased from 36.2% to 33.6% in fiscal year 2000 compared to fiscal year 1999. The decrease in margin was primarily the result of lower cigarette margins due to increases in the wholesale cost of cigarettes. Additionally, higher retail cigarette prices have increased carton sales, which are less profitable than sales of individual packs. Gasoline gross profit increased $3.0 million in fiscal year 2000 compared to fiscal year 1999. This increase was primarily attributable to the increase in gasoline gallons sold, as described above, partially offset by lower gross profit margin. Gross profit margin was 11.4 cents per gallon in fiscal year 2000 compared to 11.8 cents per gallon in fiscal year 1999. Gasoline gross profit margins were negatively impacted by increases in crude oil prices and wholesale gasoline costs in the fourth quarter of fiscal year 2000, and were substantially lower than the gross profit margins experienced in the previous three quarters and fiscal year when wholesale prices were considerably lower. Other revenues and gross profit decreased $2.9 million in fiscal year 2000 compared to fiscal year 1999. In fiscal year 1999, the company recognized a one-time $3.0 million pre-tax fee earned through the termination of a long-term ATM (automated teller machine) agreement. The Company's former partner in the agreement agreed to the termination fee in lieu of its on-going payment obligations under the agreement, which were approximately $130,000 per month. OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses increased $10.6 million in fiscal year 2000 compared to fiscal year 1999. A summary of operating and administrative expenses is shown below:
2000 1999 ------ ------ (IN MILLIONS) Operating expenses.......................................... $112.3 $ 99.8 General & administrative expenses........................... 25.0 26.9 ------ ------ Total............................................. $137.3 $126.7 ====== ======
The increase in operating expenses was primarily the result of an increase in store wages, employee benefits, payroll taxes, advertising expense, depreciation and store occupancy costs. Store labor costs have increased as a result of wage rate increases required to attract store associates in a low 13 16 unemployment environment and highly competitive labor market. Advertising expenses were increased to promote the Company's food service offerings as described above. Depreciation and store occupancy costs increased as a result of the Company's new store expansion program and additional capital expenditures to implement food service programs and upgrade gasoline facilities. The decrease in general and administrative expenses was primarily the result of lower salary and wage costs and a net gain on the disposition of properties in fiscal year 2000 compared to a net loss in fiscal year 1999 partially offset by (i) $0.9 million of non-recurring expenses in fiscal year 2000 incurred in a derivative litigation settlement and the reclassification of the Company's former two classes of Common Stock into a new, single class of stock (see Item 3. Legal Proceedings) and (ii) $0.5 million of expenses in fiscal year 2000 related to costs incurred relative to the Company's ongoing pursuit of a long-term gasoline supply and branding relationship for its Ohio and Michigan markets. INTEREST EXPENSE, INFLATION AND TAXES Interest expense was $11.6 million in fiscal year 2000 and $10.8 million in fiscal year 1999. The increase is due to higher borrowings under the revolving line of credit and capital leases. Inflation did not have a material effect on the Company's revenues, gross profits, operating expenses and administrative expenses other than increases in the cost of cigarettes, gasoline and labor in fiscal year 2000, as identified above. The effective tax rate for the Company was a benefit of 31.8% for fiscal year 2000 and a provision of 85.7% for fiscal year 1999. RECENT TRENDS In fiscal year 2000, particularly in the fourth quarter, the Company experienced lower gasoline gross profit margins, resulting from escalating wholesale gasoline costs, lower merchandise gross profits margins, resulting primarily from the higher wholesale costs of cigarettes, and increased store labor costs, resulting from the low unemployment rate and increased wage rates. These trends had a significant negative effect on the Company's operating results during the fourth quarter of fiscal year 2000 and are expected to have a negative effect on the Company's operating results in the first quarter of fiscal year 2001. Notwithstanding the current conditions, the Company expects that over the long term gasoline gross profit margins will increase when wholesale gasoline prices decline and that the Company's increased market share in gasoline should result in higher earnings. Additionally, to counter the negative effect of these trends on the Company's operating results for fiscal year 2001, the Company intends to (1) continue to review in-store merchandise product prices, looking for opportunities to increase gross profit margins while remaining competitive; (2) continue to place a greater emphasis on a variety of higher-margin food service products, particularly Millstone Coffee and Coca-Cola fountain programs; (3) execute the sale or closing of under-performing assets and execute a corresponding reduction in overhead expenses and debt; and (4) implement a gasoline strategy to lower product costs and increase volume. FISCAL YEAR 1999 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1998 RESULTS: During fiscal year 1998, the Company sold 156 convenience store and retail gasoline locations in the northeastern United States for $39.1 million. The Company also sold a former office and manufactur- 14 17 ing facility for $4.1 million. These transactions resulted in a pre-tax gain of $3.6 million, which has been excluded from the pro forma results shown below. The following discussion and analysis of Results of Operations for fiscal year 1999 compared to fiscal year 1998 is based on an unaudited Pro Forma Consolidated Statement of Operations for fiscal year 1998. The unaudited Pro Forma Consolidated Statement of Operations as presented below reflects the exclusion of the historical revenues, cost of goods sold, operating expenses and direct and indirect administrative expenses associated with the assets sold. Additionally, the unaudited Pro Forma Consolidated Statement of Operations for fiscal year 1998 reflects the elimination of historical interest expense related to debt retired based on the assumption that proceeds from the asset sales had been received as of the beginning of fiscal year 1998, and also reflects the elimination of the estimated income taxes associated with the excluded results of operations for the assets sold. REVENUES Revenues for fiscal year 1999 increased $17.7 million compared to fiscal year 1998. A summary of revenues by functional area is shown below:
PRO FORMA 1999 1998 ------ ------ (IN MILLIONS) Convenience stores.......................................... $313.0 $285.7 Gasoline.................................................... 159.8 170.5 Other....................................................... 4.2 3.1 ------ ------ Total............................................. $477.0 $459.3 ====== ======
Convenience store revenues increased $27.3 million, or 9.6%, in fiscal year 1999 compared to fiscal year 1998 as a result of a 9.2% increase in comparable Company operated store sales and the opening of 25 new stores during fiscal year 1999, partially offset by the closure and/or sale of 34 under-performing stores. Although the reduction in stores had a negative impact on revenues, it did not have a material adverse effect on results of operations, because the majority of stores closed and/or sold had been operating at a loss. Gasoline revenues decreased $10.7 million in fiscal year 1999 compared to fiscal year 1998 as a result of a decrease in the average selling price of gasoline of 16.0 cents per gallon primarily due to a general market decline in retail gasoline prices during fiscal year 1999. 15 18 GROSS PROFIT Gross profit increased $11.4 million from fiscal year 1998 to fiscal year 1999. A summary of gross profit by functional area is shown below:
PRO FORMA 1999 1998 ------ ------ (IN MILLIONS) Convenience stores.......................................... $113.4 $103.7 Gasoline.................................................... 20.1 19.5 Other....................................................... 4.2 3.1 ------ ------ Total............................................. $137.7 $126.3 ====== ======
Convenience store gross profit increased by $9.7 million in fiscal year 1999 compared to fiscal year 1998. The increase was a result of the increase in convenience store sales, as described above. Convenience store gross profit margin remained constant in fiscal year 1999 compared to fiscal year 1998. Gasoline gross profit increased $0.6 million in fiscal year 1999 compared to fiscal year 1998. This increase is primarily attributable to the increase in gallons sold in fiscal year 1999 compared to fiscal year 1998, offset partially by a decrease in gross profit margin of 0.7 cents per gallon. Other revenues and gross profit increased $1.1 million in fiscal year 1999 compared to fiscal year 1998. In fiscal year 1999, the Company recognized a $3.0 million one-time pre-tax fee earned through the termination of a long-term ATM (automatic teller machine) agreement. This fee was partially offset by a decrease in interest income. In fiscal year 1998, proceeds received from the sale of certain assets were invested resulting in higher interest income. OPERATING AND ADMINISTRATIVE EXPENSES Operating and administrative expenses increased $4.8 million in fiscal year 1999 compared to fiscal year 1998. A summary of operating and administrative expenses is shown below:
PRO FORMA 1999 1998 ------ ------ (IN MILLIONS) Operating expenses.......................................... $ 99.8 $ 94.7 General & administrative expenses........................... 26.9 27.2 ------ ------ Total............................................. $126.7 $121.9 ====== ======
The increase was primarily due to higher store wages, depreciation expense, repair and maintenance expenses, and certain expenses related to the relocation of the Company's information processing center from Connecticut to Ohio. These increases were partially offset by lower environmental remediation expenses. 16 19 INTEREST EXPENSE, INFLATION AND TAXES Interest expense in fiscal year 1999 increased $0.5 million compared to fiscal year 1998 as a result of increased borrowings under the Company's revolving line of credit. Inflation did not have a material effect on the Company's revenues, gross profits, operating and administrative expenses in fiscal years 1999 and 1998. The effective tax rate for the Company was a provision of 85.7% and a benefit of 26.6% for fiscal years 1999 and 1998, respectively. The higher effective tax rate in the current year is a result of nondeductible expenses related to the amortization of acquired assets. LIQUIDITY AND CAPITAL RESOURCES The Company generates substantial operating cash flow since a majority 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 Company continues to pursue expansion initiatives in its retail operations, although at a slower rate than in fiscal years 2000 and 1999 (see "Capital Expenditures"). The capital expenditures of the Company are generally funded by the excess operating cash flow available after debt service, the proceeds from the sale of property, equipment and assets held for sale and other forms of long-term asset financing or leasing including sale/leaseback transactions. Additionally, the Company has a $30.0 million senior revolving credit facility available to address the seasonality of operations and the timing of capital expenditures and certain working capital disbursements. The Company can issue up to $15.0 million of letters of credit under the facility. The facility is due and payable on April 30, 2003. As of January 29, 2000, the Company had $14.3 million in outstanding revolving credit loans and had $5.4 million in outstanding letters of credit under the facility. At the end of fiscal year 2000, the Company had $35.5 million available under forward commitments that provide real estate sale/leaseback or mortgage financing on a long-term basis to fund the real estate acquisitions associated with its new store development program. The Company accounts for these real estate sale/leaseback transactions as either operating leases or mortgages. Management believes that the cash flow from operations, the proceeds from the sale of certain assets held for sale and other forms of asset financing or leasing, supplemented by the availability under the revolving credit facility, will provide the Company with adequate liquidity and the capital necessary to achieve its expansion initiatives. CASH PROVIDED BY OPERATING ACTIVITIES During fiscal year 2000, net cash provided by operating activities was $6.3 million compared to $10.9 million for fiscal year 1999. The decrease in net cash provided by operating activities for fiscal year 2000 was primarily the result of a decrease in operating profits, an increase in accounts receivable and increased store inventory, partially offset by increased accounts payable. The increase in store inventory is the result of increased store sales and higher wholesale cigarette and gasoline costs as described above. Accounts receivable increased primarily as a result of higher vendor allowances associated with increased store sales. The increase in accounts payable is due to increased inventory and increased gasoline excise taxes payable as a result of higher gasoline gallons sold. 17 20 CASH USED FOR INVESTING ACTIVITIES Net cash used for investing activities was $16.5 million and $19.7 million for fiscal years 2000 and 1999, respectively. The decrease in cash used for investing activities during fiscal year 2000 compared to fiscal year 1999 was primarily the result of decreased purchases of property and equipment. The Company opened 18 new stores in fiscal year 2000 compared to 25 new stores in fiscal year 1999. (See "Capital Expenditures" section below and "New Stores" section of Item 1. Business for further discussion of the Company's capital spending plans.) CASH PROVIDED BY FINANCING ACTIVITIES Net cash used for financing activities was $14.6 million and $8.4 million for fiscal years 2000 and 1999, respectively. In fiscal year 2000, the Company borrowed $10.4 million, net of repayments, under capital leases and real estate mortgages, which were used to support the Company's new store expansion program. In fiscal year 2000, the Company's net borrowings under its revolving credit facility were $4.1 million compared to $10.2 million in fiscal year 1999. CAPITAL EXPENDITURES The Company anticipates spending approximately $15.3 million, net of sale/leaseback transactions, for capital expenditures in fiscal year 2001 by purchasing store and gasoline equipment for up to fifteen new stores, remodeling a certain number of existing store and gasoline locations and implementing and/or upgrading office and store technology. ENVIRONMENTAL RESPONSIBILITY The Company's financial statements are in conformity with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities," which provides guidance on specific accounting issues that are present in the recognition, measurement and disclosure of environmental remediation liabilities. The Company accrues its estimate of all costs to be incurred for assessment and remediation with respect to the release of regulated substances from existing and previously operated retail gasoline facilities. For a related discussion on environmental liabilities, see the Notes to the Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK The Company does not have any instruments that it believes would be materially affected by any future interest rate changes. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company and its Subsidiaries and notes thereto, appear on pages 27 through 58 of this Form 10-K. The required Supplementary Data appears on page 60 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 21 PART III Information required by Items 10, 11, 12 and 13 (Directors and Executive Officers of The Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; and Certain Relationships and Related Transactions) is incorporated herein by reference from the sections entitled "INFORMATION CONCERNING NOMINEES AND CERTAIN EXECUTIVE OFFICERS," "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND VOTING RIGHTS," "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS," "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS" and "CERTAIN TRANSACTIONS" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year 2000. 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 25. (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, is filed herewith. (3.2) 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 November 2, 1996 and is 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, and 10.24 hereto, and those instruments filed as Exhibit 4.1 of the Company's Registration Statement on Form S-1 (Registration No. 33-639) dated November 5, 1985, which are incorporated herein by reference.
19 22 (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 holders of the Company's Warrants include the Form of Stock Purchase Warrants filed as Exhibits 10.13 and 10.14 thereto was filed as Exhibit 4.3 of the Company's Form 10-K for the fiscal year ended February 3, 1996 and is incorporated herein by reference. (10) Material Contracts. (10.1) Credit Agreement dated as of December 28, 1999, among the Company, the Banks from time to time parties hereto and Citizens Bank of Connecticut, as agent, and related schedules and First Amendment thereto dated January 28, 2000 is filed herewith. (10.2) Asset Purchase Agreement dated March 6, 1997, among Dairy Mart Convenience Stores, Inc. and DB Companies, Inc. was filed as Exhibit 2.1 of the Company's Form 8-K for the June 21, 1997 event and is incorporated herein by reference. (10.3) Closing agreement dated June 19, 1997, between Dairy Mart Convenience Stores, Inc. and DB Companies, Inc. was filed as Exhibit 2.2 of the Company's Form 8-K for the June 21, 1997 event and is incorporated herein by reference. (10.4) 1990 Stock Option Plan was filed as Exhibit 10.6 to the Company's Form 10-K for the fiscal year ended January 30, 1999 and is incorporated herein by reference. (10.5) Amended and Restated 1995 Stock Option and Incentive Award Plan was filed as Exhibit A to the Company's 1998 Annual Proxy Statement filed on Schedule 14A on May 29, 1998 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. is filed herewith. (10.8) Employment agreement between the Company and Gregory G. Landry is filed herewith. (10.9) 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. (10.10) 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.
20 23 (10.11) Form of Stock Purchase Warrant to Subscribe for and Purchase Shares of Common Stock of the Company (Initially Exercisable for an Aggregate of 1,215,000 Shares of 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. (10.12) Form of Stock Purchase Warrant to Subscribe for and Purchase Shares of Common Stock of the Company (Initially Exercisable for an Aggregate of 500,000 Shares of 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. (10.13) 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 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. (10.14) 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. (10.15) 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. (10.16) 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. (10.17) DM Associates Limited Partnership Agreement, dated March 12, 1992, was filed as Exhibit E of the Company's Schedule 13D dated March 12, 1992, filed by DM Associates Limited Partnership, DM Management Associates and Frank Colaccino and is incorporated herein by reference. (10.18) 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. (10.19) 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.
21 24 (10.20) 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. (10.21) Rights Agreement dated as of January 19, 1996 between the Company and the First National Bank of Boston, as Rights 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. (10.22) Third Amendment to Partnership Agreement of new DM Management Associate I, dated as of December 12, 1997, was filed as Exhibit 1 of the Company's Form 8-K for the December 12, 1997 event and is incorporated herein by reference. (10.23) Dairy Mart Convenience Stores, Inc. Supplemental Executive Retirement Plan was filed as Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended January 30, 1999 and is incorporated herein by reference. (10.24) Directors Deferred Compensation Plan was filed as Exhibit 10.27 to the Company's Form 10-K for the fiscal year ended January 30, 1999 and is incorporated herein by reference. (10.25) Employment agreement between the Company and J. Wayne Colley dated January 18, 2000, is filed herewith. (10.26) Nonqualified Deferred Compensation Plan is filed herewith. (18.1) Preferability letter of Arthur Andersen LLP regarding change in accounting policy relating to the change in inventory valuation methods filed as Exhibit 18.1 to the Company's Form 10-K for the fiscal year ended January 30, 1999 and is incorporated herein by reference (21) Subsidiaries of the Company was filed as Exhibit 21 of the Company's Form 10-K for the fiscal year ended February 3, 1996 and is incorporated herein by reference (23) Consent of Arthur Andersen LLP to the incorporation of their reports included in this Form 10-K, for the fiscal year ended January 29, 2000, into the Company's previously filed Registration Statements on Forms S-8. (27) Financial Data Schedule (99) Additional Exhibits (99.1) NONE (b) Reports on Form 8-K NONE No Financial Statements were filed with any of the Current Report. (c) See (3) above (d) See (2) above
22 25 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: 4/21/00 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 Vice Chairman and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Dated: 4/21/00 /s/ ROBERT B. STEIN, JR. --------------------------------------- Robert B. Stein, Jr. President, Chief Executive Officer, Chairman of the Board (Principal Executive Officer) and Director Dated: 4/21/00 /s/ GREGORY G. LANDRY --------------------------------------- Gregory G. Landry Vice Chairman, Chief Financial Officer, (Principal Financial and Accounting Officer) and Director Dated: 4/21/00 /s/ ALBERT T. ADAMS --------------------------------------- Albert T. Adams Director Dated: 4/21/00 /s/ FRANK W. BARRETT --------------------------------------- Frank W. Barrett Director
23 26 Dated: 4/21/00 /s/ J. KERMIT BIRCHFIELD, JR. --------------------------------------- J. Kermit Birchfield, Jr. Director Dated: 4/21/00 /s/ JOHN W. EVERETS --------------------------------------- John W. Everets Director Dated: 4/21/00 /s/ WILLIAM A. FOLEY --------------------------------------- William A. Foley Director Dated: 4/21/00 /s/ THOMAS W. JANES --------------------------------------- Thomas W. Janes Director
24 27 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K PAGE --------- Report of Independent Public Accountants on Consolidated Financial Statements...................................... 26 Consolidated Statements of Operations for the Fiscal Years Ended January 29, 2000, January 30, 1999, and January 31, 1998...................................................... 27 Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.......................................... 28 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended January 29, 2000, January 30, 1999 and January 31, 1998.......................................... 29 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 29, 2000, January 30, 1999 and January 31, 1998...................................................... 30 Notes to Consolidated Financial Statements for the Fiscal Years Ended January 29, 2000, January 30, 1999 and January 31, 1998.................................................. 31-58 Report of Independent Public Accountants on Schedule II..... 59 Schedule II................................................. 60
25 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Dairy Mart Convenience Stores, Inc.: We have audited the accompanying consolidated balance sheets of Dairy Mart Convenience Stores, Inc. (a Delaware corporation) and Subsidiaries as of January 29, 2000 and January 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 29, 2000. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dairy Mart Convenience Stores, Inc. and Subsidiaries as of January 29, 2000, and January 30, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 29, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, April 21, 2000. 26 29 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 -------- -------- -------- Revenues (including excise taxes of $34,865, $31,265 and $29,641)........................... $581,119 $477,047 $501,359 Cost of goods sold and expenses: Cost of goods sold............................. 435,867 339,308 364,525 Operating and administrative expenses.......... 137,329 126,758 128,221 Interest expense............................... 11,583 10,806 10,612 -------- -------- -------- 584,779 476,872 503,358 -------- -------- -------- Income (loss) before income taxes.............. (3,660) 175 (1,999) Benefit (provision) from income taxes.......... 1,164 (150) 531 -------- -------- -------- Net income (loss).............................. $ (2,496) $ 25 $ (1,468) ======== ======== ======== Earnings (loss) per share........................ $ (.51) $ .01 $ (0.31)
The accompanying notes are an integral part of these financial statements. 27 30 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 -------- -------- ASSETS Current assets: Cash...................................................... $ 7,702 $ 3,367 Short-term investments.................................... 155 2,724 Accounts and notes receivable, net........................ 20,499 15,541 Inventory................................................. 34,804 24,293 Prepaid expenses and other current assets................. 1,704 2,324 Deferred income taxes..................................... 2,393 1,520 -------- -------- Total current assets................................. 67,257 49,769 Assets held for sale........................................ 2,392 6,327 Property and equipment, net................................. 110,946 98,829 Intangible assets, net...................................... 14,582 15,452 Other assets, net........................................... 14,622 10,954 -------- -------- Total assets......................................... $209,799 $181,331 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations............... $ 3,091 $ 4,056 Accounts payable.......................................... 50,916 35,685 Accrued expenses.......................................... 11,651 15,378 Accrued interest.......................................... 3,490 3,713 -------- -------- Total current liabilities......................... 69,148 58,832 -------- -------- Long-term obligations, less current portion above........... 120,044 104,451 Other liabilities........................................... 13,738 8,791 Commitments and contingencies (Notes 6, 7, 13) Stockholders' equity: Preferred stock (serial), par value $.01, 1,000 shares authorized, no shares issued........................... -- -- Common stock, par value $.01, 30,000 shares authorized, 6,949 and 6,909 issued................................. 69 69 Paid-in capital........................................... 32,107 31,999 Retained deficit.......................................... (10,302) (7,806) Treasury stock, at cost................................... (15,005) (15,005) -------- -------- Total stockholders' equity........................... 6,869 9,257 -------- -------- Total liabilities and stockholders' equity........... $209,799 $181,331 ======== ========
The accompanying notes are an integral part of these financial statements. 28 31 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998 (IN THOUSANDS)
COMMON STOCK ------------------------------------------------------- NOTE CLASS CLASS RETAINED TREASURY STOCK RECEIVABLE A B COMMON PAID-IN EARNINGS ----------------- FROM DM SHARES SHARES SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT ASSOCIATES ------ ------ ------ ------ ------- --------- ------ -------- ---------- Balance February 1, 1997 -- as previously stated....... 3,544 2,925 -- $64 $30,561 $ (5,406) 698 $ (5,005) $(10,000) Conversion premium on former Class B shares (see Note 9)......................... -- 284 -- 3 954 (957) 18 -- -- Reclassification of former Class A and Class B shares into single class common stock (see Note 9)......... (3,544) (3,209) 6,753 -- -- -- -- -- -- ------ ------ ----- --- ------- -------- ----- -------- -------- Balance February 1, 1997 -- as restated................ -- -- 6,753 67 31,515 (6,363) 716 (5,005) (10,000) Issuance of common stock... -- -- 78 1 241 -- -- -- -- Note receivable from DM.... -- -- -- -- -- -- -- -- -- Associates............... -- -- -- -- -- -- -- -- 10,000 Purchase of treasury stock.................... -- -- -- -- -- -- 1,342 (10,000) -- Net loss................... -- -- -- -- -- (1,468) -- -- -- ------ ------ ----- --- ------- -------- ----- -------- -------- Balance January 31, 1998..... -- -- 6,831 68 31,756 (7,831) 2,058 (15,005) -- Issuance of common stock... -- -- 78 1 243 -- -- -- -- Net income................. -- -- -- -- -- 25 -- -- -- ------ ------ ----- --- ------- -------- ----- -------- -------- Balance January 30, 1999..... -- -- 6,909 69 31,999 (7,806) 2,058 (15,005) -- ISSUANCE OF COMMON STOCK... -- -- 40 -- 108 -- -- -- -- NET LOSS................... -- -- -- -- -- (2,496) -- -- -- ------ ------ ----- --- ------- -------- ----- -------- -------- BALANCE JANUARY 29, 2000..... -- -- 6,949 $69 $32,107 $(10,302) 2,058 $(15,005) -- ====== ====== ===== === ======= ======== ===== ======== ========
The accompanying notes are an integral part of these financial statements. 29 32 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $ (2,496) $ 25 $ (1,468) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 13,576 10,252 10,842 Change in deferred income taxes................. (1,420) 127 (1,289) (Gain) loss on dispositions of properties, net.......................................... (577) 710 (1,856) Net changes in assets and liabilities: Accounts and notes receivable................... (5,512) 1,138 (4,562) Inventory....................................... (10,511) (3,205) (22) Accounts payable................................ 15,231 4,388 607 Accrued interest................................ (223) 146 (68) Other assets and liabilities.................... (1,761) (2,690) 5,692 -------- -------- -------- Net cash provided by operating activities....... 6,307 10,891 7,876 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments.............. -- -- (2,096) Proceeds from sale of short-term investments.... 2,569 905 -- Purchase of property & equipment................ (41,878) (52,398) (31,604) Proceeds from sale of property, equipment and assets held for sale......................... 22,254 30,760 32,552 Increase in long-term notes receivable.......... (442) (1,176) (653) Proceeds from collection of long-term notes receivable................................... 1,275 1,544 998 (Increase) decrease in intangibles and other assets....................................... (325) 642 1,317 -------- -------- -------- Net cash (used for) provided by investing activities...................................... (16,547) (19,723) 514 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on revolving loan, net............... 4,096 10,200 (10,280) Borrowings of long-term obligations............. 14,882 -- -- Repayment of long-term obligations.............. (4,511) (2,051) (3,836) Issuance of common stock........................ 108 244 242 -------- -------- -------- Net cash (used for) provided by financing activities...................................... 14,575 8,393 (13,874) -------- -------- -------- Increase (decrease) in cash....................... 4,335 (439) (5,484) Cash at beginning of year......................... 3,367 3,806 9,290 -------- -------- -------- Cash at end of year............................... $ 7,702 $ 3,367 $ 3,806 ======== ======== ======== SUPPLEMENTAL DISCLOSURES: Cash (paid) refunded during the year -- Interest................................... $(11,806) $(10,661) $(10,544) Income taxes refunded...................... 119 381 1,188 Non-cash investing and financing activities -- Note receivable from DM Associates......... -- -- 10,000 Purchase of treasury stock................. -- -- (10,000)
The accompanying notes are an integral part of these financial statements. 30 33 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998 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 7 states in the Midwest and the Southeast United States. The stores offer a wide range of products including groceries, dairy products, snack foods, tobacco products, lottery tickets, beverages, general merchandise, health and beauty aids and deli products. Fiscal Year -- The Company's fiscal year ends on the Saturday closest to January 31. There were 52 weeks included in the fiscal years ended January 29, 2000, January 30, 1999 and January 31,1998. Use of Estimates in the Preparation of Financial Statements -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 Investments -- As of January 29, 2000, the Company's short-term investments consisted of over-night investment securities. As of January 30, 1999, the Company's short-term investments consisted of U.S. Treasury Bills having original maturities of less than one year. The Company accounted for these investments as being available for sale. As of January 29, 2000, and January 30, 1999, the fair values of the short-term investments approximated cost. Inventory -- The Company's 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 amounts the Company may ultimately realize could differ materially from the amounts assumed in arriving at the carrying value. Assets held for sale at the end of fiscal year 1999 included $5.1 million for the Company's former headquarters, office building and manufacturing and processing plant in Enfield, Connecticut. The Company sold both facilities and a portion of the underlying land in fiscal year 2000 and recognized a net gain of $1.0 million. 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.................................................. 5-30 years
31 34 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Leasehold improvements are amortized primarily over the lesser of 10 years or the term of the lease. Long-lived Assets -- Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable. Measurement of the amount of the impairment may be based on market values of similar assets or estimated discounted future cash flows resulting from use and ultimate disposition of the asset. Management has determined that there has been no material impairment to any long-lived assets as of January 29, 2000. Self Insurance Reserves -- The Company is self-insured for certain property, liability, accident and health insurance risks, and establishes reserves for estimated outstanding claims based on its historical claims experience and reviews by third-party loss reserves specialists. The Company has purchased insurance coverage for losses that may occur above certain levels. As of January 29, 2000 and January 30, 1999, the Company had established reserves for these risks of $1,843,000 and $2,878,000, respectively, which are recorded on a present value basis using a risk-free rate of return to discount the liability. The ultimate amount of these liabilities could differ from these estimates. At January 29, 2000 and January 30, 1999, the risk-free rates of return were 6.65% and 4.80%, respectively. Fair Value of Financial Instruments -- The Company has disclosed the fair value, related carrying value and method of 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 in exchange for the Company providing merchandising, advertising, store audit, and other operating and administrative support services, as well as revenues derived from initial fees and the gain on sale of store assets to franchisees. Franchise revenues were $9,678,000, $10,255,000 and $12,481,000 for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998, respectively. Store Preopening and Closing Costs -- Consistent with the requirements of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," 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 the present value of estimated future 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. During fiscal year 1996, the Company acquired a $10,000,000 note receivable from DM Associates Limited Partnership (DM Associates) collateralized by 1,342,000 shares of the 32 35 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company's Common Stock (Pledged Shares). In fiscal year 1998, DM Associates relinquished its right to the Pledged Shares in satisfaction of the note principal and therefore these shares are reflected as treasury stock for earnings (loss) per share purposes. On February 9, 2000 the Company's former Class A and former Class B Common Stock were reclassified into a new, single class of Common Stock (see Note 9). Under terms of the reclassification, each share of the Company's former Class A Common Stock was converted into one share of the new Common Stock and each share of the former Class B Common Stock was converted into 1.1 shares of the new Common Stock. The impact of the 10% conversion premium for the former Class B shares has been incorporated into EPS calculations for all periods shown. The weighted-average number of shares used in the calculation of basic earnings (loss) per share is 4,868,664, 4,823,154 and 4,749,022 for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998, respectively. Dilutive earnings per share has not been presented as the Company's basic and dilutive earnings per share are equal for fiscal years 2000, 1999 and 1998. New Authoritative Accounting Pronouncements -- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires companies to recognize all derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB delayed the effective date of this Statement for one year to fiscal years beginning after June 15, 2000. The FASB cited the reason for this delay was to address concerns about a company's ability to modify its information systems and educate its managers in time to apply this Statement. The Company anticipates it will adopt this Statement on February 4, 2001 and is in the process of determining the effect that adoption will have on its financial statements. Reclassifications -- Certain amounts in the prior periods' Consolidated Financial Statements have been reclassified to conform to the presentation used for the current period. 33 36 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ACCOUNTS AND NOTES RECEIVABLE: A summary of accounts and notes receivable as of January 29, 2000 and January 30, 1999 is as follows:
2000 1999 ------- ------- (IN THOUSANDS) Franchise accounts receivable............................... $ 3,338 $ 4,293 Franchise notes receivable.................................. 1,729 2,894 Marketing allowances........................................ 8,374 4,665 Other receivables........................................... 15,679 8,810 ------- ------- 29,120 20,662 Less allowance for doubtful accounts and notes receivable... (2,063) (2,074) ------- ------- Net accounts and notes receivable........................... 27,057 18,588 Less noncurrent notes receivable (included in other assets)................................................... (6,558) (3,047) ------- ------- Current accounts and notes receivable....................... $20,499 $15,541 ======= =======
The carrying amount of current accounts and notes receivable approximates fair value because of the short maturity of those receivables. The fair value of the Company's noncurrent notes receivable is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of January 29, 2000 and January 30, 1999, the fair values of the noncurrent notes receivable approximate their carrying values. 3. PROPERTY AND EQUIPMENT: A summary of property and equipment as of January 29, 2000 and January 30, 1999 is as follows:
2000 1999 -------- -------- (IN THOUSANDS) Land and improvements....................................... $ 5,543 $ 5,779 Building and leasehold improvements......................... 42,189 32,156 Equipment................................................... 118,889 108,517 Assets under capital leases................................. 5,331 6,259 -------- -------- 171,952 152,711 Less accumulated depreciation and amortization.............. (61,006) (53,882) -------- -------- Property and equipment, net................................. $110,946 $ 98,829 ======== ========
34 37 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INTANGIBLE ASSETS: A summary of intangibles as of January 29, 2000 and January 30, 1999 is as follows:
2000 1999 ------- ------- (IN THOUSANDS) Goodwill.................................................... $13,907 $14,003 Franchise and operating rights.............................. 10,104 10,104 ------- ------- 24,011 24,107 Less accumulated amortization............................... (9,429) (8,655) ------- ------- Intangible assets, net...................................... $14,582 $15,452 ======= =======
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 on an undiscounted basis. Management has determined that there has been no material impairment to goodwill or franchise and operating rights as of January 29, 2000. 5. ACCRUED EXPENSES: A summary of accrued expenses as of January 29, 2000 and January 30, 1999 is as follows:
2000 1999 ------- ------- (IN THOUSANDS) Accrued salaries and wages.................................. $ 4,274 $ 4,286 Accrued environmental assessment and remediation............ 2,390 2,797 Other accrued expenses...................................... 4,987 8,295 ------- ------- Total accrued expenses...................................... $11,651 $15,378 ======= =======
35 38 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM OBLIGATIONS: The Company had the following long-term obligations as of January 29, 2000 and January 30, 1999:
Jan. 30, JANUARY 29, 2000 1999 INTEREST MATURITY ------------------------------ -------- RATE (FISCAL YR.) CURRENT LONG-TERM TOTAL TOTAL -------------- ------------ ------- --------- -------- -------- (IN THOUSANDS) Senior subordinated notes (Series A Notes)....... 10.25% 2005 $ -- $ 75,000 $ 75,000 $ 75,000 Senior subordinated notes (Series B Notes) net of original issue discount of $1,002.............. 10.25% 2005 -- 12,498 12,498 12,337 Senior revolving credit facility............... Various 2004 -- 14,296 14,296 10,200 Real estate mortgage notes payable.......... 9.97%-10.75% 2007-2021 118 5,123 5,241 2,993 Small Business Administration debentures............. 6.875%-8.33% 2002-2006 -- 3,130 3,130 3,130 Equipment financing...... 7.5%-11.81% 2001-2009 2,973 9,997 12,970 4,847 ------ -------- -------- -------- $3,091 $120,044 $123,135 $108,507 ====== ======== ======== ========
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 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 of a former majority stockholder of the Company and certain of his affiliates in DM Associates (see Note 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 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 Common Stock of the Company. The warrants may be exercised any time until December 1, 2001. The initial exercise price of the warrants was $6.95 per share, which was adjusted in December 1996, to $5.45 per share. Due to the anti-dilution provisions of the warrants and the Company's reclassification of former Class A and Class B Common Stock into a new, single class of Common Stock, the number of warrants increased to 1,823,389 and the exercise price of the warrants was adjusted to $5.13 per share. The exercise price may be adjusted further based upon the occurrence of various events, including stock dividends and issuance of Common Stock by the 36 39 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Common Stock. The Series A and Series B Notes (collectively, the "Notes") are redeemable, at the option of the Company, beginning March 15, 1999 at rates starting at 104.75% of the principal amount reduced annually through March 15, 2002, at which time they become redeemable at 100% of the 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 the Notes will have the right to require the Company to repurchase such holder's Notes at 101% of the principal amount thereof. The original issue discount amortization related to the Series B Notes of $160,980, $153,904 and $136,319 is included in interest expense for the fiscal years January 29, 2000, January 30, 1999 and January 31, 1998, respectively. The Company is party to a $30,000,000 senior revolving credit facility, of which up to $15,000,000 is available for the issuance of letters of credit. The outstanding balance is due and payable on April 30, 2003; however, the Company may extend such date for up to two additional one-year periods with the consent of the lenders. Interest on revolving credit loans is computed at an applicable margin over the agent bank's base rate or the LIBOR rate, at the option of the Company. The applicable margin, if any, is based upon the ratio of consolidated indebtedness to consolidated EBITDA, as defined below. The credit agreement, which has been amended effective January 28, 2000, to revise certain covenants, 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 (reduced by an amount equal to cash and store properties held for sale/leaseback as defined in the credit agreement) to earnings before interest expense, taxes, depreciation and amortization (EBITDA); EBITDA to interest expense; EBITDA plus 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. At January 29, 2000, the Company was in compliance with all covenants. 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 January 29, 2000, taking into account such limitations, the Company would not have been able to pay cash dividends. In fiscal year 2000, the Company entered into capital lease agreements of $9.8 million for equipment and $5.0 million in real estate mortgages which were used to support new store development. In fiscal year 1999, the Company entered into a capital lease agreement of $3.8 million for new store equipment. 37 40 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of January 29, 2000 and January 30, 1999, respectively, the fair values of the real estate mortgage notes payable, Small Business Administration debentures, equipment financing and capital leases, approximated their respective carrying amounts. Fair values of obligations are based on rates available to the Company for debt with similar terms and maturities. As of January 29, 2000 and January 30, 1999, the fair value of the Series A and Series B Notes, net of original issue discount, approximated the carrying amount. The fair value of the Notes was based on quoted market prices as of January 29, 2000 and January 30, 1999, respectively. The revolving credit facility is a variable rate loan, and thus, the fair value approximates the carrying amount as of January 29, 2000. As of January 29, 2000, maturities on long-term obligations for the next five years and thereafter, are as follows:
FISCAL YEAR ----------- (IN THOUSANDS) 2001................................ $ 3,091 2002................................ 5,691 2003................................ 3,703 2004................................ 17,651 2005................................ 87,735 Thereafter.......................... 5,264 -------- $123,135 ========
7. OPERATING LEASES: The Company leases operating properties, including store locations and office space, under various lease agreements expiring through fiscal year 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 net of subleases as of January 29, 2000 is as follows:
NET OPERATING FISCAL YEAR LEASES ----------- -------------- (IN THOUSANDS) 2001................................ $ 15,165 2002................................ 13,146 2003................................ 11,403 2004................................ 10,100 2005................................ 9,141 Thereafter.......................... 67,505 -------- Total............................... $126,460 ========
38 41 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rental expense for all operating leases was as follows:
2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Leases............................................... $16,691 $13,746 $13,224 Less subleases....................................... 1,592 1,999 2,509 ------- ------- ------- Net.................................................. $15,099 $11,747 $10,715 ======= ======= =======
8. FEDERAL AND STATE INCOME TAXES: The (provision) benefit from income taxes for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998 was as follows:
2000 1999 1998 ------ ----- ----- (IN THOUSANDS) Current provision Federal................................................ $ (102) $ (23) $(286) State and Local........................................ (249) -- (472) ------ ----- ----- Total current provision........................ (351) (23) (758) ------ ----- ----- Deferred (provision) benefit Federal................................................ 1,299 (103) 811 State and Local........................................ 216 (24) 478 ------ ----- ----- Total deferred (provision) benefit............. 1,515 (127) 1,289 ------ ----- ----- Total (provision) benefit................................ $1,164 $(150) $ 531 ====== ===== =====
The Company is subject to minimum state taxes in excess of statutory state income taxes in many of the states in which it operates. A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate follows:
PERCENT OF PRETAX INCOME (LOSS) -------------------- 2000 1999 1998 ---- ---- ---- Statutory federal income tax rate........................... (34%) 34% (34%) Increase (decrease) from: State income tax net of federal tax effect................ (1) 14 (1) Nondeductible expenses and amortization of acquired assets................................................. 3 38 8 --- -- --- Effective income tax rate................................... (32%) 86% (27%)
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which 39 42 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the differences are expected to reverse. Significant deferred tax assets (liabilities) as of January 29, 2000 and January 30, 1999 were as follows:
2000 1999 -------- -------- (IN THOUSANDS) Capitalized leases.......................................... $ 442 $ 161 Depreciation and amortization............................... (14,814) (13,624) Vacation accrual............................................ 296 277 Reserve for asset valuations................................ 838 842 Insurance reserves not deductible for tax purposes.......... 740 1,082 Income deferred for financial statement purposes............ 3,828 3,341 Reserve for closed stores and renovations................... 221 455 Accrued restructuring and severance reserves................ 0 27 Write-down of non-operating properties...................... 0 1,185 Environmental reserves...................................... (503) (27) Tax credits and net operating loss carryforwards............ 13,921 9,650 Other....................................................... (209) (27) -------- -------- Net deferred tax asset...................................... $ 4,760 $ 3,342 ======== ========
As of January 29, 2000, the Company had alternative minimum tax credits aggregating $256,000 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 $1,914,000 of targeted jobs credit carryforwards that expire, if unused, during fiscal years 2007 to 2011 and $338,000 of foreign tax credit carryforwards that expire, if unused, in fiscal years 2001 to 2005. The Company and its subsidiaries file a consolidated federal income tax return but generally file separate state income tax returns. As of January 29, 2000, the Company had a capital loss carryforward of $1,610,000 that will expire in fiscal year 2003. As of January 29, 2000, the Company had regular federal income tax net operating loss carryforwards of $27,033,000 which expire, if unused, during fiscal years 2011 to 2020 and net operating loss carryforwards for state income tax purposes of $36,700,000 which expire, if unused, during fiscal years 2001 to 2014. Realization of the net operating loss carryforwards and tax credits are dependent on the successful implementation of tax-planning strategies 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. No valuation allowance for deferred tax assets was provided as of January 29, 2000 and January 30, 1999. 40 43 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMON STOCK RECLASSIFICATION: On February 8, 2000, the Company's shareholders approved a reclassification of the Company's then existing Class A Common Stock and Class B Common Stock into a new, single class of common stock. Under terms of the reclassification, which became effective February 9, 2000, each share of the Company's former Class A Common Stock was converted into one share of the new Common Stock and each share of the former Class B Common Stock was converted into 1.1 shares of the new Common Stock. Each share of the new Common Stock is entitled to one vote on all matters and will vote on the election of all directors. Prior to the reclassification, holders of Class A Common Stock had one-tenth vote per share and were entitled to elect 25% of the Board of Directors so long as the number of outstanding shares of Class A Common Stock was at least 10% of the total number of all Common Stock outstanding. Holders of Class B Common Stock had one vote per share. On the effective date of the reclassification, 2,835,637 of the former Class B shares were issued, of which 1,439,680 were outstanding and 1,395,957 were held in treasury. The 10% conversion premium created approximately 283,563 new shares. Based on the closing price of $3.375 for the Class B shares on February 8, 2000, the final day the shares traded, $2,836 and $954,192 were transferred from retained deficit to the Common Stock and Paid-in Capital accounts, respectively. The conversion premium applicable to the treasury shares created approximately 139,596 shares (which are included in the 283,563 shares above), of which, 17,956 shares have been included in the re-stated February 1, 1997 balance and 122,000 shares have been included in the fiscal year 1998 purchase of treasury shares. The shares held in treasury remain stated at their cost. 10. CAPITAL STOCK: In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under the SRP, each holder of Common Stock received 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 June 1986, the stockholders approved an Employee Stock Purchase Plan. The plan, as amended in September, 1996, provides that employees may purchase quarterly, through payroll deductions, up to 1,000 shares of Common Stock at 85% of the market value. Of the original 1,250,000 shares provided for under this plan, 983,319 shares remained available for issuance as of January 29, 2000. As of January 29, 2000, January 30,1999 and January 31,1998, the Company held 2,057,178 shares of Common Stock as treasury stock. 11. STOCK OPTION PLANS, GRANTS AND WARRANTS: In general, the Company's stock option plans provide for the granting of options to purchase the Company's shares at the market price of such shares as of the option grant date. The options generally have a ten year term and vest and become exercisable on a pro rata basis over four years. All options to purchase the Company's former Class B Common Stock have been adjusted for the 41 44 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reclassification of the Company's Common Stock (see Note 9) by increasing the number of options for the 10% conversion premium and dividing the exercise price by 1.1. In fiscal year 1996, and subsequently amended in fiscal year 1998, the Company adopted a Stock Option and Incentive Award Plan ("Award Plan") and a non-qualified Stock Option Plan for Outside Directors ("Outside Directors Plan"). The Award Plan provides for the granting of stock awards and options to employees up to a total of 1,150,000 shares of common stock. In fiscal years 2000, 1999 and 1998, the Company granted incentive stock options of 246,000, 271,844, and 125,000, respectively. As of January 29, 2000, the Company had available for grant under the Award Plan options to purchase 267,156 shares of Common Stock after considering the lapse of options previously granted. The Outside Directors Plan provides for the initial grant of an option to purchase 3,500 shares of the Company's Common Stock to each non-employee director and an annual grant of an option to purchase 3,500 shares. The maximum number of shares reserved for issuance under this plan, as amended, is 150,000. The Company granted 24,500 and 52,500 non-qualified stock options in fiscal years 2000 and 1999, respectively. The Company did not grant any stock options under the Outside Directors Plan in fiscal year 1998. As of January 29, 2000 the Company had available for grant under the Outside Directors Plan options to purchase 45,000 shares of common stock, after considering lapses. During fiscal year 1998 the Company awarded, pursuant to the Award plan, restricted stock grants consisting of an aggregate of 288,750 shares of the Company's Common Stock. No shares were awarded in fiscal years 2000 or 1999. No compensation was recorded with respect to the shares awarded under the Award Plan. The Company adopted Stock Option Plans in 1985 and 1990 providing for the granting of options to employees up to an aggregate of 226,875 shares of the former Class B Common Stock and 750,000 shares of the former Class A Common Stock. The Company granted incentive stock options pursuant to these Plans totaling 61,906 in fiscal year 1999. No options were granted from these plans in fiscal year 2000 or fiscal year 1998. As of January 29, 2000 no further options are available for grant under either plan. In addition to the stock options granted under the above plans, the Company granted 15,000 and 47,500 non-qualified stock options in fiscal years 1999 and 1998, respectively, which are not part of a specific plan. The Company did not grant any stock options that are not part of a specific plan in fiscal year 2000. Pro forma information regarding net loss and loss per share required by SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options 42 45 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
2000 1999 1998 ----- ----- ----- Risk-free interest rates................................. 6.94% 5.73% 6.19% Expected dividend yield.................................. --% --% --% Expected volatility...................................... 38.09% 40.12% 42.64% Expected life in years................................... 9.50 9.50 9.50
For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
2000 1999 1998 ------- ------ ------- Pro forma net loss.................................... $(2,545) $ (243) $(1,645) Pro forma loss per share.............................. $ (0.52) $(0.05) $ (0.35)
The pro forma effect on net loss for fiscal years 2000, 1999 and 1998 is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal year 1996. A summary of the Company's stock option activity and related information for the fiscal years ended January 29, 2000, January 30,1999 and January 31, 1998, is as follows:
WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE -------------- ---------------- (IN THOUSANDS) Outstanding as of February 1, 1997.................... 641 $3.64 Granted............................................... 172 4.49 Exercised............................................. (62) 2.84 Forfeited............................................. (84) 3.58 ----- Outstanding as of January 31,1998..................... 667 3.95 Granted............................................... 402 4.03 Exercised............................................. (53) 2.80 Forfeited............................................. (75) 5.03 ----- Outstanding as of January 30, 1999.................... 941 3.96 GRANTED............................................... 271 3.21 EXERCISED............................................. (21) 2.75 FORFEITED............................................. (73) 4.34 ----- OUTSTANDING AS OF JANUARY 29, 2000.................... 1,118 3.78 =====
43 46 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted-average fair values of stock options granted during fiscal years 2000, 1999 and 1998 were $1.93, $4.20 and $3.26, respectively. The following table summarizes information about the Company's stock options outstanding as of January 29, 2000:
WEIGHTED WEIGHTED-AVERAGE AVERAGE REMAINING GRANT OPTIONS OPTIONS EXERCISE CONTRACTUAL PRICE RANGE OUTSTANDING EXERCISABLE PRICE LIFE (YEARS) ----------- ----------- ----------- -------- ---------------- $2.75 to $3.28 326,863 170,863 $2.91 6.0 $3.44 to $4.60 660,637 263,700 3.85 7.8 $5.13 to $5.88 130,500 79,375 5.54 6.9 --------- ------- Total 1,118,000 513,938 ========= =======
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 years 2000, 1999 and 1998. 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 50% of such contributions during fiscal years 2000 and 1999 and 25% during fiscal year 1998, up to 6% of the employees' annual compensation. Matching contributions from the Company for fiscal years 2000, 1999 and 1998 were $320,000, $252,000 and $103,000, respectively. The Company does not offer any additional post retirement and post-employment benefits to its employees. In March 1998, the Company adopted a Supplemental Executive Retirement Plan (the "SERP") to provide additional retirement benefits, payable in a lump sum, to certain executive officers. The SERP is an unfunded plan; however, the Company intends to use the cash surrender value of key life insurance policies purchased by the Company to fund its obligations under the plan. As of January 29, 2000 and January 30, 1999, cash surrender values of $284,847 and $138,271, respectively, were recorded as assets on the accompanying Consolidated Balance Sheets. As of January 29, 2000 and January 30, 1999, plan obligations of $182,590 and $0, respectively, were recorded as liabilities on the accompanying Consolidated Balance Sheets. 13. COMMITMENTS AND CONTINGENCIES: As of January 29, 2000, the Company was contingently liable for outstanding letters of credit amounting to $5,400,000. 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, compli- 44 47 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ance, 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. In February 1997, the Company adopted SOP No. 96-1, "Environmental Remediation Liabilities," which provides guidance on specific accounting issues related to the recognition, measurement and disclosure of environmental remediation liabilities. These accruals are adjusted if and when new information becomes known. Due to the nature of such releases, the actual costs of assessment and remediation may vary significantly from year to year. As of January 29, 2000 and January 30, 1999, the Company had recorded an accrual of $6,045,000 and $4,589,000, 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 January 29, 2000 and January 30, 1999, the Company had recorded a reimbursement receivable of $7,286,000 and $ 4,522,000, respectively. For the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998, the Company recorded a provision for environmental expenses of $474,000, $98,000 and $3,354,000, respectively. Additionally, under current federal and state regulatory programs, the Company was obligated by December 1998 to upgrade or replace most of its existing underground storage tanks ("USTs"). The Company met this obligation prior to December 22, 1998 for all operating locations. Gasoline operations at 14 locations were closed prior to December 22, 1998. The Company has sold the locations or pulled the UST's at the unsold locations during fiscal year 2000. The Company remains responsible for specific known remediation requirements at these locations. These locations are included in the Company's remediation accrual as of January 29, 2000. The Company is party to an agreement, through September 2005, which provides for the wholesale supply of various grocery items. Under the supply agreement, the Company is obligated to purchase annually a minimum amount of merchandise. Management believes that the annual purchase level is readily achievable over the term of the new agreement. Prices to be charged by the supplier must be competitive. In fiscal year 1999, the Company entered into a long-term supply and branding agreement with Chevron Products Company to brand certain high-volume retail gasoline locations. The agreement obligates the Company to purchase a minimum volume of gasoline over a ten-year period. Management believes that the purchase volume is readily achievable over the term of the agreement. In addition, the agreement provides for the Company to be reimbursed for costs incurred in the conversion of equipment and display facilities. In January 1999, the Company entered into an agreement with Coca-Cola USA Fountain to exclusively sell Coca-Cola fountain products in the Company's fountain centers. The agreement calls for the purchase of a minimum quantity of fountain syrups. Management expects to meet the required level of purchases. In March 1999, the Company signed an agreement with Procter & Gamble. The agreement calls for the Company to exclusively sell Millstone brand coffee blends through February 2004. 45 48 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company is a defendant in an action brought by a former supplier of certain dairy products to convenience stores formerly owned by the Company in Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores") entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. Dist. Ct., CT). This action was commenced on April 17, 1997 by New England Dairies, Inc. ("NED") alleging that Dairy Mart committed an anticipatory breach of a supply agreement entered into between NED and Dairy Mart on April 25, 1995 ("the Agreement"), when Dairy Mart entered into a contract with a third party to sell all company-owned and franchised convenience stores in New England, without requiring the third party purchaser to assume the Agreement. NED's action seeks lost profits in the amount of $3.7 million. The defendants are contesting the claims and, at this time, the Company is not able to determine what the results of this litigation will be. Trial is expected to take place in June or July of calendar year 2000. The Company has recognized no provision for any possible loss in the accompanying consolidated financial statements. The Company had been named as a nominal defendant, along with certain current and former directors of the Company, in two shareholder derivative actions. The two cases had been consolidated as Dairy Mart Convenience Stores, Inc. Derivative Litigation. The plaintiffs alleged, among other things, that in connection with the settlement of a dispute with respect to control of the Company between the Company's management and a shareholder, who was a former director and officer of the Company, the directors violated their fiduciary duty to the Company and its shareholders. On November 8, 1999, the parties to the litigation executed a Stipulation of Settlement ("Settlement Agreement") that provided, among other provisions, for the dismissal of the lawsuit and for a $2.0 million payment by the Company's insurance carrier to the Company on behalf of all the defendants, which the Company used to cover all of the attorney's fees and expenses awarded to plaintiffs by the court. The Settlement Agreement was conditioned upon approval by the court, which was obtained on December 13, 1999 and was also conditioned upon the Company reclassifying its former Class A Common Stock and Class B Common Stock into a new, single class of Common Stock. On February 8, 2000, the Company's shareholders approved a reclassification of its former Class A and Class B Common Stock into a new, single class of Common Stock (See Note 9). In the course of defending certain directors and officers of the Company in the Dairy Mart Convenience Stores, Inc. Derivative Litigation, the Company incurred approximately $3.9 million in legal fees. The Company expects to recover $3.0 million under the Company's directors and officers excess liability insurance policy and as such, this amount is included in accounts receivable in the accompanying consolidated balance sheet as of January 29, 2000. The insurance carrier is currently disputing the claim; however, the Company believes it has a strong position and will ultimately prevail in litigation. 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. 46 49 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. RESTRUCTURING INITIATIVE During fiscal year 1996, the Company entered into an agreement with a former majority stockholder of the Company and certain of his affiliates (Former Holder) for purposes of settling a dispute between the Former Holder and the Company's board of directors and management with respect to control of the Company. The dispute arose due to philosophical differences with regards to the strategic direction and management of the Company. The agreement provided for a cash payment of $13,150,000 to the Former Holder comprised of $10,000,000 for the purchase of certain interests of the Former Holder in DM Associates, which then owned 1,858,743 shares of the Company's former Class B Common Stock, and $3,150,000 for additional costs and expenses which consisted of $850,000, $800,000 and $1,500,000 for the reimbursement of legal and other costs, for the execution of a non-compete agreement, and for a release of claims against the Company, by or with the Former Holder, respectively. The acquired interests included a 46% limited partnership interest in DM Associates and a promissory note receivable from DM Associates. The promissory note had a principal amount of $7,100,000, and had accrued interest at an annual rate of 9% since its inception in 1992, for a total accreted value as of February 3, 1996 of approximately $10,000,000. The note was collateralized by the Pledged Shares and had a scheduled maturity date of September 12, 1997. The Company did not attribute value to its acquired limited partnership interest in DM Associates because at the then current market price of the Company's former Class B Common Stock, the Company would not receive any distribution upon a dissolution of DM Associates in respect of the interest since the other limited partner of DM Associates is entitled to a preferential return according to the terms and conditions of the partnership agreement. Based upon the market price of the Company's former Class B Common Stock as of January 29, 2000, the Company still would not receive any distribution upon a liquidation of DM Associates. The Company attributed a fair value of $10,000,000 to the acquired promissory note and recorded the note as a reduction of stockholders' equity in the Consolidated Balance Sheets. Although DM Associates retained its right to pay the full accreted value of the note at or before maturity, the Company anticipated, based upon the market price of the Company's former Class B Common Stock and since DM Associates primary asset was the Pledged Shares, that DM Associates would choose to relinquish its right to the Pledged Shares in full satisfaction of the note. Assuming that the Company received the Pledged Shares in satisfaction of the note and received no value for its limited partnership interest, the Company effectively paid $8.20 per share for the Pledged Shares at the time of the agreement when the quoted market price of the Company's former Class B Common Stock was $6.38 per share. The Company's Board of Directors obtained a fairness opinion from a nationally recognized valuation firm prior to consummating the agreement to the effect that the price paid by the Company in the transaction was fair from a financial point of view to the Company and its public stockholders. The aforementioned opinion was based on, among other items: the market multiple approach in which the Company was compared with other publicly traded companies on the basis of operational and economic similarities; the comparable transaction approach in which transactions involving the acquisition of a control position in other convenience and grocery store operators were reviewed; and the discounted cash flow approach in which management's financial projections (which reflected improved profitability and cash flows for fiscal years 1997 through 2001) were reviewed to develop a value indication for the Company. These analyses resulted in a valuation range for the Company's Common Stock of 47 50 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $6.85 to $9.45 per share. In addition, the Company elected to expense the costs associated with the non-compete agreement rather than deferring such costs over the term of the agreement as the future value was deemed to have minimal economic impact on future years. In September 1997, DM Associates relinquished its right to the Pledged Shares in satisfaction of the note principal and paid $646,000 to the Company as interest on the note. The interest income is included in revenues in the accompanying Consolidated Statement of Operations for fiscal year 1998. 15. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION: The Company's payment obligations under the Notes are guaranteed by certain of the Company's subsidiaries ("Guarantor Subsidiaries"). The Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by each of the Guarantor Subsidiaries. The following supplemental financial information sets forth, on a consolidating basis, statements of operations, balance sheets and statements of cash flows for the Company ("Parent Company"), for the Guarantor Subsidiaries and for Financial Opportunities, Inc. ("FINOP"), the Company's non-guarantor subsidiary. Separate complete financial statements of the respective Guarantor Subsidiaries would not provide additional information which would be useful in assessing the financial condition of the Guarantor Subsidiaries, and are omitted accordingly. Investment in subsidiaries is accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. 48 51 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 29, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ----- ------------ ------------ Revenues.................. $ 444 $580,334 $341 $ -- $581,119 Cost of goods sold and expenses: Cost of goods sold...... -- 435,867 -- -- 435,867 Operating and administrative expenses............. 297 137,010 22 -- 137,329 Interest expense........ 9,848 1,492 243 -- 11,583 -------- -------- ---- -------- -------- 10,145 574,369 265 -- 584,779 -------- -------- ---- -------- -------- Income (loss) before income taxes and equity in income (loss) of consolidated subsidiaries......... (9,701) 5,965 76 -- (3,660) Benefit (provision) from income taxes............ (769) 1,963 (30) -- 1,164 -------- -------- ---- -------- -------- Income (loss) before equity in income (loss) of consolidated subsidiaries....... (10,470) 7,928 46 -- (2,496) Equity in income of consolidated subsidiaries............ 7,974 46 -- (8,020) -- -------- -------- ---- -------- -------- Net income (loss).... $ (2,496) $ 7,974 $ 46 $ (8,020) $ (2,496) ======== ======== ==== ======== ========
49 52 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET AS OF JANUARY 29, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------ ------------ ------------ ASSETS Current assets: Cash................... $ 206 $ 4,458 $3,038 $ -- $ 7,702 Short-term investments......... -- 155 -- -- 155 Accounts and notes receivable, net..... 3,526 16,199 774 -- 20,499 Inventory.............. -- 34,804 -- -- 34,804 Prepaid expenses and other current assets.............. 71 1,633 -- -- 1,704 Deferred income taxes............... -- 2,393 -- -- 2,393 -------- -------- ------ --------- -------- Total current assets......... 3,803 59,642 3,812 -- 67,257 -------- -------- ------ --------- -------- Assets held for sale..... -- 2,392 -- -- 2,392 Property and equipment, net.................... -- 110,946 -- -- 110,946 Intangible assets, net... -- 14,582 -- -- 14,582 Other assets, net........ 1,820 11,735 1,067 0 14,622 Investment in and advances to subsidiaries........... 140,164 1,638 301 (142,103) -- -------- -------- ------ --------- -------- Total assets...... $145,787 $200,935 $5,180 $(142,103) $209,799 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations......... $ 2,008 $ 1,083 $ -- $ -- $ 3,091 Accounts payable....... 28,056 22,860 -- -- 50,916 Accrued expenses....... 119 11,493 39 -- 11,651 Accrued interest....... 3,417 1 72 -- 3,490 -------- -------- ------ --------- -------- Total current liabilities.... 33,600 35,437 111 -- 69,148 -------- -------- ------ --------- -------- Long-term obligations, less current portion above.................. 105,318 11,596 3,130 -- 120,044 Other liabilities........ -- 13,738 -- -- 13,738 Stockholders' equity..... 6,869 140,164 1,939 (142,103) 6,869 -------- -------- ------ --------- -------- Total liabilities and stockholders' equity......... $145,787 $200,935 $5,180 $(142,103) $209,799 ======== ======== ====== ========= ========
50 53 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 29, 2000 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------ ------------ ------------ Net cash provided by (used in) operating activities........... $ (3,446) $ 9,400 $ 353 $ -- $ 6,307 Cash flows from investing activities: Purchase of and change in short-term investments...... -- (14) 2,583 -- 2,569 Purchase of property and equipment................... (1,859) (40,019) -- -- (41,878) Proceeds from sale of property, equipment and assets held for sale.................... -- 22,254 -- -- 22,254 Investment in and advances to subsidiaries................ 2,575 (2,610) 35 -- 0 Increase in long-term notes receivable.................. -- (442) -- -- (442) Proceeds from collection of long-term notes receivable.................. -- 1,214 61 -- 1,275 Increase in intangibles and other assets................ (300) (31) 6 -- (325) -------- -------- ------ --------- -------- Net cash (used in) provided by investing activities........... 416 (19,648) 2,685 -- (16,547) -------- -------- ------ --------- -------- Cash flows from financing activities: Borrowings on revolving loan, net......................... 4,096 -- -- -- 4,096 Borrowings of long-term obligations................. 1,859 13,023 -- -- 14,882 Repayment of long-term obligations................. (3,346) (1,165) -- (4,511) Issuance of common stock....... 108 -- -- -- 108 -------- -------- ------ --------- -------- Net cash provided by (used in) financing activities........... 2,717 11,858 -- -- 14,575 -------- -------- ------ --------- -------- Increase (decrease) in cash...... (313) 1,610 3,038 -- 4,335 Cash at beginning of year........ 519 2,848 -- -- 3,367 -------- -------- ------ --------- -------- Cash at end of year.............. $ 206 $ 4,458 $3,038 $ -- $ 7,702 ======== ======== ====== ========= ======== Supplemental disclosures: Cash (paid) refunded during the year - Interest....................... $(10,070) $ (1,493) $ (243) -- $(11,806) Income taxes refunded.......... 119 -- -- -- 119
51 54 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 30, 1999 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ Revenues (including excise taxes of $31,265)....... $ 155 $476,470 $422 $ -- $477,047 Cost of goods sold and expenses: Cost of goods sold...... -- 339,308 -- -- 339,308 Operating and administrative expenses............. 276 126,460 22 -- 126,758 Interest expense........ 9,749 752 305 -- 10,806 ------- -------- ---- ------- -------- 10,025 466,520 327 -- 476,872 ------- -------- ---- ------- -------- Income (loss) before income taxes and equity in income of consolidated subsidiaries......... (9,870) 9,950 95 -- 175 Benefit (provision) from income taxes............ 4,342 (4,454) (38) -- (150) ------- -------- ---- ------- -------- Income (loss) before equity in income of consolidated subsidiaries......... (5,528) 5,496 57 -- 25 Equity in income of consolidated subsidiaries............ 5,553 57 -- (5,610) -- ------- -------- ---- ------- -------- Net income.............. $ 25 $ 5,553 $ 57 $(5,610) $ 25 ======= ======== ==== ======= ========
52 55 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET AS OF JANUARY 30, 1999 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------ ------------ ------------ ASSETS Current assets: Cash................... $ 519 $ 2,848 $ -- $ -- $ 3,367 Short-term investments......... 138 3 2,583 -- 2,724 Accounts and notes receivable, net..... 1,327 13,093 1,121 -- 15,541 Inventory.............. -- 24,293 -- -- 24,293 Prepaid expenses and other current assets.............. -- 2,324 -- -- 2,324 Deferred income taxes............... -- 1,520 -- -- 1,520 -------- -------- ------ --------- -------- Total current assets......... 1,984 44,081 3,704 -- 49,769 -------- -------- ------ --------- -------- Assets held for sale..... -- 6,327 -- -- 6,327 Property and equipment, net.................... -- 98,829 -- -- 98,829 Intangible assets, net... -- 15,452 -- -- 15,452 Other assets, net........ 1,689 11,271 1,134 (3,140) 10,954 Investment in and advances to subsidiaries........... 140,880 1,602 290 (142,772) -- -------- -------- ------ --------- -------- Total assets...... $144,553 $177,562 $5,128 $(145,912) $181,331 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations......... $ 3,807 $ 249 $ -- $ -- $ 4,056 Accounts payable....... 23,776 11,885 24 -- 35,685 Accrued expenses....... 183 15,186 9 -- 15,378 Accrued income taxes... 2,593 -- -- (2,593) -- Accrued interest....... 3,641 (1) 73 -- 3,713 -------- -------- ------ --------- -------- Total current liabilities.... 34,000 27,319 106 (2,593) 58,832 -------- -------- ------ --------- -------- Long-term obligations, less current portion above.................. 100,749 572 3,130 -- 104,451 Other liabilities........ 547 8,791 -- (547) 8,791 Stockholders' equity..... 9,257 140,880 1,892 (142,772) 9,257 -------- -------- ------ --------- -------- Total liabilities and stockholders' equity......... $144,553 $177,562 $5,128 $(145,912) $181,331 ======== ======== ====== ========= ========
53 56 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 30, 1999 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------- ------------ ------------ Net cash provided by (used in) operating activities............. $ 7,221 $ 4,129 $ (459) $-- $ 10,891 Cash flows from investing activities: Purchase of and change in short-term investments......... (138) -- 1,043 -- 905 Purchase of property and equipment....... -- (52,398) -- -- (52,398) Proceeds from sale of property, equipment and assets held for sale................ -- 30,760 -- -- 30,760 Investment in and advances to subsidiaries........ (15,909) 15,909 -- -- -- Increase in long-term notes receivable.... -- (1,816) 640 -- (1,176) Proceeds from collection of long-term notes receivable.......... -- 1,544 -- -- 1,544 Increase in intangibles and other assets.... (448) 1,198 (108) -- 642 -------- -------- ------- -- -------- Net cash (used in) provided by investing activities............. (16,495) (4,803) 1,575 -- (19,723) -------- -------- ------- -- -------- Cash flows from financing activities: Increase in revolving loan, net........... 10,200 -- -- -- 10,200 Repayment of long-term obligations......... (651) (300) (1,100) (2,051) Payment of dividend.... -- 250 (250) -- -- Issuance of common stock............... 244 -- -- -- 244 -------- -------- ------- -- -------- Net cash provided by (used in) financing activities............. 9,793 (50) (1,350) -- 8,393 -------- -------- ------- -- -------- Increase (decrease) in cash................... 519 (724) (234) -- (439) Cash at beginning of year................... -- 3,572 234 -- 3,806 -------- -------- ------- -- -------- Cash at end of year...... $ 519 $ 2,848 $ -- $-- $ 3,367 ======== ======== ======= == ======== Supplemental disclosures: Cash (paid) refunded during the year -- Interest............... $ (9,876) $ (435) $ (350) -- $(10,661) Income taxes refunded............ 381 -- -- -- 381
54 57 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1998 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED ------- ------------ ----- ------------ ------------ Revenues (including excise taxes of $29,641)....... $1,144 $499,737 $478 $ -- $501,359 Cost of goods sold and expenses: Cost of goods sold...... -- 364,525 -- -- 364,525 Operating and administrative expenses............. 269 127,919 33 -- 128,221 Interest expense........ 9,776 485 351 -- 10,612 ------- -------- ---- ------- -------- 10,045 492,929 384 -- 503,358 ------- -------- ---- ------- -------- Income (loss) before income taxes and equity in income of consolidated subsidiaries......... (8,901) 6,808 94 -- (1,999) Benefit (provision) from income taxes............ 2,573 (2,015) (27) -- 531 ------- -------- ---- ------- -------- Income (loss) before equity in income of consolidated subsidiaries......... (6,328) 4,793 67 -- (1,468) Equity in income of consolidated subsidiaries............ 4,860 67 -- (4,927) -- ------- -------- ---- ------- -------- Net income (loss)....... $(1,468) $ 4,860 $ 67 $(4,927) $ (1,468) ======= ======== ==== ======= ========
55 58 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET AS OF JANUARY 31, 1998 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------ ------------ ------------ ASSETS Current assets: Cash................... $ -- $ 3,572 $ 234 $ -- $ 3,806 Short-term investments......... -- 3 3,626 -- 3,629 Accounts and notes receivable, net..... 1,254 13,040 676 -- 14,970 Inventory.............. -- 21,088 -- -- 21,088 Prepaid expenses and other current assets.............. 69 2,162 -- -- 2,231 Deferred income taxes............... 852 196 -- -- 1,048 -------- -------- ------ --------- -------- Total current assets......... 2,175 40,061 4,536 -- 46,772 -------- -------- ------ --------- -------- Assets held for sale..... -- 10,715 -- -- 10,715 Property and equipment, net.................... -- 82,589 -- -- 82,589 Intangible assets, net... -- 16,017 -- -- 16,017 Other assets, net........ 1,580 8,192 1,782 -- 11,554 Investment in and advances to subsidiaries........... 121,215 1,948 137 (123,300) -- -------- -------- ------ --------- -------- Total assets...... $124,970 $159,522 $6,455 $(123,300) $167,647 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations......... $ 637 $ 319 $1,100 $ -- $ 2,056 Accounts payable....... 20,138 11,159 -- -- 31,297 Accrued expenses....... 1,297 16,857 23 -- 18,177 Accrued interest....... 3,450 -- 117 -- 3,567 -------- -------- ------ --------- -------- Total current liabilities.... 25,522 28,335 1,240 -- 55,097 -------- -------- ------ --------- -------- Long-term obligations, less current portion above.................. 90,460 802 3,130 -- 94,392 Other liabilities........ -- 9,170 -- -- 9,170 Stockholders' equity..... 8,988 121,215 2,085 (123,300) 8,988 -------- -------- ------ --------- -------- Total liabilities and stockholders' equity......... $124,970 $159,522 $6,455 $(123,300) $167,647 ======== ======== ====== ========= ========
56 59 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 1998 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------- ------------ ------------ Net cash provided by (used in) operating activities............. $ 3,844 $ 3,993 $ 39 $ -- $ 7,876 Cash flows from investing activities: Purchase of and change in short-term investments......... -- (3) (2,093) -- (2,096) Purchase of property and equipment....... -- (31,604) -- -- (31,604) Proceeds from sale of property, equipment and assets held for sale................ -- 32,552 -- -- 32,552 Investment in and advances to subsidiaries........ 8,112 (8,818) 706 -- -- Increase in long-term notes receivable.... -- (92) (561) -- (653) Proceeds from collection of long-term notes receivable.......... -- 35 963 998 Decrease in intangibles and other assets.... 28 1,281 8 -- 1,317 -------- -------- ------- -------- -------- Net cash used in investing activities... 8,140 (6,649) (977) -- 514 -------- -------- ------- -------- -------- Repayment of long-term obligations......... (12,326) (1,790) -- -- (14,116) Issuance of common stock............... 242 -- -- -- 242 -------- -------- ------- -------- -------- Net cash used in financing activities... (12,084) (1,790) -- -- (13,874) -------- -------- ------- -------- -------- Decrease in cash......... (100) (4,446) (938) -- (5,484) Cash at beginning of year................... 100 8,018 1,172 -- 9,290 -------- -------- ------- -------- -------- Cash at end of year...... $ -- $ 3,572 $ 234 $ -- $ 3,806 ======== ======== ======= ======== ======== Supplemental disclosures: Cash (paid) refunded during the year -- Interest............... $ (9,710) $ (485) $ (349) -- $(10,544) Income taxes refunded............ 1,188 -- -- -- 1,188 Non-cash inventory and financing activities -- Note receivable from DM Associates.......... 10,000 -- -- -- 10,000 Purchase of treasury stock............... (10,000) -- -- -- (10,000)
57 60 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES 16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): Quarterly financial information is as follows:
FISCAL QUARTER ENDED ----------------------- May 1, July 31, October 30, January 29, FISCAL YEAR ENDED JANUARY 29, 2000 1999 1999 1999 2000 ---------------------------------- -------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues............................. $123,643 $155,438 $154,210 $147,828 Gross profit......................... 34,216 38,916 37,351 34,769 Net income (loss).................... 97 1,156 511 (4,260) Basic earnings (loss) per share...... 0.02 0.24 0.11 (0.88) Diluted earnings (loss) per share (1)................................ 0.02 0.23 0.10 (0.88)
FISCAL QUARTER ENDED ------------------------ May 2, August 1, October 31, January 30, FISCAL YEAR ENDED JANUARY 30, 1999 1998 1998 1998 1999 ---------------------------------- -------- --------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.............................. $109,849 $126,129 $126,183 $114,886 Gross profit.......................... 31,221 35,724 37,522 33,272 Net income (loss)..................... (629) 846 637 (829) Basic earnings (loss) per share....... (0.13) 0.18 0.13 (0.17) Diluted earnings (loss) per share (1)................................. (0.13) 0.17 0.13 (0.17)
(1) Earnings per share amounts for each quarter are required to be computed independently. As a result, their sum does not equal the total year earnings per share for diluted earnings per share in fiscal years 2000 and 1999. 17. OPERATING SEGMENT The Company operates in one segment. That segment is the operating and franchising of convenience food stores. Revenues from external customers are derived primarily from three major categories -- merchandise, gasoline and food service. The Company's merchandise sales are comprised of groceries, beverages, beer/wine, tobacco products, dairy products, candy/snacks, non-food merchandise and services. Services include lottery, and money order services. Food service sales are comprised of branded restaurant sales such as Mr. Hero(R), Taco Bell(R), and Subway(R). The Company does not rely on any major customers as a source of revenue. Excluding license royalties, the Company's operations are concentrated in seven states in the Midwest and southeastern part of the United States. 58 61 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 auditing standards generally accepted in the United States, the consolidated financial statements of Dairy Mart Convenience Stores, Inc. and subsidiaries (the Company) included in this Form 10-K and have issued our report thereon dated April 21, 2000. Our audit was 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 Cleveland, Ohio April 21, 2000. 59 62 SCHEDULE II DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES VALUATION ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------- ------------ ----------------------- ----------- ---------- ADDITIONS DEDUCTIONS ----------------------- ----------- BALANCE AT CHARGED TO OTHER ACCOUNTS BALANCE AT BEGINNING OF COSTS AND AND WRITTEN- END OF DESCRIPTION PERIOD EXPENSES RECOVERIES OFF PERIOD ----------- ------------ ---------- ---------- ----------- ---------- Reserve for Doubtful Accounts: Fiscal Year Ended January 31, 1998............................. 1,544,737 986,907 -- (291,006) 2,240,638 Fiscal Year Ended January 30, 1999............................. 2,240,638 421,905 -- (588,436) 2,074,107 Fiscal Year Ended January 29, 2000............................. 2,074,107 262,101 -- (272,869) 2,063,339
60 63 [DAIRY MART LOGO] DAIRY MART CONVENIENCE STORES INCORPORATED ONE DAIRY MART WAY 300 EXECUTIVE PARKWAY WEST HUDSON, OHIO 44236 www.dairymart.com EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF DAIRY MART CONVENIENCE STORES, INC. UNDER SECTIONS 242 AND 245 OF THE DELAWARE GENERAL CORPORATION LAW Dairy Mart Convenience Stores, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: The name of the Corporation is Dairy Mart Convenience Stores, Inc. SECOND: The Certificate of Incorporation of the Corporation was filed with the Secretary of the State of Delaware on the 8th day of February 1972, under the name Giant Dairy Mart Corporation. THIRD: This Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of the Corporation by amending Article IV to increase the number of shares of the Corporation's authorized Common Stock par value $.01 per share, from 10,000,000 shares to 30,000,000 shares, which increase consists of an increase in the number of shares of Class A Common Stock, par value $.01 per share, from 7,000,000 shares to 20,000,000 shares, and an increase in the number of shares of Class B Common Stock, par value $.01 per share, from 3,000,000 shares to 10,000,000 shares. FOURTH: The test of the Restated Certificate of Incorporation, as amended or supplemented heretofore, is further amended hereby to read as herein set forth in full: FIFTH: This Restated Certificate of Incorporation was duly adopted by the Stockholders of the Corporation in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. 2 IN WITNESS WHEREOF, Dairy Mary Convenience Stores, Inc. has caused this Certificate to be signed by Mitchell J. Kupperman, its Executive Vice President, and attested by Gregory Wozniak, its Assistant Secretary, this 13th day of June, 1991. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Mitchell J. Kupperman ------------------------- Mitchell J. Kupperman Its Executive Vice President ATTEST: By: /s/ Gregory Wozniak ------------------- Gregory Wozniak Its Assistant Secretary 2 3 RESTATED CERTIFICATE OF INCORPORATION OF DAIRY MART CONVENIENCE STORES, INC. ARTICLE I The name of the corporation is Dairy Mart Convenience Stores, Inc. (hereinafter the "Corporation"). ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at the address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV A. AUTHORIZED CAPITAL STOCK. The aggregate number of shares which the Corporation shall have authority to issue is 31,000,000 shares, consisting of: 1. 1,000,000 shares of Serial Preferred Stock, par value $.01 per share; 2. 30,000,000 shares of Common Stock, par value $.01 per share. B. SERIAL PREFERRED STOCK. The Board of Directors is authorized at any time, and from time to time, to provide for the issuance of shares of Serial Preferred Stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights of the Serial Preferred Stock or any series thereof. For each series, the Board of Directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series: 1. The rate and manner of payment of dividends, if any; 4 2. Whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption; 3. The amount payable for shares in the event of liquidation, dissolution or other winding up of the Corporation; 4. Sinking fund provisions, if any, for the redemption or purchase of shares; 5. The terms and conditions, if any, on which shares may be converted or exchanged; 6. Voting rights, if any; and 7. Any other rights and preferences of such shares, to the full extent now or hereafter permitted by the laws of the State of Delaware. The Board of Directors shall have the authority to determine the number of shares that will comprise each series. Prior to the issuance of any shares of a series, but after adoption by the Board of Directors of the resolution establishing such series, the appropriate officers of the Corporation shall file such documents with the State of Delaware as may be required by law. C. COMMON STOCK. The total number of shares of Common Stock the corporation has authority to issue is 30,000,000 shares, consisting of 20,000,000 shares of Class A Common Stock with a par value of $.01 per share and 10,000,000 shares of Class B Common Stock with a par of $.01 per share. Class A Common Stock and Class B Common Stock shall be identical in all respects and shall have equal rights and privileges, except as otherwise expressly provided herein. The relative powers, preferences, rights, qualifications, limitations and restrictions of the shares of each of the classes of Common Stock are as follows: 1. CASH OR PROPERTY DIVIDENDS. Subject to section 4(c)(2), whenever a dividend is paid to the holders of Class B Common Stock, the corporation shall also pay to the holders of Class A Common Stock a dividend per share at least equal to the dividend per share paid to the holders of the Class B Common Stock. The corporation may pay dividends to holders of Class A Common Stock in excess of dividends paid, or without paying dividends, to holders of Class B Common Stock. 2. STOCK DIVIDENDS. If at any time a dividend is to be paid in Class B Common Stock or Class A Common Stock (a "stock dividend"), such stock dividend may be declared and paid only as follows: (i) So long as no Class A Common Stock has been issued and is outstanding, Class A Common Stock may be paid to holders of Class B Common Stock; 2 5 (ii) So long as shares of both classes are issued and outstanding, Class A Common Stock may be paid only to holders of Class A Common Stock and Class B Common Stock may be paid only to holders of Class B Common Stock, and whenever a stock dividend is paid, the same number of shares shall be paid in respect of each outstanding share of Class A or Class B Common Stock. 3. STOCK SUBDIVISIONS AND COMBINATIONS. The Corporation shall not subdivide or combine stock of any class without at the same time making a proportionate subdivision or combination of the other class. 4. VOTING. Voting power shall be divided between classes of stock as follows: (a) With respect to the election of directors, holders of Class A Common Stock voting as a separate class shall be entitled, subject to paragraph 4(e), to elect that number of directors which constitutes 25% of the authorized number of members of the Board of Directors and, if such 25% is not a whole number, then the holders of Class A Common Stock shall be entitled to elect the nearest higher whole number of directors that is at least 25% of such membership. Holders of Class B Common Stock voting as a separate class shall be entitled, subject to paragraph 4(f), to elect the remaining directors. Directors elected by the holders of Class A Common Stock, voting as a separate class, and directors elected by one or more other directors to fill vacancies created by the death, resignation or removal of directors elected by such class, shall be designated as "Class A Directors." Directors elected by the holders of Class B Common Stock, voting as a separate class, and directors elected by one or more other directors to fill vacancies created by the death, resignation or removal of directors elected by such class, shall be designated as "Class B Directors." Directors elected by the holders of Class A and Class B Common Stock, voting together as a single class pursuant to paragraph 4(e) or paragraph 4(f), and directors elected by one or more other directors to fill vacancies created by death, resignation or removal of directors so elected, shall be designated as "Joint Directors". (b) Holders of Class A Common Stock shall be entitled to vote as a separate class on the removal, with or without cause, of any Class A Director. Holders of Class B Common Stock shall be entitled to vote as a separate class on the removal, with or without cause, of any Class B Director. Holders of Class A and Class B Common Stock shall be entitled to vote together as a single class, as provided for in paragraph 4(g), on the removal, with or without cause, of any Joint Director. (c) The holders of the Class A Common Stock and the holders of the Class B Common Stock shall be entitled to vote as separate classes only (A) when required by law to do so irrespective of the limitations placed herein on the voting rights of such stockholders, or (B) where a separate class vote is required by specific provision therefor in this Certificate of Incorporation. Holders of Class A Common Stock and Class B Common Stock shall vote as a single class, as provided for in paragraph 4(g), in order to amend this Certificate of Incorporation so as to increase or decrease the aggregate number of authorized shares of any class or classes of stock, and no class vote of either class shall be required for such amendment. 3 6 (d) Any vacancy in the office of a Class A Director may be filled by a vote of holders of Class A Common Stock voting as a separate class. Any vacancy in the office of a Class B Director may be filled by a vote of holders of Class B Common Stock voting as a separate class. Any vacancy in the office of a Joint Director may be filled by a vote of holders of Class A and Class B Common Stock, voting together as a single class as provided for in paragraph 4(g). Notwithstanding anything in this section 4 to the contrary, any vacancy in the office of a director of any class may be filled by the vote of the majority of the directors in such class, by the sole remaining director in such class or, in the event that there are no remaining directors in such class, by the vote of the majority of the other directors or by the sole remaining director, regardless, in each instance, of any quorum requirements set out in the By-laws. Any director elected by some or all of the directors to fill a vacancy shall serve until the next Annual Meeting of Stockholders and until his or her successor has been elected and has qualified. If permitted by the By-laws, the Board of Directors may increase the number of directors and any vacancy so created may be filled by the Board of Directors; provided, that, so long as the holders of Class A Common Stock have the rights provided in paragraphs 4(a) and this paragraph 4(d) in respect of the last preceding Annual Meeting of Stockholders, the Board of Directors may be so enlarged by the Board of Directors only to the extent that at least 25% of the enlarged Board consists of Class A Directors. (e) Holders of Class A Common Stock will not have the rights to elect directors set forth in paragraphs 4(a) and 4(d) if, on the record date for the stockholder meeting at which such directors are to be elected, or on the record date for any written consent of stockholders pursuant to which directors are elected, the number of issued and outstanding shares of Class A Common Stock is less than 10% of the aggregate number of issued and outstanding shares of Class A Common Stock and Class B Common Stock. In such case, all directors to be elected shall be elected by holders of Class A Common Stock and Class B Common Stock voting together as a single class, provided that, with respect to said election, the holders of Class A Common Stock shall have one-tenth vote per share and holders of Class B Common Stock shall have one vote per share. (f) Holders of Class B Common Stock will not have the rights to elect directors set forth in paragraphs 4(a) and 4(d) if, on the record date for the stockholder meeting at which directors are elected, or on the record date for any written consent of stockholders pursuant to which directors are elected, the number of issued and outstanding shares of Class B Common Stock is less than 12.5% of the aggregate number of issued and outstanding shares of Class A Common Stock and Class B Common Stock. In such case, holders of Class A Common Stock voting as a separate class, shall have the right to elect 25% of the members of the Board of Directors as provided in paragraph 4(a), and holders of Class A Common Stock and holders of Class B Common Stock voting together as a single class shall be entitled to elect the remaining directors, provided that, with respect to said election, the holders of Class A Common Stock shall have one-tenth vote per share and holders of Class B common Stock shall have one vote per share. (g) Holders of Class A and Class B Common Stock shall in all matters not otherwise specified in this section 4 vote together as a single class, provided that, with respect to 4 7 all such matters, the holders of Class A Common Stock shall have one-tenth vote per share and the holders of Class B Common Stock shall have one vote per share. (h) Notwithstanding anything in this section 4 to the contrary, the holders of Class A Common Stock shall have exclusive voting power on all matters at any time when no Class B Common Stock is issued and outstanding, and the holders of Class B Common Stock shall have exclusive voting power on all matters at any time when no Class A Common Stock is issued and outstanding. 5. CONVERSION. All preexisting issued and outstanding Common Stock of the Corporation shall automatically constitute, without any action on the part of the holders of any such stock or on the part of the Corporation, Class B Common Stock. As used herein, "preexisting Common Stock" means Common Stock issued prior to September 15, 1985 or pursuant to the exercise of an option granted prior to September 15, 1985 to the extent that the agreement evidencing any such option does not provide otherwise. Each holder of record of Class B Common Stock may at any time or from time to time, in such holder's sole discretion and at such holder's option, convert any whole number or all of such holder's shares of Class B Common Stock at the rate of one share of Class A Common Stock for each share of Class B Common Stock surrendered for conversion. Any such conversion may be effected by any holder of Class B Common Stock surrendering such holder's certificate or certificates for the Class B Common Stock to be converted, duly endorsed, at the office of the corporation or any transfer agent for the Class B Common Stock, together with a written notice to the corporation at such office that such holder elects to convert all or a specified number of shares of Class B Common Stock and stating the name or names in which such holder desires the certificate or certificates for such Class A Common Stock to be issued. Promptly thereafter, the corporation shall issue and deliver to such holder, or such holder's nominee or nominees, a certificate or certificates for the number of shares of Class A Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made at the close of business at the date of such surrender and the person or persons entitled to receive the Class A Common Stock issuable on such conversion shall be treated for all purposes as the record holder or holders of such Class A Common Stock on that date. Authorized but unissued Class A Common Stock, to the extent that such stock may be necessary to meet any exercise of the conversion privilege of issued and outstanding Class B Common Stock, shall be held by the Corporation, without the necessity of a declaration by the Directors, in reserve, to be issued only in satisfaction of the conversion privilege of the issued and outstanding Class B Common Stock. No Class B Common Stock may be issued unless the authorized but unissued and unreserved shares of Class A Common Stock are sufficient to satisfy the conversion privilege which will exist with respect to such Class B Common Stock when issued. (a) LIQUIDATION. In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the Class A Common Stock and the holders or Class B Common Stock shall participate equally per share in any distribution to stockholders, without distinction between classes. 5 8 ARTICLE V The Corporation is to have perpetual existence. ARTICLE VI The Board of Directors of the Corporation is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE VII The Corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The Corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the Court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in 6 9 the first two paragraphs of this Article VII, or in defense of any claim, issue or matter therein he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Any indemnification under either the first or second paragraph of this Article VII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in the particular paragraph. Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount, if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VII. The indemnification and advancement of expenses provided by or granted pursuant to the other provisions of this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided, authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII. Notwithstanding any other provision of this Article VII, to the full extent permitted by law, no director of the Corporation shall have any personal liability to the Corporation or its stockholders for monetary damages for breach of his fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. 7 10 ARTICLE VIII In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: To authorize and cause to be executed mortgages, security agreements and other liens upon the real and personal property of the Corporation; To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created; By a majority of the whole board, to designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee and may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolutions or in the By-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business in affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, the By-laws may provide that in the absence or disqualification of any member committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member; When and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders' meeting duly called upon such notice as is required by statute, or when authorized by the written consent of the holders of a majority of the voting stock issued and outstanding, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its good will and its corporate franchises upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock, in and/or other securities of, any other corporation or corporations, as its Board of Directors shall deem expedient and for the best interests of the Corporation. ARTICLE IX Meetings of stockholders may be held within or without the State of Delaware, as the By-laws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-laws of the Corporation. Elections of Directors need not be by written ballot unless the By-laws of the Corporation shall so provide. 8 11 ARTICLE X The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders and directors are subject to this reserved power. ARTICLE XI CERTAIN PROVISIONS RELATING TO BUSINESS COMBINATIONS, BOARD OF DIRECTORS, AND OTHER MATTERS 11.1 DEFINITIONS AND RELATED MATTERS. 11.1(a) AFFILIATE. An "Affiliate" of, or a Person "affiliated with," a specified Person, means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. 11.1(b) ASSOCIATE. The term "Associate" used to indicate a relationship with any Person means: (1) Any corporation or organization (other than the Corporation or a Subsidiary of the Corporation), or any subsidiary or parent thereof, of which such Person is an officer or partner or is, directly or indirectly, the Beneficial Owner of ten percent or more of any class of equity securities; (2) Any trust or other estate in which such Person has a ten percent or greater beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; (3) Any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person; or (4) Any investment company registered under the Investment Company Act of 1940 for which such Person or any Affiliate or Associate of such Person serves as investment adviser. 11.1(c) BENEFICIAL OWNER. A Person shall be considered the "Beneficial Owner" of any shares of stock (whether or not owned of record): (1) With respect to which such person or any Affiliate or Associate of such Person directly or indirectly has or shares (i) voting power, including the power to vote or to direct the voting of such shares of stock and/or (ii) investment power, including the power to dispose of or to direct the disposition of such shares of stock; 9 12 (2) Which such Person or any Affiliate or Associate of such Person has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, and/or (ii) the right to vote pursuant to any agreement, arrangement or understanding (whether such right is exercisable immediately or only after the passage of time); or (3) Which are Beneficially Owned within the meaning of (1) or (2) of this Section 11.1(c) by any other Person with which such first-mentioned Person or any of its Affiliates or Associates has any agreement, arrangement or understanding, written or oral, with respect to acquiring, holding, voting or disposing of any shares of stock of the Corporation or any Subsidiary of the Corporation or acquiring, holding or disposing of all or substantially all, or any Substantial Part, of the assets or businesses of the Corporation or a Subsidiary of the Corporation. For the purpose only of determining whether a Person is the Beneficial Owner of a percentage specified in this Article XI of the outstanding Voting Shares, such shares shall be deemed to include any Voting Shares which may be issuable pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants, options or otherwise and which are deemed to be Beneficially Owned by such Person pursuant to the foregoing provisions of this Section 11.1(c). 11.1(d) BUSINESS COMBINATION. A "Business Combination" means: (1) The sale, exchange, lease, transfer or other disposition to or with a Related Person or any Affiliate or Associate of such Related Person by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part, of its or their assets or businesses (including, without limitation, any securities issued by a Subsidiary); (2) The purchase, exchange, lease or other acquisition by the Corporation or any of its Subsidiaries (in a single transaction or a series of related transactions) of all or substantially all, or any Substantial Part, of the assets or business of a Related Person or any Affiliate or Associate of such Related Person; (3) Any merger or consolidation of the Corporation or any Subsidiary thereof into or with a Related Person or any Affiliate or Associate of such Related Person or into or with another Person which, after such merger or consolidation, would be an Affiliate or an Associate or a Related Person, in each case irrespective of which Person is the surviving entity in such merger or consolidation; (4) Any reclassification of securities, recapitalization or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of Voting Shares of the Corporation or any Subsidiary thereof which are Beneficially Owned by a Related Person, or any partial or complete liquidation, spinoff, splitoff or splitup of the 10 13 Corporation or any Subsidiary thereof; provided, however, that this Section 11.1(d)(4) shall not relate to any transactions of the types specified herein that has been approved by a majority of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors; or (5) The acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of Voting Shares or securities convertible into Voting Shares or any voting securities or securities convertible into voting securities of any Subsidiary of the Corporation, or the acquisition upon the issuance thereof of Beneficial Ownership by a Related Person of any rights, warrants or options to acquire any of the foregoing or any combinations of the foregoing Voting Shares or voting securities of a Subsidiary. As used in this definition, a "series of related transactions" shall be deemed to include not only a series of transactions with the same Related Person, but also a series of separate transactions with a Related Person or any Affiliate or Associate of such Related Person. Anything in this definition to the contrary notwithstanding, if there are not less than four Continuing Directors, this definition shall not be deemed to include (i) any transaction that has been approved on or prior to the Date of Determination by 80% of this Continuing Directors and by 80% of the Whole Board of Directors, or (ii) any transaction of the type set forth in Section 11.1(d)(1) through 11.1(d)(3) above, between or among any two or more Subsidiaries of the Corporation or the Corporation and one or more Subsidiaries of the Corporation if such transaction has been approved by the affirmative vote of at least 67% of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors on or prior to the Date of Determination. 11.1(e) CONTINUING DIRECTOR. A "Continuing Director" shall mean: (1) An individual who was a member of the Board of Directors of the Corporation on June 30, 1985, or who was a member of the Board of Directors of the Corporation elected by the shareholders prior to the time that a Related Person acquired in excess of five percent of the stock of the Corporation entitled to vote in the election of directors, or (2) If there are not less than six Continuing Directors before his designation, an individual designated (before his initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. 11.1(f) DATE OF DETERMINATION. The term "Date of Determination" means: (1) The date on which a binding agreement (except for the fulfillment of conditions precedent, including without limitation, votes of shareholders to approve such transaction) is entered into by the Corporation, as authorized by its Board of Directors, and another Person providing for any Business Combination; or, 11 14 (2) If such an agreement as referred to in Section 11.1(f)(1) above is amended so as to make it less favorable to the Corporation and its shareholders, the date on which such amendment is approved by the Board of Directors of the Corporation; or, (3) In cases where neither Section 11.1(f)(1) or (2) shall be applicable, the record date for the determination of shareholders of the Corporation entitled to notice of and to vote upon the transaction in question. A majority (but in any event not less than four) of the Continuing Directors shall have the power and duty to determine the Date of Determination as to any transaction under this Article 11. Any such determination shall be conclusive and binding for all purposes of this Article. 11.1(g) INDEPENDENT MAJORITY OF SHAREHOLDERS. "Independent Majority of Shareholders" shall mean the holders of a majority of the outstanding Voting Shares that are not Beneficially Owned or controlled, directly or indirectly, by a Related Person. 11.1(h) OFFER. The term "offer" includes every offer to buy or acquire, solicitation of an offer to sell, tender offer or request or invitation for tender of, a security or interest in a security for value. 11.1(i) PERSON. The term "Person" shall mean any person, partnership, corporation, group or other entity (other than the Corporation, any Subsidiary of the Corporation or a trustee holding stock for the benefit of employees of the Corporation or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements). When two or more persons act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnership, syndicate, association or group shall be deemed a "Person". 11.1(j) RELATED PERSON. "Related Person" means any Person which is the Beneficial Owner as of the Date of Determination or immediately prior to the consummation of a Business Combination, or both, of 5% or more of the Voting Shares, or any person who is an Affiliate of the Corporation and at any time within five years preceding the Date of Determination was the Beneficial Owner of five percent or more of the then outstanding Voting Shares, but does not include any one or group of more than one Continuing Director. 11.1(k) SUBSTANTIAL PART. The term "Substantial Part" as used with reference to the assets of the Corporation, of any Subsidiary or of any Related Person means assets having a value of more than five percent of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the determination is being made. 11.1(l) SUBSIDIARY. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Person or Related Person set forth in Section 11.1(i) 12 15 and 11.1(j) above, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 11.1(m) VOTING SHARES. "Voting Shares" shall mean shares of the Corporation entitled to vote generally in the election of directors. 11.1(n) WHOLE BOARD OF DIRECTORS. "Whole Board of Directors" shall mean the total number of directors which the Corporation would have if there were no vacancies. 11.1(o) CERTAIN DETERMINATIONS WITH RESPECT TO ARTICLE XI. (1) A majority (but in any event not less than four) of the Continuing Directors shall have the power to determine for the purposes of this Article XI, on the basis of information known to them: (i) the number of Voting Shares of which any Person is the Beneficial Owner, (ii) whether a Person is an Affiliate or Associate of another, (iii) whether a Person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of "Beneficial Owner" as hereinabove defined, (iv) whether the assets subject to any Business Combination constitute a "Substantial Part" as hereinabove defined, (v) whether two or more transactions constitute a "series of related transactions" as hereinabove defined, (vi) any matters referred to in Section 11.1(o)(2) below, and (vii) such other matters with respect to which a determination is required under this Article XI. (2) A Related Person shall be deemed to have acquired a share of the Corporation at the time when such Related Person became the Beneficial Owner thereof. With respect to shares owned by Affiliates, Associates or other Persons whose ownership is attributed to a Related Person under the foregoing definition of Beneficial Owner, if the price paid by such Related Person for such shares is not determinable, the price so paid shall be deemed to be the higher of (i) the price paid upon acquisition thereof by the Affiliate or Associate or other Person or (ii) the market price of the shares in question (as determined by a majority (but in any event not less than four) of the Continuing Directors) at the time when the Related Person became the Beneficial Owner thereof. 11.1(p) FIDUCIARY OBLIGATIONS. Nothing contained in this Article 11 shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. 11.2 APPROVAL OF BUSINESS COMBINATION-MINIMUM VOTE. Whether or not a vote of the shareholders is otherwise required in connection with the transaction, neither the Corporation nor any of its Subsidiaries shall become party to any Business Combination without the prior affirmative vote at a meeting of the Corporation's shareholders as to all shares owned: (1) By the holders of not less than 67% of the outstanding Voting Shares, voting separately as a class, and (2) By an Independent Majority of Shareholders; 13 16 provided, however, that the provisions of this Section 11.2 shall not apply to any Business Combination approved by 67% of the Whole Board of Directors of the Corporation either (a) at a time prior to the acquisition of 5% or more of the outstanding Voting Shares of the Corporation by the Related Person, or (b) after such acquisition, but only so long as such Related Person sought and obtained the approval, by the affirmative vote of at least 67% of the Whole Board of Directors of the Corporation, of the acquisition of 5% of more to the outstanding Voting Shares prior to such acquisition being consummated; and provided further, that this Section 11.2 shall not apply to, and such vote shall not be required for, any Business Combination recommended to shareholders by the favorable vote of not less than a majority of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors and any such Business Combination so recommended shall require only the vote, if any, required under the applicable provisions of the Delaware Corporation Laws. The affirmative vote required by this Section 11.2 is in addition to the vote of the holders of any class or series of stock of the Corporation otherwise required by law, this Certificate of Incorporation (including, without limitation, any voting requirements in Section 11.3 hereof, if applicable), any resolution which has been adopted by the Board of Directors providing for the issuance of a class or series of stock, or any agreement between the Corporation and any securities exchange. 11.3 APPROVAL OF BUSINESS COMBINATION-MAXIMUM VOTE. 11.3(a) Except as provided in Section 11.3(b) or Section 11.3(d), neither the Corporation nor any of its Subsidiaries shall become party to any Business Combination without the prior affirmative vote at a meeting of the Corporation's shareholders: (1) By the holders of not less than 80% of the outstanding Voting Shares, voting separately as a class, and (2) By an Independent Majority of Shareholders. Such favorable votes shall be in addition to any shareholder vote which would be required without reference to this Section 11.3 and shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may specified by law or elsewhere in this Certificate of Incorporation (including, without limitation, the lesser vote required by Section 11.2 hereof, if applicable) or the By-laws of the Corporation or otherwise. 11.3(b) The provisions of Section 11.3(a) shall not apply to a particular Business Combination, and such Business Combination shall require only such shareholder vote (if any) as would be required without reference to this Section 11.3, if all of the conditions set forth in Subparagraphs (1) through (7) below are satisfied: (1) The ratio of (i) the aggregate amount of the cash and the fair market value of the other consideration to be received per share of the Common Stock of the Corporation in such Business Combination by holders of Common Stock other than the Related Person involved in such Business Combination, to (ii) the market price per share of the Common Stock immediately prior to the announcement of the proposed Business Combination, is at least as great as the ratio of (x) the highest per share price (including 14 17 brokerage commissions, such transfer taxes and soliciting dealers' fees) which such Related Person has theretofore paid in acquiring any Common Stock prior to such Business Combination, to (y) the market price per share of the Common Stock immediately prior to the initial acquisition by such Related Person of any shares of Common Stock; and (2) The aggregate amount of the cash and the fair market value of other consideration to be received per share of Common Stock in such Business Combination, (i) is not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by such Related Person in acquiring any of its holdings of Common Stock, and (ii) is not less than 150% of the book value of a share of the Common Stock, as reflected in the balance sheet of the Corporation as of the last day of the last fiscal quarter of the Corporation preceding the Date of Determination; and (3) If applicable, the ratio of (i) the aggregate amount of the cash and the fair market value of other consideration to be received per share of Preferred Stock of the Corporation in such Business Combination by holders of Preferred Stock other than the Related Person involved in such Business Combination, to (ii) the market price per share of the Preferred Stock immediately prior to the announcement of the proposed Business Combination, is at least as great as the ratio of (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such Related Person has theretofore paid in acquiring any Preferred Stock prior to such Business Combination to (y) the market price per share of Preferred Stock immediately prior to the initial acquisition by such Related Person of any shares of Preferred Stock; and (4) If applicable, the aggregate amount of the cash and the fair market value of other consideration to be received per share of Preferred Stock in such Business Combination by holders of Preferred Stock, other than the Related Person involved in such Business Combination, (i) is not less than the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) paid by such Related Person in acquiring any of its holdings of Preferred Stock, and (ii) is not less than the highest preferential amount per share to which the holders of shares of such class of Preferred Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event; and (5) The consideration (if any) to be received in such Business Combination by holders of stock other than the Related Person involved shall, except to the extent that a shareholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring stock already owed by it; and (6) After such Related Person became a Related Person and prior to the consummation of such Business Combination: 15 18 (i) such Related Person shall have taken steps to insure that the Board of Directors of the Corporation included at all times representation by the Continuing Directors proportionate to the ratio that the number of Voting Shares of the Corporation from time to time owned by shareholders who are not Related Persons bears to all Voting Shares of the Corporation outstanding at the time in question (with a Continuing Director to occupy any resulting fractional position among the directors); (ii) such Related Person shall not have acquired from the Corporation, directly or indirectly, any shares of the Corporation (except (x) upon conversion of convertible securities acquired by it prior to becoming a Related person or (y) as a result of a pro rata stock dividend, stock split or division of shares or (z) in a transaction which satisfied all applicable requirements of this article XI); (iii) such Related Person shall not have acquired any additional Voting Shares of the Corporation or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such Related Person's becoming a Related Person; (iv) such Related Person shall not have (x) received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or any Subsidiary, or (y) made any major change in the Corporation's business or equity capital structure or entered into any contract, arrangement or understanding with the Corporation except any such change, contract, arrangement or understanding as may have been approved by the favorable vote of not less than a majority of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors of the Corporation; and (v) except as approved by a majority of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors, there shall have been: (x) no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (y) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock); and (z) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the stock; and (7) A proxy statement complying with the requirements of the Securities Exchange Act of 1934, as amended, shall have been mailed to all holders of Voting Shares for the purpose of soliciting shareholder approval of such Business Combination. Such proxy statement shall contain at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination 16 19 which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority (but in any event not less than four) of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination from the point of view of the holders of Voting Shares other than any Related Person (such investment banking firm to be selected by a majority (but in any event not less than four) of the Continuing Directors, to be furnished with all information it reasonably requests, and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). 11.3(c) For purposes of Sections 11.3(b)(1) through 11.3(b)(4) hereof, in the event of a Business Combination upon consummation of which the Corporation would be the surviving corporation or company or would continue to exist (unless it is provided, contemplated or intended that as part of such Business Combination or within one year after consummation thereof a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" shall include (without limitation) stock retained by shareholders of the Corporation other than Related Persons who are parties to such Business Combination. 11.3(d) The provision of this Section 11.3 shall not apply to any Business Combination approved by 67% of the Whole Board of Directors of the Corporation either (i) at a time prior to the acquisition of 5% of more of the outstanding Voting Shares of the Corporation by the Related Person, or (ii) after such acquisition, but only so long as such Related Person sought and obtained the approval, by the affirmative vote of at least 67% of the Whole Board of Directors of the Corporation, of the acquisition of 5% or more of the outstanding Voting Shares prior to such acquisition being consummated. 11.3(e) Any amendment, change or repeal of this Section 11.3 or any other amendment of this Certificate of Incorporation which would have the effect of modifying or permitting circumvention of this Section 11.3 shall require the affirmative vote, at a meeting of shareholders of the Corporation, as to all shares held: (1) By the holders of at least 80% of the voting power of the then outstanding Voting Shares; and (2) By an Independent Majority of Shareholders; provided, however, that in the event that any such amendment, change or repeal is recommended to shareholders by the favorable vote of not less than a majority of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors, then such amendment, change or repeal so recommend shall require only the vote of an Independent Majority of shareholders and the vote, if any, required under the applicable provisions of the Delaware Corporation Laws. 11.4 BOARD OF DIRECTORS. 11.4(a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors of the Corporation (exclusive of 17 20 directors to be elected by the holders of any one or more series of the Preferred Stock voting separately as a class or classes) that shall constitute the initial Board of Directors shall be seven. A majority of the Whole Board of Directors may by resolution increase or decrease the number of directors constituting the Whole Board of Directors by up to two members within any twelve-month period. The number of directors constituting the Whole Board of Directors may be increased or decreased by more than two members within any twelve-month period, from time to time by resolution adopted by: (1) The Board of Directors, by the affirmative vote of at least 67% of the Whole Board of Directors and a majority (but in any event not less than six) of the Continuing Directors; or (2) The shareholders, by the affirmative vote of at least 80% of the then outstanding Voting Shares and an Independent Majority of Shareholders; provided, however, that the minimum number of directors shall be five and the maximum number of directors shall be eleven. 11.4(b) Notwithstanding any other provisions of this Certificate of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-laws of the Corporation), any director or the entire Board of Directors of the Corporation may be removed at any time with or without cause only by the affirmative vote, at a meeting of the shareholders called for that purpose, by the holders of 2/3 or more of the Voting Shares of the Class or Classes that elected the director. 11.4(c) In addition to the right of the Board of Directors of the Corporation to make nominations for the election of directors, nominations for the election of directors may be made by any shareholder entitled to vote for the election of directors may be made by any shareholder entitled to vote for the election of directors if that shareholder complies with all of the provisions of this Section 11.4(c). (1) Advance notice of such proposed nomination shall be received by the Chairman of the Nominating Committee of the Board of Directors of the Corporation (which notice may be sent to such Chairman in care of the Secretary of the Corporation) or, in the absence of such a Nominating Committee, by the Secretary of the Corporation, not less than 14 days nor more than 60 days prior to any meeting of the shareholders called for the election of directors; provided, however, that if fewer than 21 days' notice of the meeting is given to shareholders, such written notice shall be received not later than the close of the tenth day following the day on which notice of the meeting was mailed to shareholders. (2) Each notice under Section 11.4(c)(1) shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the Corporation which are Beneficially Owned by each such 18 21 nominee. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. (3) The nomination made by the shareholder may only be made in a meeting of the shareholders of the Corporation called for the election of directors at which such shareholder is present in person or by proxy, and can only be made by a shareholder who has theretofore complied with the notice provisions of Section 11.4(c)(1) and (2) above. (4) The Chairman of the meeting may in his discretion determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 11.7 AMENDMENTS OF THIS ARTICLE XI. Notwithstanding any other provisions of this Certificate of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the By-laws of the Corporation), and in addition to such additional vote of any preferred stock as may be required by the provisions of any series thereof or by applicable law, this Article XI (except for Section 11.3 hereof) shall not be amended, altered, changed or repealed without: (1) The affirmative vote of 67% of the Whole Board of Directors and a majority of Continuing Directors, and (2) The affirmative vote (i) by the holders of more than 50% of the outstanding Voting Shares, voting separately as a class, and (ii) by an Independent Majority of Shareholders. 11.8 AMENDMENTS OF BY-LAWS. The By-laws of the Corporation may be adopted, altered, amendment or repealed or new by-laws may be adopted by the Board of Directors at any regular or special meeting upon the affirmative vote of both 67% of the Whole Board of Directors and a majority (but in any event not less than four) of the Continuing Directors as defined in the Certificate of Incorporation of the Corporation. The By-laws of the Corporation may also be adopted, altered, amend or repealed or new bylaws may be adopted by the shareholders only upon the affirmative vote as to all stock held (i) by the holders of not less than 67% of the Outstanding Voting Shares and (ii) by an Independent Majority of Shareholders, as defined in the Certificate of Incorporation of the Corporation. 19 22 AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF DAIRY MART CONVENIENCE STORES, INC. UNDER SECTION 242 OF THE DELAWARE GENERAL CORPORATION LAW Dairy Mart Convenience Stores, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: The name of the Corporation is Dairy Mart Convenience Stores, Inc. SECOND: The Certificate of Incorporation of the Corporation was filed with the Secretary of the State of Delaware on the 8th day of February 1972, under the name Giant Dairy Mart Corporation. THIRD: On June 30, 1991, the Certificate of Incorporation, and certain amendments thereto, were integrated into a Restated Certificate of Incorporation. FOURTH: Article IV of the Restated Certificate of Incorporation, as amended or supplemented heretofore, is further amended and restated in its entirety to read as herein set forth as on Exhibit A (the "Amendment"). FIFTH: The Amendment was duly adopted by the Stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. 23 IN WITNESS WHEREOF, Dairy Mary Convenience Stores, Inc. has caused this Certificate to be signed by Gregory G. Landry, its Executive Vice President, and attested by Susan Adams, its Secretary, this 8th day of February, 2000. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry --------------------- Gregory G. Landry, Executive Vice President ATTEST: By: /s/ Susan Adams --------------- Susan Adams, Assistant Secretary 2 24 EXHIBIT A ARTICLE IV A. Authorized Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 31,000,000 shares, consisting of: 1. 1,000,000 shares of Serial Preferred Stock, par value $.01 per share ("Serial Preferred Stock"); 2. 30,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"). B. Serial Preferred Stock. The Board of Directors is authorized at any time, and from time to time, to provide for the issuance of shares of Serial Preferred Stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights of the Serial Preferred Stock or any series thereof. For each series, the Board of Directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations and relative or other rights thereof, including but not limited to the following relative rights and preferences, as to which there may be variations among different series: 1. The rate and manner of payment of dividends, if any; 2. Whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption; 3. The amount payable for shares in the event of liquidation, dissolution or other winding up of the Corporation; 4. Sinking fund provisions, if any, for the redemption or purchase of shares; 5. The terms and conditions, if any, on which shares may be converted or exchanged; 6. Voting rights, if any; and 7. Any other rights and preferences of such shares, to the full extent now or hereafter permitted by the laws of the State of Delaware. The Board of Directors shall have the authority to determine the number of shares that will comprise each series. 25 Prior to the issuance of any shares of a series, but after adoption by the Board of Directors of the resolution establishing such series, the appropriate officers of the Corporation shall file such documents with the State of Delaware as may be required by law. C. Common Stock. The powers, preferences, rights, qualifications, limitations and restrictions of the shares of Common Stock are as follows: 1. Voting. Each outstanding share of Common Stock will entitle the holder thereof to one vote on each matter submitted to such holder to vote on. 2 Conversion. (a) Upon the effectiveness of this Article IV, (a) each issued share of Class A Common Stock, $.01 par value (the "Class A Common Stock") (including each treasury share), shall automatically be changed, reclassified, converted and thereafter constitute one share of Common Stock and (b) each issued share of Class B Common Stock, $.01 par value (the "Class B Common Stock") (including each treasury share), shall, subject to paragraph 2(b), automatically be changed, reclassified, converted and thereafter constitute 1.1 shares of Common Stock, in each case without any action on the part of any holder thereof. (b) No fractional shares will be issued in connection with any change, reclassification, conversion or reconstitution of shares of Class B Common Stock. Rather, holders of Class B Common Stock who would otherwise be entitled to receive a fraction of a share of Common Stock (after aggregating all the shares that are evidenced by certificates registered in the name of such holder) will receive (i) one additional share of Common Stock in lieu thereof if such fraction of a share of Common Stock is equal to .50 or greater or (ii) no additional shares of Common Stock or other consideration in lieu thereof, if such fraction of a share of Common Stock is less than .50. (c) Upon the effectiveness of this Article IV, holders of record of any certificates that, immediately prior to the effectiveness of this Article IV, represented shares of Class A Common Stock or Class B Common Stock, but which now, by virtue of the effectiveness of this Article IV, represent shares of Common Stock, shall be entitled to receive, upon surrender of such certificates, new certificates that evidence the appropriate number of shares and designation of the Common Stock. 2 26 AMENDED CERTIFICATE OF DESIGNATIONS OF SERIES A JUNIOR PREFERRED STOCK OF DAIRY MART CONVENIENCE STORES, INC. Pursuant to Section 151 of the Delaware General Corporation Law Dairy Mart Convenience Stores, Inc., a corporation organized and existing under the Delaware General Corporation Law (the "Company"), in accordance with the provisions of Section 151(g) of such law, DOES HEREBY CERTIFY as follows: FIRST: On January 30, 1996 at 3:30 p.m., the Certificate of Designation of Series A Junior Preferred Stock of the Company was filed that created a series of 89,400 shares of Preferred Stock designated as Series A Junior Preferred Stock. SECOND: None of the 89,400 shares of Preferred Stock designated as Series A Junior Preferred Stock are outstanding and none have ever been issued. THIRD: On December 16, 1999 the Board of Directors, pursuant to Section 151(g) of the Delaware General Corporation Law and the authority vested in the Board of Directors of the Company in accordance with the provisions of Article IV, paragraph B of the amendment to the Restated Certificate of Incorporation of the Company adopted the following resolutions: RESOLVED, that upon the effectiveness of the Amendment, that the Rights Plan dated January 19, 1996 between the Company and Fleet Bank, successor to The First National Bank of Boston (the "Rights Plan"), is hereby amended and restated in its entirety, including the Certificate of Designation that sets forth the terms of the Series A Junior Preferred Stock, par value $.01 per share (the "Certificate of Designation"), in the form presented to the members of the Board of Directors in advance of this meeting; FURTHER RESOLVED, that the Authorized Officers are, and each of them acting alone is, hereby authorized and directed to execute and deliver, for and on behalf of the Company, the Rights Agreement and any certification in connection with the filing of the Certificate of Designation, with such changes therein and modifications thereto (which changes and modifications may be of a substantive nature) as may be approved by such Authorized Officer who is executing the same, with his or her execution thereof to be conclusive evidence of such approval; FURTHER RESOLVED, that the Chairman of the Board and the Chief Executive Officer are, and each of them acting along is, hereby authorized, but not required, to terminate Fleet Bank as the Rights Agent and substitute 27 therefor any other reputable agent, including American Stock Transfer & Trust Company; and FURTHER RESOLVED, that the Authorized Officers of the Company are, and each of them is, hereby empowered and directed to take any further action to do any other things they deem necessary or desirable in connection with carrying out the foregoing resolutions, including filing the amended Certificate of Designation with the Secretary of the State of the State of Delaware. FOURTH: Pursuant to the resolutions adopted by the Board of Directors of the Company, the Certificate of Designation previously filed with the Secretary of the State of Delaware on January 30, 1996 amends and restates this series of 89,400 shares of Preferred Stock designated as Series A Junior Preferred Stock, as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting such series shall be 89,400. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, $0.01 par value per share, of the Company (the "Common Stock") and (ii) a preferential cash dividend (the "Preferential Dividends"), if any, in preference to the holders of any class of Common Stock, on the first day of February, May, August and November of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, payable in an amount (except in the case of the first Quarterly Dividend Payment if the date of the first issuance of Series A Preferred Stock is a date other than a Quarterly Dividend Payment date, in which case such payment shall be a prorated amount of such amount) equal to $.10 per share of Series A Preferred Stock less the per share amount of all cash dividends declared on the Series A Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall, at any time after the issuance of any share or fraction of a share of Series A Preferred Stock, make any distribution on the shares of Common Stock of the Company, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Company or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence, a distribution of shares of Common Stock or other capital stock of the Company or a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less than the Fair Market Value (as hereinafter defined) of such share), then, and in each such event, the Company shall simultaneously pay on each then outstanding share of Series A Preferred Stock of the Company a distribution, in like kind, of 100 times such 2 28 distribution paid on a share of Common Stock (subject to the provisions for adjustment hereinafter set forth). The dividends and distributions on the Series A Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple". In the event the Company shall at any time after February 8, 2000 declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Dividends which holders of shares of Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare each Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Dividend in respect of such dividend or distribution on the Common shall be simultaneously paid, or set aside for payment, on the Series A Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of Stock issuance of any shares of Series A Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1 vote on all matters submitted to a vote of the holders of the Common Stock. The number of votes which a holder of Series A Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple". In the event the Company shall at any time after February 8, 2000 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a 3 29 fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Restated Certificate of Incorporation or By-laws, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) In the event that the Preferential Dividends accrued on the Series A Preferred Stock for four or more quarterly dividend periods, whether consecutive or not, shall not have been declared and paid or irrevocably set aside for payment, the holders of record of Preferred Stock of the Company of all series (including the Series A Preferred Stock), other than any series in respect of which such right is expressly withheld by the Restated Certificate of Incorporation or the authorizing resolutions included in any Certificate of Designations therefor, shall have the right, at the next meeting of stockholders called for the election of directors, to elect two members to the Board of Directors, which directors shall be in addition to the number required by the By-laws prior to such event, to serve until the next Annual Meeting and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or irrevocably set aside for payment) in full. The holders of shares of Series A Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law; provided, however, that any such action by stockholders shall be taken at a meeting of stockholders and shall not be taken by written consent thereto. (D) Except as otherwise required by the Restated Certificate of Incorporation or By-laws or set forth herein, holders of Series A Preferred Stock shall have no other special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever Preferential Dividends or Dividends are in arrears or the Company shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Dividends, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid or set irrevocably aside for payment in full, and in addition to any and all other rights which any holder of shares of Series A Preferred Stock may have in such circumstances, the Company shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of stock ranking junior 4 30 (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series A Preferred Stock, unless dividends are paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled if the full dividends accrued thereon were to be paid; (iii) except as permitted by subparagraph (iv) of this paragraph 4(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any Subsidiary (as hereinafter defined) of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. A "Subsidiary" of the Company shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors of such corporation or other entity or other persons performing similar functions are beneficially owned, directly or indirectly, by the Company or by any corporation or other entity that is otherwise controlled by the Company. (C) The Company shall not issue any shares of Series A Preferred Stock except upon exercise of Rights issued pursuant to that certain Amended and Restated Rights Agreement dated as of February 8, 2000 between the Company and American Stock Transfer & Trust Company, a copy of which is on file with the Secretary of the Company at its principal executive office and shall be made available to stockholders of record without charge upon written request therefor addressed to said Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Company from issuing for any purpose any series of Preferred Stock with rights and privileges similar to, different from, or greater than, those of the Series A Preferred Stock. 5 31 Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares upon their retirement and cancellation shall become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless the holders of shares of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided, (A) $100.00 per share of Preferred Stock plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment or, (B) if greater than the amount specified in clause (i)(A) of this sentence, an amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, as the same may be adjusted as hereinafter provided and (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series A Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series A Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Company pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company applicable pursuant to said clause to the determination of the Participating Liquidation Amount, as said multiple may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple". In the event the Company shall at any time after February 8, 2000 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then, in each such case, the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series A Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock of the Company receive after February 8, 2000 in respect of their shares of Common Stock any share of capital stock of the Company (other than any share of Common Stock of the Company), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise (a "Transaction"), then, and in each such event, the dividend rights, voting rights and rights upon 6 32 the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall be adjusted so that after such event the holders of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Company receive after February 8, 2000 in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall each be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Fair Market Value of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock of the Company receive after February 8, 2000 in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Company (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Company (other than Common Stock), at a purchase price per share less than the Fair Market Value of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall each be adjusted so that after such event each holder of a share of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) 7 33 such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Fair Market Value of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Company as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Fair Market Value of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Certificate of Designations, the "Fair Market Value" of a share of capital stock of the Company (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing price per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Fair Market Value of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after (i) the ex-dividend date for a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) the effective date of any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Fair Market Value shall be appropriately adjusted by the Board of Directors of the Company to take into account ex-dividend or post-effective date trading. The closing price for any day shall be the last sale price, regular way, or, in case, no such sale takes place on such day, the average of the closing bid and asked prices, regular way (in either case, as reported in the applicable transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange), or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the applicable transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to 8 34 trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Company is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Fair Market Value thereof as aforesaid, "Fair Market Value" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Company. In either case referred to in the foregoing sentence, the determination of Fair Market Value shall be described in a statement filed with the Secretary of the Company. Section 8. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. Effective Time of Adjustments. (A) Adjustments to the Series A Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Company shall give prompt written notice to each holder of a share of Series A Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Company of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. No Redemption. The shares of Series A Preferred Stock shall not be redeemable at the option of the Company or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Company may acquire shares of Series A Preferred Stock in any other manner permitted by law, the provisions hereof and the Restated Certificate of Incorporation of the Company. Section 11. Ranking. Unless otherwise provided in the Restated Certificate of Incorporation of the Company or a Certificate of Designations relating to a subsequent series of preferred stock of the Company, the Series A Preferred Stock shall rank junior to all other series of the Company's preferred stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and senior to the Common Stock. Section 12. Amendment. The provisions hereof and the Restated Certificate of Incorporation of the Company shall not be amended in any manner which would adversely affect the rights, privileges or powers of the Series A Preferred Stock without, in addition to any other 9 35 vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Preferred Stock, voting together as a single class. IN WITNESS WHEREOF, I have executed and subscribed this Certificate of Designations and do affirm the foregoing as true under the penalties of perjury this 8th day of February, 2000. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry --------------------- Gregory G. Landry, Executive Vice President ATTEST: /s/ Susan Adams - --------------- Susan Adams, Assistant Secretary 10 EX-10.1 3 EXHIBIT 10.1 1 Exhibit 10.1 CREDIT AGREEMENT ---------------- AMONG DAIRY MART CONVENIENCE STORES, INC., THE BANKS FROM TIME TO TIME PARTIES HERETO AND CITIZENS BANK OF CONNECTICUT AS AGENT $30,000,000 REVOLVING CREDIT FACILITY DATED AS OF DECEMBER , 1999 i 2 TABLE OF CONTENTS -----------------
PAGE SECTION 1. DEFINITIONS..........................................................................................1 1.1 Defined Terms......................................................................................1 1.2 Other Definitional Provisions.....................................................................18 1.3 Change in Accounting Principles...................................................................18 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS.....................................................................18 2.1 Revolving Credit Commitments......................................................................18 2.2 Designation of Interest Rates; LIBOR Interest Periods.............................................19 2.3 Interest Rates and Payment Dates..................................................................19 2.4 Procedure for Borrowing...........................................................................20 2.5 Conversion and Continuation Options...............................................................21 2.6 Minimum Amounts and Maximum Number of Tranches....................................................21 2.7 Revolving Credit Notes............................................................................22 2.8 Fees..............................................................................................22 2.9 Termination or Reduction of Revolving Credit Commitments..........................................22 2.10 Optional Prepayments..............................................................................22 2.11 Mandatory Prepayments; Cash Collateralizations....................................................23 2.12 Computation of Interest and Fees..................................................................23 2.13 Inability to Determine Interest Rate..............................................................24 2.14 Pro Rata Treatment and Payments...................................................................24 2.15 Extension of Termination Date.....................................................................25 2.16 Annual Clean-Down of Revolving Credit Loans.......................................................26 2.17 Illegality........................................................................................26 2.18 Requirements of Law...............................................................................26 2.19 Taxes.............................................................................................27 2.20 Indemnity.........................................................................................29 SECTION 3. LETTERS OF CREDIT...................................................................................30 3.1 L/C Commitment....................................................................................30 3.2 Procedure for Issuance of Letters of Credit.......................................................30 3.3 Fees, Commissions and Other Charges...............................................................31 3.4 Reimbursement Obligation of the Company...........................................................32 3.5 L/C Draws and Reimbursements......................................................................32 3.6 Obligations Absolute..............................................................................33 3.7 Letter of Credit Payments.........................................................................33 3.8 Application.......................................................................................34 SECTION 4. REPRESENTATIONS AND WARRANTIES......................................................................34 4.1 Financial Condition...............................................................................34 4.2 No Change.........................................................................................35 4.3 Corporate Existence; Compliance with Law..........................................................35 4.4 Corporate Power, Authorization; Enforceable Obligations ..........................................35
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4.5 No Legal Bar......................................................................................36 4.6 No Material Litigation............................................................................36 4.7 No Default........................................................................................36 4.8 Ownership of Property; Liens......................................................................36 4.9 Intellectual Property.............................................................................37 4.10 No Burdensome Restrictions........................................................................37 4.11 Taxes.............................................................................................37 4.12 Federal Regulations...............................................................................37 4.13 ERISA.............................................................................................37 4.14 Investment Company Act; Other Regulations.........................................................38 4.15 Subsidiaries......................................................................................38 4.16 Purpose of Loans..................................................................................38 4.17 Environmental Matters.............................................................................38 4.18 Security Documents................................................................................39 4.19 Company Senior Indebtedness.......................................................................40 SECTION 5. CONDITIONS PRECEDENT................................................................................40 5.1 Conditions to Initial Extension of Credit.........................................................40 5.2 Conditions to Each Extension of Credit............................................................43 SECTION 6. AFFIRMATIVE COVENANTS...............................................................................44 6.1 Financial Statements..............................................................................44 6.2 Certificates; Other Information...................................................................45 6.3 Payment of Obligations............................................................................46 6.4 Conduct of Business and Maintenance of Existence..................................................46 6.5 Maintenance of Property; Insurance................................................................47 6.6 Inspection of Property; Books and Records; Discussions............................................47 6.7 Notices...........................................................................................47 6.8 Environmental Laws................................................................................48 6.9 Additional Designated Subsidiaries................................................................49 6.10 Further Assurances................................................................................50 SECTION 7. NEGATIVE COVENANTS..................................................................................50 7.1 Financial Condition Covenants.....................................................................50 7.2 Limitation on Indebtedness........................................................................51 7.3 Limitation on Liens...............................................................................52 7.4 Limitation on Guarantee Obligations...............................................................53 7.5 Limitations on Fundamental Changes................................................................53 7.6 Limitations on Sale of Assets.....................................................................54 7.7 Limitation on Restricted Payments.................................................................54 7.8 Limitation on Capital Expenditures................................................................55 7.9 Limitation on Investments, Loans and Advances.....................................................55 7.10 Limitation on Optional Payments and Modifications of Debt Instruments.............................57 7.11 Transactions with Affiliates......................................................................57 7.12 Sale and Leaseback................................................................................57 7.13 Corporate Documents; Name/Location of Assets......................................................57 7.14 Fiscal Year.......................................................................................58
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7.15 Limitation on Negative Pledge Clauses.............................................................58 SECTION 8. EVENTS OF DEFAULT...................................................................................58 SECTION 9. THE AGENT...........................................................................................62 9.1 Appointment.......................................................................................62 9.2 Delegation of Duties..............................................................................62 9.3 Exculpatory Provisions............................................................................62 9.4 Reliance by Agent.................................................................................63 9.5 Notice of Default.................................................................................63 9.6 Non-Reliance on Agent and Other Banks.............................................................63 9.7 Indemnification...................................................................................64 9.8 Agent in Its Individual Capacity..................................................................64 9.9 Successor Agent...................................................................................64 SECTION 10. MISCELLANEOUS......................................................................................65 10.1 Amendments and Waivers............................................................................65 10.2 Notices...........................................................................................65 10.3 No Waiver; Cumulative Remedies....................................................................66 10.4 Survival of Representations and Warranties........................................................67 10.5 Payment of Expenses and Taxes.....................................................................67 10.6 Successors and Assigns; Participations; Purchasing Banks..........................................68 10.7 Adjustments; Set-off..............................................................................71 10.8 Counterparts......................................................................................71 10.9 Severability......................................................................................72 10.10 Integration.......................................................................................72 10.11 Governing Law.....................................................................................72 10.12 Submission to Jurisdiction; Waivers...............................................................72 10.13 Acknowledgments...................................................................................73 10.14 WAIVERS OF JURY TRIAL; COMMERCIAL TRANSACTIONS....................................................73
iii 5 CREDIT AGREEMENT CREDIT AGREEMENT dated as of December __, 1999 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 CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, 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 that the Banks severally extend credit to the Company in an aggregate principal amount not to exceed $30,000,000 at any time outstanding, the proceeds of which shall be used for the purposes hereinafter set forth; and 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 and limitations 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: "ADJUSTED CONSOLIDATED INDEBTEDNESS" that amount which is equal to Consolidated Indebtedness reduced by an amount equal to the sum of (i) Cash and Cash Equivalents, and (ii) that portion of the Company's assets (as shown on its balance sheet) which represents real property owned by the Company and used for stores with respect to which the Company is party to a fully binding commitment to enter into a sale-leaseback arrangement within sixty days following the date of such calculation. "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 1 6 the power, directly or ndirectly, (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. "AGENT" as defined in the Preamble. "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,
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- ----------------------------------------------------------------------------------------------------------- but greater than or equal to 3.50 to 1.00 0.00% 2.50% - ----------------------------------------------------------------------------------------------------------- IV Less than 4.50 to 1.00, but greater than or equal to 4.00 to 1.00 0.25% 2.75% - ----------------------------------------------------------------------------------------------------------- V Greater than or equal to 4.50 to 1.00 0.50% 3.00% ===========================================================================================================
"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 E. "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. "BENEFITTING BANK" as defined in Section 10.7. "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; PROVIDED HOWEVER, that expenditures, which otherwise would constitute Capital Expenditures hereunder, funded by external sources such as bank financing, capital or operating leases, equity investments, allowances from gas companies, etc. shall not be deemed to be Capital Expenditures for purposes of this definition. "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" when used in connection with any Person, all monetary and nonmonetary items owned by that Person are treated as cash in accordance with GAAP. 3 8 "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 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; or (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 4 9 "CLEAN-DOWN PERIOD" the period commencing on May 15 and ending on September 15 of each year during the Commitment Period. "CODE" the Internal Revenue Code of 1986, as amended from time to time. "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. "COLLATERAL DISCLOSURE LIST" the list executed and delivered by the Company on the Effective Date setting forth certain information with respect to the Company and the Collateral in the form of EXHIBIT I attached hereto. "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 on the Effective Date, 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, made by the Company in favor of the Agent for the ratable benefit of the Banks on the Effective Date, 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 5 10 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. "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. 6 11 "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. "EFFECTIVE DATE" The date of this Agreement or such later date agreed to in writing by the Company, the Agent and the Banks. "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 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. 7 12 "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 1999 shall mean the Saturday closest to January 31, 1999, which shall be the date on which the Company's 1999 fiscal year shall end. "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 8 13 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 owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "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 accrued and unpaid interest on Existing Revolving Credit Loans, the Effective Date and (b) after the Effective Date, as to (x) Alternate Base Rate Loan, each FQED to occur while such Loan is outstanding, (y) as to any LIBOR Loan having a LIBOR Interest Period of three months or less, the last day of such LIBOR Interest Period, and (z) as to any LIBOR Loan having a LIBOR Interest Period longer than three months, each day which is three months or a whole multiple 9 14 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" Citizens Bank of 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 EBITDA for the period of four consecutive fiscal quarters ending on the FQED immediately preceding such time: 10 15
Ratio of Consolidated Indebtedness to Consolidated Level EBITDA Letter of Credit Rate ==================================================================================================== I Less than 3.00 to 1.00 1.00% - ---------------------------------------------------------------------------------------------------- II Less than 3.50 to 1.00, but greater than or equal to 3.00 to 1.00 1.25% - ---------------------------------------------------------------------------------------------------- III Less than 4.00 to 1.00, but greater than or equal to 3.50 to 1.00 1.50% - ---------------------------------------------------------------------------------------------------- IV Less than 4.50 to 1.00, but greater than or equal to 4.00 to 1.00 1.75% ==================================================================================================== V Greater than or equal to 4.50 to 1.00 2.00% ====================================================================================================
"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. "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 11 16 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" as at the FQED to occur on or about January 31, 1999: $5,600,000 and thereafter, $5,600,000 plus 50% of the cumulative Consolidated Net Income earned after the FQED ending approximately January 31, 1999. "MULTIEMPLOYER PLAN" a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. 12 17 "NCB" as defined in the Preamble. "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. "OBLIGATIONS" means any and all loans, advances, indebtedness, liabilities, obligations, covenants or duties of the Company to the Agent, any Issuing Bank, the Banks or any Bank Affiliate of any kind or nature, including obligations to pay money and to perform acts or refrain from taking action, arising under or pursuant to this Credit Agreement, the Notes or the Loan Documents, or under any loan, finance lease, line of credit, letter of credit, guaranty, indemnity, confirmation, acceptance, currency exchange, interest rate protection, automatic clearinghouse transfer, overdraft or other type of financing arrangement, and any and all extensions and renewals thereof, and modifications and amendments thereto, whether in whole or in part, whether created directly or acquired by assignment, purchase, discount or otherwise, whether any of the foregoing are direct or indirect, joint or several, absolute or contingent under, due or to become due, now existing or hereafter arising, and whether or not evidenced by a writing and specifically including but not being limited to (i) the unpaid principal amount outstanding at any time under the Notes, plus all accrued and unpaid interest thereon, together with all fees, expenses, including attorneys' fees, penalties, and other amount sowing by or chargeable to the Company under this Credit Agreement, the Notes or the Loan Documents, (ii) all Reimbursement Obligations; and (iii) interest which accrues after the commencement of any case or proceeding in bankruptcy after the insolvency of, 13 18 or for the reorganization of, the Company, whether or not allowed in such case or proceeding. "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. "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. 14 19 "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 67%. "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. 15 20 "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 -- 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. "STORE PROPERTIES HELD FOR SALE/LEASEBACK" as of any date, the book value, as indicated on the Company's financial statements and determined in accordance with GAAP, of any real or personal property owned by the Company and held in anticipation of entering into a Sale/Leaseback Transaction with respect thereto. "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 16 21 "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 on the Effective Date, 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 on the Effective Date, 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, made by each Designated Subsidiary in favor of the Agent for the ratable benefit of the Banks on the Effective Date , 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, 2003, or such later date to which the Termination Date may be extended in accordance with subsection 2.15. "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. 17 22 (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. 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 Effective 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. From and after the Effective 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 18 23 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 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). 19 24 (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 the greater of (i) five percent (5%) of the total amount of such payment or amount due or Thirty-Five Dollars ($35.00); provided, such late charge shall not be payable in respect of any overdue payment in the event Borrower was entitled to a Revolving Credit Loan in the amount of such payment under the provisions of subsection 2.1 at the time such payment became due, Borrower duly requested such Revolving Credit Loan in compliance with the requirements of the Credit Agreement, and the Banks failed to provide such Revolving Credit Loan without cause. 2.4 PROCEDURE FOR BORROWING. The Company may borrow under the Revolving Credit Commitments on or after the Effective 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 20 25 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. 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 21 26 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 Effective 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 Effective Date 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 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. 22 27 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 an "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 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: 23 28 (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 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, 24 29 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. If at any time the Company shall default in the observance or performance of any agreement contained in Section 7, irrespective of whether such default is cured by the Company or any action is taken by the Agent or any Bank, then, for a period of at least 30 Consecutive Days during the Clean-Down Periods occurring during the fiscal years set forth below, the aggregate 25 30 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 --------------------------------------------------------- 2001 $18,000,000 2002 12,000,000 2003 6,000,000 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; 26 31 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 of reducing the rate of return on such Bank's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, after submission by such Bank to the Company (with a copy to the Agent) of a written request therefore, the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. 2.19 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 27 32 Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes, provided, however, that the Company shall not be required to increase any such amounts payable to any Bank that is not organized under the laws of the United States of America or a state thereof if such Bank fails to comply with the requirements of paragraph (b) of this subsection. Whenever any Non-Excluded Taxes are payable by the Company, as promptly as possible thereafter the Company shall send to the Agent for its own account or for the account of such Bank, as the case may be, a certified copy of an original official receipt received by the Company showing payment thereof. If the Company fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Company shall indemnify the Agent and the Banks for any incremental taxes, interest or penalties that may become payable by the Agent or any Bank as a result of any such failure. The agreements in this subsection shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Bank that is not incorporated under the laws of the United States of America or a state thereof shall: (i) deliver to the Company and the Agent (A) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be; (ii) deliver to the Company and the Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Agent unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank so advises the Company and the Agent. Such Bank shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Bank or a Participant pursuant to subsection 10.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this subsection, provided that in the case of a Participant such Participant shall furnish all such required forms and 28 33 statements to the Bank from which the related participation shall have been purchased. 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. 29 34 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 Effective 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, including, but not limited to, bonds required for court proceedings, or (2) other similar financial support for obligations of the Company. (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 30 35 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 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 31 36 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 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 32 37 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 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. 33 38 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 of January 30, 1999 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 of October 30, 1999 and the related unaudited consolidated statements of operations and retained earnings for the nine-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 nine-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). (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 30, 1999 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 34 39 financial condition of the Company and its consolidated Subsidiaries as of January 30, 1999. 4.2 NO CHANGE. Since January 30, 1999, (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 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 35 40 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 or as disclosed in the Company's most recent annual report. 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. 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 36 41 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 Effective 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. 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 37 42 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 Effective 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 30, 1999 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 30, 1999 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. 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. 38 43 (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 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 39 44 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, (v) the Company Security Agreement, executed and delivered by a duly authorized officer of the Company, and the Collateral Disclosure List executed and delivered by a duly authorized officer of the Company. (c) EXISTING INDEBTEDNESS. The Agent shall have received, with a copy for each Bank, a certificate, dated on or before the Effective Date, executed by a duly authorized officer of the Company certifying that, on or before the Effective Date, the Company shall have paid in full all indebtedness of the Company outstanding under that Credit Agreement dated April 24, 1996 and as amended from time to time, by and between Bank of Boston Connecticut, as agent, the Company and the banks a party thereto, other than the indebtedness represented by the letters of credit described on SCHEDULE VIII, each of which has the benefit of a Letter of Credit issued on the Effective Date by the Agent. 40 45 (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 Effective 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 Effective 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 each Designated Subsidiary, certified at the Effective 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. 41 46 (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 Effective 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 Effective Date referred to in subsection 2.8 and the Agent shall have received an agency fee in the amount of $20,000, and the fees and disbursements of Updike, Kelly & Spellacy, P.C., special counsel for the Agent, shall have been paid in full on the Effective Date. Annually on the anniversary of the Effective 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 Baker & Hostetler, counsel to the Company and its Subsidiaries, and Peter D. Miller, General Counsel to the Company and its Subsidiaries, each dated the Effective Date and substantially in the form of EXHIBIT F, with such changes thereto as the Agent shall approve. Such legal opinions shall cover 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 Effective 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 42 47 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 Effective 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 Effective Date, Guarantee Obligations incurred after the Effective 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. 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 43 48 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 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 44 49 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 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; 45 50 (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 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 46 51 relation to its business and 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 (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. 47 52 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 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 48 53 Subsidiaries not named a Designated Subsidiary on the Effective 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) ADJUSTED CONSOLIDATED INDEBTEDNESS TO CONSOLIDATED EBITDA. For any period of four consecutive fiscal quarters ending on any FQED set forth below, permit the ratio of (i) Adjusted Consolidated Indebtedness at the end of such period less Store Properties Held For Sale/Leaseback at the end of such period to (ii) Consolidated EBITDA for such period to be more than the ratio set forth opposite such FQED: FQED Ratio ---- ----- 49 54
The FQED ending on or about January 31, 1999 4.65 to 1.00 The FQED ending on or about April 30, 1999 4.50 to 1.00 The FQED ending on or about July 31, 1999 4.35 to 1.00 The FQED ending on or about October 30, 1999 4.25 to 1.00 The FQED ending on or about January 31, 2000 4.25 to 1.00 The FQED ending on or about April 30, 2000 4.15 to 1.00 The FQED ending on or about July 31, 2000 4.10 to 1.00 The FQED ending on or about October 30, 2000 and thereafter 3.90 to 1.00
(b) EBITDA TO INTEREST EXPENSE. For any period of four consecutive fiscal quarters ending on any FQED 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 FQED:
FQED Ratio ---- ----- The FQED ending on or about January 31, 1999 2.00 to 1.00 The FQED ending on or about April 30, 1999 2.00 to 1.00 The FQED ending on or about July 31, 1999 2.00 to 1.00 The FQED ending on or about October 30, 1999 2.10 to 1.00 The FQED ending on or about January 31, 2000 2.10 to 1.00 The FQED ending on or about April 30, 2000 and thereafter 2.25 to 1.00
(c) FIXED CHARGE COVERAGE. For any period of four consecutive fiscal quarters ending on any FQED 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 FQED:
FQED Ratio ---- ----- The FQED ending on or about January 31, 1999 and thereafter 1.25 to 1.00
(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: 50 55 (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 Effective 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 Effective 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 (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; 51 56 (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 Effective 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 Effective 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, 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 52 57 (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 (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 applicable. 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 53 58 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 January 30, 1999 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 January 30, 1999, would not exceed the sum of (x) 50% of Consolidated Net Income accrued on a cumulative basis from January 30, 1999 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 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 ----------- ------------ 1999 $35,000,000 Each fiscal year thereafter $25,000,000 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. 54 59 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; (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 Effective 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 Effective 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 55 60 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 (j) Permitted Joint Venture Investments. 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 required under Section 5.1(c) hereof, 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 56 61 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, 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 57 62 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 (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 58 63 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 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 59 64 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. 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, 60 65 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. SECTION 9. THE AGENT 9.1 APPOINTMENT. Each Bank hereby irrevocably designates and appoints Citizens Bank of 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. 61 66 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 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) 62 67 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 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. 63 68 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 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 64 69 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 Dairy Mart Way 300 Executive Parkway West Hudson, OH 44236 Attention: Gregory G. Landry Telephone: (330) 342-6729 Telecopy: (330) 342-6804 With a copy to: Dairy Mart Convenience Stores, Inc. One Dairy Mart Way 300 Executive Parkway West Hudson, OH 44236 Attention: Peter D. Miller, General Counsel Telephone: (330) 342-6725 Telecopy: (330) 342-6804 The Agent: Citizens Bank of Connecticut 237 Main Street Middletown, CT 06457 Attention: Scott S. Barnett Telephone: (860) 343-3809 Telecopy: (860) 638-4439 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. 65 70 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 66 71 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 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. 67 72 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 in the minimum principal amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof, 68 73 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 Effective 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. 69 74 Notwithstanding any provision of this subsection (e) to the contrary, no registration and processing fee shall be due and payable as a result of any assignment required to make CBC or NCB a party to this Agreement. (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. (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. 184453 CITIZENS BANK OF CONNECTICUT UPDIKE, KELLY & SPELLACY, P.C. (Hartford/New Haven, Connecticut) 70 75 (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. 71 76 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 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: 72 77 (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. [SIGNATURE PAGE S-1 NEXT FOLLOWS] 73 78 S-1 IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Credit Agreement as of the date first set forth above. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Susan Adams -------------------------------------- Name: Susan Adams Title: Vice President CITIZENS BANK OF CONNECTICUT, Individually and as Agent By: /s/ Scott S. Barrett -------------------------------------- Name: Scott S. Barrett Title: Vice President NATIONAL CITY BANK By: /s/ W. Michael Sweeny -------------------------------------- Name: W. Michael Sweeny Title: Senior Vice President 79 SCHEDULE I COMMITMENTS; ADDRESSES Commitment Commitment $ Amount Percentage CITIZENS BANK OF CONNECTICUT $17,500,000 58.33333333% 63 Eugene O'Neill Drive New London, CT 06320 Attn: Scott S. Barnett Telecopy No. (860) 638-4439 NATIONAL CITY BANK $ 7,500,000 25% 1 Cascade Plaza Akron, OH 44308 Attn: W. Michael Sweeney Telecopy No. (330) 375-8436 THE PROVIDENT BANK $ 5,000,000 16.66666667 1111 Superior Avenue Cleveland, OH 44114 Attn: James M. Hojnacki Telecopy No. (216)694-2336 TOTALS $30,000,000 100% 80 EXHIBIT A --------- FORM OF REVOLVING CREDIT NOTE 81 REVOLVING CREDIT NOTE $___________________ December __, 1999 FOR VALUE RECEIVED, the undersigned DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation (the "Borrower" or "Maker"), hereby unconditionally promises to pay to the order of _________________________ (the "Bank"), or any subsequent assignee or holder (Bank and any such subsequent assignee or holder being sometimes referred to as "Holder"), at the office of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, in its capacity as the agent (in such capacity, the "Agent") under the Credit Agreement (as hereinafter defined), located at 63 Eugene O'Neill Drive, New London, Connecticut 06320 or such other place as the Holder may designate from time to time, in lawful money of the United States of America and in immediately available funds, the principal amount of ___________________($___________) or such lesser amounts as may have been loaned, advanced and readvanced to Maker by Bank pursuant to that certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") by and among Borrower, the banks, financial institutions and other lenders which are or may become parties thereto (collectively, with Bank, the "Banks"), and the Agent under the Credit Agreement, together with interest thereon as provided herein and all other amounts due from Maker to Bank under the Credit Agreement and this Note. The unpaid principal amount of this Note shall be paid at the times and in the manner set forth in Section 2.4 of the Credit Agreement, but if not sooner paid, the entire unpaid principal amount of this Note, together with accrued and unpaid interest thereon, shall be due and payable on April 30, 2003. Interest on the unpaid principal amount of this Note shall accrue and be payable at the times, in the manner and at the rates set forth in Section 2.3 of the Credit Agreement and, upon the occurrence of an Event of Default, Section 2.3 (c) of the Credit Agreement. The Holder is authorized to, and so long as it holds this Note shall, record the date, Type and amount of each Revolving Credit Loan made by the Bank pursuant to Section 2.7 of the Credit Agreement, each continuation thereof and each conversion of all or a portion thereof to another Type pursuant to Section 2.5 of the Credit Agreement, the date and amount of each payment or prepayment of principal thereof and, in the case of Libor Loans, the length of each Interest Period and Libor Rate with respect thereto, on Schedules A and B attached hereto and constituting a part hereof, or on a continuation thereof which shall be attached hereto and constitute a part hereof, PROVIDED that failure of the Bank to make any such recordation (or any error in such recordation) shall not affect the obligations of the Borrower under this Note or under the Credit Agreement. This Note is one of the Revolving Credit Notes referred to in Section 2.7 of the Credit Agreement, the terms and conditions of which are hereby incorporated by this reference. 82 2 Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. No reference to the Credit Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the Maker of this Note to pay the principal of and interest on this Note as herein provided. Until notified in writing of the transfer of this Note, Maker shall be entitled to deem Holder or such Person who has been so identified by the transferor in writing to Maker as the holder of this Note, as the owner and holder of this Note. The Credit Agreement and this Note shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of Connecticut. Upon the occurrence of an Event of Default (as defined in Section 8 of the Credit Agreement), the unpaid principal amount of this Note may become or may be declared to be due and payable in the manner, upon the conditions and with the effect provided in Section 8 of the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in Section 10.1 of the Credit Agreement. This Note is subject to prepayment under the circumstances set forth in Section 2.10 and Section 2.11 of the Credit Agreement and may be prepaid in the manner set forth in Section 2.10 and Section 2.11 of the Credit Agreement. Any payment of principal or interest which is not made within ten (10) days of its due date shall be subject to a late payment charge in an amount set forth in Section 2.3(e) of the Credit Agreement. Nothing in the preceding sentence shall affect the Bank's rights to exercise any of its rights and remedies provided in the Agreement if an Event of Default has occurred. Any failure by the Banks or the Agent to exercise any rights or remedies under this Note or the Credit Agreement arising or existing as a result of the occurrence of an Event of Default, or any delay in such exercise, shall not constitute a waiver of the right to exercise such right at a later time so long as such Event of Default shall remain uncured, and shall not constitute a waiver of the right to exercise such right if any other Event of Default shall occur. The acceptance by the Bank or the Agent of the payment of any sum due and payable under this Note after the date specified for such payment shall not be a waiver of any right to require prompt payment when due of all other sums payable under this Note or the right to declare a default for failure to make prompt payment in full. 83 3 Except as otherwise set forth in the Credit Agreement, maker and each endorser, guarantor and surety of this Note, and each other Person liable or who shall become liable for all or any part of the indebtedness evidenced by this Note: (a) waive demand, presentment, protest, notice of protest, notice of dishonor, diligence in collection, notice of nonpayment and all notices of a like nature; and (b) consent to (i) the release, surrender, exchange or substitution of all or any part of the security for the indebtedness evidenced by this Note, or the taking of any additional security; (ii) the release of any or all other Persons from liability, whether primary or contingent, for the indebtedness evidenced by this Note or for any related obligations; and (iii) the granting of any other indulgences to any such Person; and (c) consent to (i) all renewals, extensions or modifications of this Note or the Credit Agreement (including any affecting the time of payment) made in accordance with Section 10.1 of the Credit Agreement, and (ii) all advances under this Note or the Credit Agreement. Any such renewal, extension, modification, advance, release, surrender, exchange, substitution, taking or indulgence may take place without notice to any such Person, and, whether or not any such notice is given, shall not impair the liability of any such Person. Maker and each endorser, guarantor and surety of this Note, and each other Person liable or who shall become liable for all or any part of the indebtedness evidenced by this Note, hereby give Holder a lien and right of setoff for all of their respective liabilities in respect of such indebtedness upon and against all of their respective deposits, credits and property, now or hereafter in the possession or control of Holder or in transit to Holder. Holder may, at any time after the occurrence and during the continuance of an Event of Default, apply the same, or any part thereof, to any liability of Maker or any such other Person, whether matured or unmatured, to Holder. If this Note is now, or hereafter shall be, signed by more than one Person, it shall be the joint and several obligation of all such Persons (including, without limitation, all makers, endorsers, guarantors and sureties, if any) and shall be binding on all such Persons and their respective heirs, executors, administrators, legal representatives, successors and assigns. This Note and all covenants, agreements and provisions set forth in this Note shall inure to the benefit of Holder and its successors and assigns, including any lender(s) with which Holder may participate in the making of any loans or advances evidenced by this Note. MAKER AND EACH AND EVERY ENDORSER, GUARANTOR AND SURETY OF THIS NOTE, AND EACH OTHER PERSON WHO IS OR WHO SHALL BECOME LIABLE FOR ALL OR ANY PART OF THIS NOTE, HEREBY ACKNOWLEDGE THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL 84 4 TRANSACTION AND WAIVE THEIR RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES OR BY OTHER APPLICABLE LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO USE. MAKER AND EACH AND EVERY ENDORSER, GUARANTOR AND SURETY OF THIS NOTE, AND EACH OTHER PERSON WHO IS OR WHO SHALL BECOME LIABLE FOR ALL OR ANY PART OF THIS NOTE, HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION, OR PROCEEDING OR ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTION OF WHICH THIS NOTE IS A PART AND/OR IN THE ENFORCEMENT BY THE AGENT OR THE BANKS OF ANY OF THEIR RIGHTS AND REMEDIES HEREUNDER OR UNDER APPLICABLE LAW. MAKER ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER BY ITS ATTORNEY. IN WITNESS WHEREOF, Maker has executed this Note as of the date first set forth above. DAIRY MART CONVENIENCE STORES, INC. By:____________________________ Name: Title: 85 SCHEDULE A TO REVOLVING CREDIT NOTE LOANS, CONVERSIONS AND PAYMENTS OF ALTERNATE BASE RATE LOANS ----------------------------
Amount of Amount of Unpaid Libor Loans Base Rate Principal Amount of Converted Loans Balance of Alternate Base into Alternate Converted Amount of Alternate Date Rate Loan Base Rate into Libor Principal Base Rate Notation - ---- --------- Loans---- Loans Repaid Loans Made By ----- ----- ------ ----- -------
86 SCHEDULE B TO REVOLVING CREDIT NOTE LOANS, CONVERSIONS AND PAYMENTS OF LIBOR RATE LOANS
Amount of Amount of Alternate Interest Libor Loans Amount of Base Rate Period and Converted Libor Loan Loans Libor Rate into Amount Unpaid (and Converted with Alternate of Principal Continuations into Libor Respect Base Rate Principal Balance of Notation Date Thereof) Loans Thereto Loans Repaid Libor Loans Made By - ----- ------- ----- ------- ----- ------ ----------- -------
87 EXHIBIT B --------- FORM OF SUBSIDIARY GUARANTEE 88 GUARANTEE AGREEMENT ------------------- This GUARANTEE AGREEMENT (the "Guarantee") is made as of this ___ day of December, 1999 by _____________________________, with its chief executive office located at ______________________, (the "Guarantor") in favor of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, with an office located at 63 Eugene O'Neill Drive, New London, Connecticut 06320 as Agent (in such capacity, the "Agent") for the banks, financial institutions and other Banks (the "Banks") which are or become parties to the Credit Agreement (as hereinafter defined). RECITALS -------- Dairy Mart Convenience Stores, Inc. (the "Borrower"), the Agent and the Banks are parties to a certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") pursuant to which the Banks agreed severally to make loans, advances and other extensions of credit to Borrower. Guarantor is a direct or indirect wholly owned subsidiary of Borrower and, as such, will receive a direct pecuniary benefit from the making of such loans, advances and extension of credit to Borrower. It is a condition precedent to the obligation of the Banks to make their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement that the Guarantor shall have executed and delivered this Guarantee. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to enter into the Credit Agreement and to induce the Banks to make and continue their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement, the Guarantor hereby agrees with the Agent, for the ratable benefit of the Banks, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein, including, but not limited to the term "Obligations" are so used as so defined. 2. GUARANTEE. The Guarantor hereby unconditionally and irrevocably guarantees to the Agent and the Banks the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. Anything contained in this Guaranty to the contrary notwithstanding, the obligation of Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under 89 2 the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of the Guarantor in respect of intercompany indebtedness to the Borrower or other affiliates of Borrower to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder, and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including without limitation any such right of contribution). 3. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default specified in the Credit Agreement, the Agent and the Banks are hereby irrevocably authorized at any time and from time to time without notice to the Guarantor, any such notice being hereby waived by the Guarantor, to set off and appropriate and apply 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 the Agent or any Bank to or for the credit or the account of the Guarantor, or any part thereof in such amounts as the Agent or any Bank may elect, on account of the liabilities of the Guarantor hereunder and claims of every nature and description of the Agent or any Bank against the Guarantor, in any currency, whether arising hereunder, under the Credit Agreement, the Notes or otherwise, as the Agent or such Bank may elect, whether or not the Agent or such Bank has made any demand for payment and although such liabilities and claims may be contingent or unmatured. The Agent or such Bank shall notify the Guarantor promptly of any such set-off and the application made by the Agent or such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Agent or any Bank under this paragraph are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Agent or such Bank may have. 4. SUBROGATION. Upon making any payment hereunder, the Guarantor shall be subrogated to the rights of the Agent and the Banks against the Borrower with respect to such payment; PROVIDED that the Guarantor shall not seek to enforce any right or receive any payment by way of subrogation until all amounts of principal of and interest on the Notes and all other amounts due and payable by the Borrower to the Agent or any Bank under the Credit Agreement or any of the Loan Documents have been paid in full and the Commitments have been terminated. 5. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS. The Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantor, and without notice to or further assent by the Guarantor, any demand for payment of any of the Obligations made by the Agent may be rescinded by the Agent, and any of the Obligations continued, and the obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent and the Banks, and the Credit Agreement, the Notes, the Loan Documents and any other document in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Agent and the Banks may deem advisable from time to time, and any collateral security, 90 3 guarantee or right of offset at any time held by the Agent for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Agent shall have no obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. 6. GUARANTEE ABSOLUTE AND UNCONDITIONAL. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent and the Banks upon this Guarantee or acceptance of this Guarantee; the obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guarantee; and all dealings between the Borrower or the Guarantor, on the one hand, and the Agent and the Banks, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or the Guarantor with respect to the Obligations. This Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Credit Agreement, the Notes, the Loan Documents, any of the obligations or any collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Agent or any Bank, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower against the Agent or any Bank, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or the Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Guarantor, the Agent and the Banks may, but shall be under no obligation, to pursue such rights and remedies that they may have against the Borrower or any other Person or against any collateral security or guarantee for the obligations or any right of offset with respect thereto, and any failure by the Agent and the Banks to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve the Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Agent and the Banks against the Guarantor. 7. REINSTATEMENT. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent or any Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. PAYMENTS. The Guarantor hereby agrees that the Obligations will be paid to the Agent without set-off or counterclaim in U.S. Dollars at the office of the Agent located at 63 Eugene O'Neill Drive, New London, Connecticut 06320 or such other place as the Agent may designate to the Guarantor. 91 4 9. REPRESENTATIONS AND WARRANTIES. The Guarantor represents and warrants that: (a) the Guarantor has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guarantee, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guarantee; (b) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of the Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guarantee; (c) this Guarantee has been duly executed and delivered on behalf of the Guarantor and constitutes a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors, rights generally and by general principles of equity (whether enforcement is sought in proceedings in equity or at law); (d) the execution, delivery and performance of this Guarantee will not violate any provision of any Requirement of Law or Contractual Obligation of the Guarantor and will not result in or require the creation or imposition of any Lien on any of the properties or assets of the Guarantor pursuant to any Requirement of Law or Contractual Obligation of the Guarantor; and (e) no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Guarantor, threatened by or against the Guarantor or against any of its properties or revenues with respect to this Guarantee or any of the transactions contemplated hereby. 10. SEVERABILITY. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or 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. 11. PARAGRAPH HEADINGS. The paragraph headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 12. NO WAIVER; CUMULATIVE REMEDIES. The Agent or any Bank shall not by any act (except by a written instrument pursuant to paragraph 13 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right 92 5 or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or any Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except as provided in the Credit Agreement. This Guarantee shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CONNECTICUT. 14. NOTICES. Notices by the Agent to the Guarantor shall be given in care of the Borrower in the manner set forth in the Credit Agreement. 15. SUBMISSION TO JURISDICTION; WAIVERS. The Guarantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guarantee and the 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 Guarantor to the address set forth in this Agreement or at such other address of which the Agent shall have been notified; and (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. 16. ACKNOWLEDGMENTS. The Guarantor hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Guarantee and the Loan Documents; (b) neither the Agent or any Bank has any fiduciary relationship to the Guarantor, and the relationship between the Agent and the Banks and the Guarantor is solely that of guarantor and creditor; and 93 6 (c) no joint venture exists between the Agent and the Guarantor or among the Agent, the Banks, the Borrower and the Guarantor. 17. COMMERCIAL TRANSACTION. GUARANTOR ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS GUARANTY IS A PART IS A COMMERCIAL TRANSACTION, AND HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES OR BY OTHER APPLICABLE LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE AGENT OR THE BANKS MAY DESIRE TO USE. 18. WAIVER OF JURY TRIAL. GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING OR ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTION OF WHICH THIS GUARANTY IS A PART AND/OR THE ENFORCEMENT OF ANY OF ITS RIGHTS AND REMEDIES. GUARANTOR ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEY. 19. TERMINATION. Subject to the reinstatement provisions contained in Section 7 hereof, this Guaranty shall terminate upon the payment and performance of the Obligations in full and the termination of the Commitments, and the Agent shall deliver a release of Guarantor in form and substance reasonably acceptable to the Guarantor. 20. EXERCISE OF REMEDIES. Except as otherwise permitted herein or under the Credit Agreement, the Agent shall not require the payment and performance of the Obligations under this Guarantee by Guarantor until the occurrence of a Default or Event of Default specified in the Credit Agreement. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered as of the date first above written. [-------------------------] By: ------------------------------------ Name: Title: Duly Authorized 94 EXHIBIT C --------- FORM OF COMPANY PLEDGE AGREEMENT 95 COMPANY PLEDGE AGREEMENT ------------------------ This COMPANY PLEDGE AGREEMENT is made as of this ___ day of December, 1999 by DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation, with its chief executive office located at 300 Executive Parkway West, Hudson, Ohio 44236 (the "Pledgor") in favor of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, with an office located at 63 Eugene O'Neill Drive, New London, Connecticut 06320 as agent (in such capacity, the "Agent") for the banks, financial institutions and other lenders (the "Banks") which are or become parties to the Credit Agreement (as hereinafter defined). RECITALS -------- The Pldegor, the Agent and the Banks are parties to a certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") pursuant to which the Banks have agreed to make loans, advances and other extensions of credit to the Pledgor. It is a condition precedent to the obligation of the Banks to make their respective loans, advances and other extensions of credit to the Pledgor under the Credit Agreement that the Pledgor shall have executed and delivered this Company Pledge Agreement to the Agent for the ratable benefit of the Banks. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to enter into the Credit Agreement and to induce the Banks to make their respective loans, advances and other extensions of credit to the Pledgor under the Credit Agreement, the Pledgor hereby agrees with the Agent, for the ratable benefit of the Banks, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "CODE" means the Uniform Commercial Code from time to time in effect in the State of Connecticut. "COLLATERAL" means the Pledged Stock and all Proceeds. "ISSUER" means the Person or Persons which issued the Pledged Stock and which acknowledges the agreements of the Pledgor under this Agreement. "OBLIGATIONS" has the meaning set forth in the Credit Agreement. "PLEDGE AGREEMENT" means this Company Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "PLEDGED STOCK" means the shares of capital stock of the Issuer listed on Schedule I hereto, together with all stock certificates, options or rights of any nature whatsoever which may be issued or granted by the Issuer to the Pledgor while this Pledge Agreement is in effect. 96 2 "PROCEEDS" means all "proceeds" as such term is defined in Section 9-306(l) of the Uniform Commercial Code in effect in the State of Connecticut on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions with respect thereto. 2. PLEDGE; GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to the Agent all the Pledged Stock and hereby grants to the Agent, for the ratable benefit of the Banks, a security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. STOCK POWERS. Concurrently with the delivery to the Agent of each certificate representing one or more shares of the Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank with, if the Agent so requests, signature guaranteed. 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants that: (a) this Pledge Agreement has been duly executed and delivered on behalf of the Pledgor and constitutes a legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms, except as enforceability may be limited by 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); (b) the shares of Pledged Stock listed on Schedule I constitute all the issued and outstanding shares of all classes of the capital stock of the Issuer owned by the Pledgor and are represented by the certificates listed thereon; (c) to the best of Pledgor's knowledge, all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (d) the Pledgor is the record and beneficial owner of, and has title to, the Pledged Stock listed on Schedule 1, free of any and all Liens or options in favor of, or claims of, any other Person, except the Liens created by this Pledge Agreement; and (e) upon delivery to the Agent of the stock certificates evidencing the Pledged Stock (and assuming the continuing possession by Agent of such stock certificate in accordance with the requirements of applicable law), the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected Lien on the Pledged Stock, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any Pledged Stock from the Pledgor. 5. COVENANTS. The Pledgor covenants and agrees with the Agent that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: 97 3 (a) If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the Agent's and each Bank's agent, hold the same in trust for the Agent and the Banks and deliver the same forthwith to the Agent in the exact form received, duly endorsed by the Pledgor to the Agent, if required, together with an undated stock power covering such certificate duly executed in blank and with, if the Agent so requests, signature guaranteed, to be held by the Agent, for the ratable benefit of the Banks, hereunder as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the Issuer shall be paid over to the Agent to be held by it hereunder for the ratable benefits of the Banks as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of the Issuer or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Agent to be held by it for the ratable benefit of the Banks, subject to the terms hereof, as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Agent, hold such money or property in trust for the Agent and the Banks, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Agent for the ratable benefit of the Banks, except as otherwise set forth in the Credit Agreement, the Pledgor will not (i) vote to enable, or take any other action to permit, the Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of the Issuer, or (ii) sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Agent and the Banks in and to the Collateral against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Pledge Agreement. 98 4 (d) The Pledgor agrees to pay, and to save the Agent and the Banks harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 6. CASH DIVIDENDS; VOTING RIGHTS. Unless an Event of Default shall have occurred and be continuing and the Agent shall have given notice to the Pledgor of the Agent's intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends paid in the normal course of business of the Issuer and consistent with past practice, to the extent permitted in the Credit Agreement, in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock, PROVIDED, HOWEVER, that no vote shall be cast or corporate right exercised or other action taken which would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes, the Loan Documents or this Pledge Agreement. 7. RIGHTS OF AGENT. (a) If an Event of Default shall occur and be continuing and the Agent shall give notice of its intent to exercise such rights to the Pledgor: (i) the Agent shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and make application thereof to the Obligations in such order as it may determine, and (ii) at the-request of the Agent, all shares of the Pledged Stock shall be registered in the name of the Agent or its nominee, and the Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of the Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the Issuer, or upon the exercise by the Pledgor or the Agent of any right, privilege or option pertaining to such shares of the Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Agent shall have no duty to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Agent hereunder shall not be conditioned or contingent upon the pursuit by the Agent of any right or remedy against the Issuer or against any other Person which may be or become liable in respect of all or any part of the Obligations or against any other collateral security therefor, guarantee thereof or right of offset with respect thereto. The Agent shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall it be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. REMEDIES. If an Event of Default shall occur and be continuing, the Agent may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any 99 5 other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, except as otherwise set forth in the Credit Agreement, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Issuer or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Banks hereunder, including, without limitation, reasonable attorneys, fees and disbursements, to the payment in whole or in part of the Obligations, in the manner set forth in the Credit Agreement, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(i) (c) of the Code, need the Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Agent or any Bank arising out of the exercise by the Agent of any of its rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. The Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Agent or any Bank to collect such deficiency. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. 9. PRIVATE SALES. (a) The Pledgor recognizes that the Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Exchange Act of 1934 and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the Agent than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Issuer would agree to do so. 100 6 (b) The Pledgor further agrees to use its reasonable efforts to do or cause to be done all such other acts as may be necessary to make any sale or sales of all or any portion of the Pledged Stock pursuant to this paragraph 9 valid and binding and in compliance with any and all other applicable Requirements of Law. 10. NO SUBROGATION. Notwithstanding any payment or payments made by the Pledgor hereunder, or any set-off or application of funds of the Pledgor by the Agent, or the receipt of any amounts by the Agent with respect to any of the Collateral, the Pledgor shall not assert any right it may have to be subrogated to any of the rights of the Agent or any Bank against the Issuer or against any other collateral security held by the Agent for the ratable benefit of the Banks for the payment of the Obligations, until the Obligations shall have been paid in full and the Commitments shall have been terminated. 11. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS. The Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and, except as otherwise set forth in the Credit Agreement, without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Agent may be rescinded by the Agent, and any of the Obligations continued, and the Obligations, or the liability of the Issuer or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent, and the Credit Agreement, the Notes, the Loan Documents and any other document in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Agent and the Banks may deem advisable from time to time, and any guarantee, right of offset or other collateral at any time held by the Agent for the ratable benefit of the Banks for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Agent shall have no obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto. Except as otherwise set forth in the Credit Agreement, the Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent upon this Pledge Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement, and all dealings among the Issuer, the Pledgor, the Agent and the Banks shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. Except as otherwise set forth in the Credit Agreement, the Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Issuer or the Pledgor with respect to the Obligations. 12. LIMITATION ON DUTIES REGARDING COLLATERAL. The Agent's sole duty with respect to the custody safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. The Agent, the Banks or any of their respective directors, officers, employees or agents shall not be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any 101 7 obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 14. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or 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. 15. PARAGRAPH HEADINGS. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. NO WAIVER; CUMULATIVE REMEDIES. The Agent or any Bank shall not by any act (except by a written instrument pursuant to paragraph 17 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or any Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Pledge Agreement may be waived, amended, supplemented or otherwise modified except in accordance with the Credit Agreement. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CONNECTICUT. 18. NOTICES. Notices by the Agent to the Pledgor or the Issuer shall be addressed to the Pledgor at its address as set forth in the preamble hereof and if to the Issuer, at its address as set forth on the signature page. 19. IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO ISSUER. The Pledgor hereby authorizes and instructs the Issuer to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected in so complying. 102 8 20. TERMINATION. Upon the payment and the performance of the Obligations in full and the termination of the Commitments, this Pledge Agreement shall terminate and the Agent shall deliver to the Pledgor all of the Collateral that exists at such time and shall deliver any release in respect of the Collateral that the Pledgor may reasonably request. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written. DAIRY MART CONVENIENCE STORES, INC. By: ---------------------------------------- Name: Title: Duly Authorized 103 9 ACKNOWLEDGMENT AND CONSENT The undersigned, the Issuer referred to in the Pledge Agreement, hereby acknowledges receipt of a copy thereof and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The undersigned agrees to notify the Agent promptly in writing of the occurrence of any of the events described in paragraph 5(a) of the Pledge Agreement. The undersigned further agrees that the terms of paragraph 9(b) of the Pledge Agreement shall apply to it, MUTATIS MUTANDIS, with respect to all actions that may be required of it under or pursuant to or arising out of paragraph 9 of the Pledge Agreement. [------------------------] By: -------------------------------------- Name: Title: Duly Authorized 104 SCHEDULE 1 to Pledge Agreement ---------------- DESCRIPTION OF THE PLEDGED STOCK 105 EXHIBIT D --------- FORM OF SUBSIDIARY PLEDGE AGREEMENT 106 SUBSIDIARY PLEDGE AGREEMENT --------------------------- This PLEDGE AGREEMENT is made as of this ____ day of December, 1999 by________________________, a ____________, with its chief executive office located at ____________________________(the "Pledgor") in favor of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, with an office located 63 Eugene O'Neill Drive, New London, Connecticut 06320 as agent (in such capacity, the "Agent") for the banks, financial institutions and other lenders (the "Banks") which are or become parties to the Credit Agreement (as hereinafter defined). RECITALS -------- Dairy Mart Convenience Stores, Inc. (the "Borrower"), the Agent and the Banks are parties to a certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") pursuant to which the Banks agreed severally to make loans, advances and other extensions of credit to Borrower. Pledgor is a direct or indirect wholly owned subsidiary of Borrower and, as such, has and will continue to receive a direct pecuniary benefit from the making of such loans, advances and extension of credit to Borrower. In connection with the execution and delivery of the Credit Agreement, Pledgor agreed to guarantee the payment and performance of the obligations of Borrower under the Credit Agreement pursuant to a certain Guarantee Agreement of even date herewith (the "Guarantee"). It is a condition precedent to the obligation of the Banks to make their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement that the Pledgor shall have executed this Subsidiary Pledge Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to enter into the Credit Agreement and to induce the Banks to make and continue their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement, the Pledgor hereby agrees with the Agent, for the ratable benefit of the Banks, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "CODE" means the Uniform Commercial Code from time to time in effect in the State of Connecticut. "COLLATERAL" means the Pledged Stock and all Proceeds. "ISSUER" means the Person or Persons which issued the Pledged Stock and which acknowledges the agreements of the Pledgor under this Agreement. 107 2 "OBLIGATIONS" means all obligations and liabilities of the Pledgor to the Agent or the Banks, whether direct or indirect, absolute or continent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Guarantee and the Loan Documents to which the Pledgor is a party or this Pledge Agreement and any other documents made, delivered or given in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Agent and the Banks) or otherwise. "PLEDGE AGREEMENT" means this Subsidiary Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "PLEDGED STOCK" means the shares of capital stock of the Issuer listed on Schedule I hereto, together with all stock certificates, options or rights of any nature whatsoever which may be issued or granted by the Issuer to the Pledgor while this Pledge Agreement is in effect. "PROCEEDS" means all "proceeds" as such term is defined in Section 9-306(l) of the Uniform Commercial Code in effect in the State of Connecticut on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions with respect thereto. 2. PLEDGE; GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to the Agent all the Pledged Stock and hereby grants to the Agent, for the ratable benefit of the Banks, a security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. STOCK POWERS. Concurrently with the delivery to the Agent of each certificate representing one or more shares of the Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank with, if the Agent so requests, signature guaranteed. 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants that: (a) this Pledge Agreement has been duly executed and delivered on behalf of the Pledgor and constitutes a legal, valid and binding obligation of the Pledgor enforceable in accordance with its terms, except as enforceability may be limited by 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); (b) the shares of Pledged Stock listed on Schedule I constitute all the issued and outstanding shares of all classes of the capital stock of the Issuer owned by the Pledgor and are represented by the certificates listed thereon; 108 3 (c) to the best of Pledgor's knowledge, all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (d) the Pledgor is the record and beneficial owner of, and has title to, the Pledged Stock listed on Schedule 1, free of any and all Liens or options in favor of, or claims of, any other Person, except the Liens created by this Pledge Agreement; and (e) upon delivery to the Agent of the stock certificates evidencing the Pledged Stock (and assuming the continuing possession by Agent of such stock certificate in accordance with the requirements of applicable law), the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected Lien on the Pledged Stock, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any Pledged Stock from the Pledgor. 5. COVENANTS. The Pledgor covenants and agrees with the Agent that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: (a) If the Pledgor shall, as a result of its ownership of the Pledged Stock, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any shares of the Pledged Stock, or otherwise in respect thereof, the Pledgor shall accept the same as the Agent's and each Bank's agent, hold the same in trust for the Agent and the Banks and deliver the same forthwith to the Agent in the exact form received, duly endorsed by the Pledgor to the Agent, if required, together with an undated stock power covering such certificate duly executed in blank and with, if the Agent so requests, signature guaranteed, to be held by the Agent, for the ratable benefit of the Banks, hereunder as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the Issuer shall be paid over to the Agent to be held by it hereunder for the ratable benefits of the Banks as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of the Issuer or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Agent to be held by it for the ratable benefit of the Banks, subject to the terms hereof, as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Stock shall be received by the Pledgor, the Pledgor shall, until such money or property is paid or delivered to the Agent, hold such money or property in trust for the Agent and the Banks, segregated from other funds of the Pledgor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Agent for the ratable benefit of the Banks, except as otherwise set forth in the Credit Agreement, the Pledgor will not (i) vote to enable, or take any other action to permit, the Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or 109 4 exchange for any stock or other equity securities of the Issuer, or (ii) sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement. The Pledgor will defend the right, title and interest of the Agent and the Banks in and to the Collateral against the claims and demands of all Persons whomsoever. (c) At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent, to be held as Collateral pursuant to this Pledge Agreement. (d) The Pledgor agrees to pay, and to save the Agent and the Banks harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 6. CASH DIVIDENDS; VOTING RIGHTS. Unless an Event of Default shall have occurred and be continuing and the Agent shall have given notice to the Pledgor of the Agent's intent to exercise its corresponding rights pursuant to paragraph 7 below, the Pledgor shall be permitted to receive all cash dividends paid in the normal course of business of the Issuer and consistent with past practice, to the extent permitted in the Credit Agreement, in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock, provided, however, that no vote shall be cast or corporate right exercised or other action taken which would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, the Notes, the Loan Documents or this Pledge Agreement. 7. RIGHTS OF AGENT. (a) If an Event of Default shall occur and be continuing and the Agent shall give notice of its intent to exercise such rights to the Pledgor: (i) the Agent shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and make application thereof to the Obligations in such order as it may determine, and (ii) at the-request of the Agent, all shares of the Pledged Stock shall be registered in the name of the Agent or its nominee, and the Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such shares of the Pledged Stock at any meeting of shareholders of the Issuer or otherwise and (B) any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the Issuer, or upon the exercise by the Pledgor or the Agent of any right, privilege or option pertaining to such shares of the Pledged 110 5 Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Agent shall have no duty to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Agent hereunder shall not be conditioned or contingent upon the pursuit by the Agent of any right or remedy against the Issuer or against any other Person which may be or become liable in respect of all or any part of the Obligations or against any other collateral security therefor, guarantee thereof or right of offset with respect thereto. The Agent shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall it be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 8. REMEDIES. If an Event of Default shall occur and be continuing, the Agent may exercise, in addition to all other rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, except as otherwise set forth in the Credit Agreement, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Pledgor, the Issuer or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Banks hereunder, including, without limitation, reasonable attorneys, fees and disbursements, to the payment in whole or in part of the Obligations, in the manner set forth in the Credit Agreement, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(i) (c) of the Code, need the Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable law, the Pledgor waives all claims, damages and demands it may acquire against the Agent or any Bank arising out of the exercise by the Agent of any of its rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other 111 6 disposition. The Pledgor shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Agent or any Bank to collect such deficiency. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. 9. PRIVATE SALES. (a) The Pledgor recognizes that the Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities and Exchange Act of 1934 and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the Agent than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the Issuer would agree to do so. (b) The Pledgor further agrees to use its reasonable efforts to do or cause to be done all such other acts as may be necessary to make any sale or sales of all or any portion of the Pledged Stock pursuant to this paragraph 9 valid and binding and in compliance with any and all other applicable Requirements of Law. 10. NO SUBROGATION. Notwithstanding any payment or payments made by the Pledgor hereunder, or any set-off or application of funds of the Pledgor by the Agent, or the receipt of any amounts by the Agent with respect to any of the Collateral, the Pledgor shall not assert any right it may have to be subrogated to any of the rights of the Agent or any Bank against the Issuer or against any other collateral security held by the Agent for the ratable benefit of the Banks for the payment of the Obligations, until the Obligations shall have been paid in full and the Commitments shall have been terminated. 11. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS. The Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and, except as otherwise set forth in the Credit Agreement, without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Agent may be rescinded by the Agent, and any of the Obligations continued, and the Obligations, or the liability of the Issuer or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent, and the Credit Agreement, the Notes, the Loan Documents and any other document in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Agent and the Banks may deem advisable from time to time, and any guarantee, right of offset or other collateral at any time held by the Agent for the ratable benefit of the Banks for 112 7 the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Agent shall have no obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto. Except as otherwise set forth in the Credit Agreement, the Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Agent upon this Pledge Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement, and all dealings among the Issuer, the Pledgor, the Agent and the Banks shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. Except as otherwise set forth in the Credit Agreement, the Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Issuer or the Pledgor with respect to the Obligations. 12. LIMITATION ON DUTIES REGARDING COLLATERAL. The Agent's sole duty with respect to the custody safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. The Agent, the Banks or any of their respective directors, officers, employees or agents shall not be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 14. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or 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. 15. PARAGRAPH HEADINGS. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. NO WAIVER; CUMULATIVE REMEDIES. The Agent or any Bank shall not by any act (except by a written instrument pursuant to paragraph 17 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or any Bank would otherwise have on any future occasion. The rights and 113 8 remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Pledge Agreement may be waived, amended, supplemented or otherwise modified except in accordance with the Credit Agreement. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CONNECTICUT. 18. NOTICES. Notices by the Agent to the Pledgor or the Issuer shall be addressed to the Pledgor at its address as set forth in the preamble hereof and if to the Issuer, at its address as set forth on the signature page. 19. IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO ISSUER. The Pledgor hereby authorizes and instructs the Issuer to comply with any instruction received by it from the Agent in writing that (a) states that an Event of Default has occurred and (b) is otherwise in accordance with the terms of this Pledge Agreement, without any other or further instructions from the Pledgor, and the Pledgor agrees that the Issuer shall be fully protected in so complying. 20. TERMINATION. Upon the payment and the performance of the Obligations in full and the termination of the Commitments, this Pledge Agreement shall terminate and the Agent shall deliver to the Pledgor all of the Collateral that exists at such time and shall deliver any release in respect of the Collateral that the Pledgor may reasonably request. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above written. [------------------------] By: --------------------------------- Name: Title: Duly Authorized 114 9 ACKNOWLEDGMENT AND CONSENT The undersigned, the Issuer referred to in the Pledge Agreement, hereby acknowledges receipt of a copy thereof and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. The undersigned agrees to notify the Agent promptly in writing of the occurrence of any of the events described in paragraph 5(a) of the Pledge Agreement. The undersigned further agrees that the terms of paragraph 9(b) of the Pledge Agreement shall apply to it, MUTATIS MUTANDIS, with respect to all actions that may be required of it under or pursuant to or arising out of paragraph 9 of the Pledge Agreement. [ ] By: ---------------------------------- Name: Title: Duly Authorized 115 EXHIBIT E --------- FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT 116 ASSIGNMENT AND ACCEPTANCE AGREEMENT ----------------------------------- This ASSIGNMENT AND ACCEPTANCE AGREEMENT is made as of this ____ day of December, 1999, by and among the undersigned Transferor Bank (the "Transferor Bank"), the undersigned Purchasing Bank (the "Purchasing Bank") and CITIZENS BANK OF CONNECTICUT as agent for the Banks under the Credit Agreement (as hereinafter defined) (in such capacity, the "Agent"). W I T N E S S E T H WHEREAS, this Assignment and Acceptance Agreement is being executed and delivered in accordance with Section 10.6 of that certain Credit Agreement, dated as of December ____, 1999, by and among Dairy Mart Convenience Stores, Inc. (the "Borrower"), the Transferor Bank and the Agent (as amended and in effect from time to time, the "Credit Agreement"); WHEREAS, the Purchasing Bank desires to become a Bank under the Credit Agreement; and WHEREAS, the Transferor Bank is selling and assigning to the Purchasing Bank all or a portion of its rights, obligations and commitments under the Credit Agreement so that the Purchasing Bank may become a Bank under the Credit Agreement; and NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Upon receipt by the Agent of three (3) counterparts of this Assignment and Acceptance Agreement, to each of which is attached a fully completed Schedule I, and each of which has been executed by the Transferor Bank and the Purchasing Bank (and any other Person required to execute this Assignment and Acceptance Agreement under the Credit Agreement and a completed administrative questionnaire from the Purchasing Bank in the form provided by the Agent, the Agent will transmit to the Borrower, the Transferor Bank and the Purchasing Bank an Assignment Notice, substantially in the form of Schedule II to this Assignment and Acceptance Agreement (an "Assignment Notice"). Such Assignment Notice shall set forth, INTER ALIA, the date on which the transfer effected by this Assignment and Acceptance Agreement shall become effective (the "Effective Date"), which date shall be the date so specified in such Assignment Notice. From and after the Effective Date, the Purchasing Bank shall be a Bank under the Credit Agreement for all purposes thereof. 2. At or before 12:00 noon (local time of the Transferor Bank), on the Effective Date, the Purchasing Bank shall pay to the Transferor Bank, in immediately available funds, an amount equal to the purchase price, as agreed between the Transferor Bank and the Purchasing Bank (the 117 2 "Purchase Price"), of the portion being purchased by the Purchasing Bank (the "Purchasing Bank's Percentage") of the Loans of each Type and other amounts owing to the Transferor Bank under the Credit Agreement and the Transferor Bank's Note or Notes. Effective upon receipt by the Transferor Bank of the Purchase Price from the Purchasing Bank, the Transferor Bank hereby irrevocably sells, assigns and transfers to such Purchasing Bank, without recourse, representation or warranty, and the Purchasing Bank hereby irrevocably purchases, takes and assumes from the Transferor Bank, such Purchasing Bank's Percentage of the Commitments and the presently outstanding Loans and other amounts owing to the Transferor Bank under the Credit Agreement and the Transferor Bank's Note or Notes, together with all instruments, documents and collateral security pertaining thereto, which are being assigned hereunder. 3. The Transferor Bank has made arrangements with the Purchasing Bank with respect to (i) the portion, if any, to be paid, and the date or dates for payment, by the Transferor Bank to such Purchasing Bank of any Fees heretofore received by the Transferor Bank pursuant to the Credit Agreement prior to the Effective Date and (ii) the portion, if any to be paid, and the date or dates for payment by the Purchasing Bank to the Transferor Bank of interest, Fees or other amounts received by such Purchasing Bank pursuant to the Credit Agreement from and after the Effective Date. 4. (a) All principal payments that would otherwise be payable from and after the Effective Date to or for the account of the Transferor Bank pursuant to the Credit Agreement in respect of the Loans being assigned and the Transferor Bank's Note or Notes shall, instead, be payable to or for the account of the Transferor Bank and the Purchasing Bank, as the case may be, in accordance with their respective interests as reflected in this Assignment and Acceptance Agreement. (b) All interest, Fees and other amounts that would otherwise accrue for the account of the Transferor Bank from and after the Effective Date pursuant to the Credit Agreement in respect of the Commitments and Loans being assigned and the Transferor Bank's Note or Notes shall, instead, accrue for the account of, and be payable to, the Transferor Bank and the Purchasing Bank, as the case may be, in accordance with their respective interests as reflected in this Assignment and Acceptance Agreement. In the event that any amount of interest, Fees or other amounts accruing prior to the Effective Date was included in the Purchase Price paid by the Purchasing Bank, the Transferor Bank and the Purchasing Bank will make appropriate arrangements for payment by the Transferor Bank to the Purchasing Bank of such amount upon receipt thereof from the Borrower. 5. On or prior to the Effective Date, the Transferor Bank will deliver to the Agent its Note or Notes. On or prior to the Effective Date, the Borrower will deliver to the Agent Notes for the Purchasing Bank and the Transferor Bank, in each case in principal amounts reflecting, in accordance with the Credit Agreement, their Commitments (as adjusted pursuant to this Assignment and Acceptance Agreement). Each such new Note shall be dated the Closing Date. Promptly after the Effective Date, the Agent will send to each of the Transferor Bank and the Purchasing Bank its new Notes and will send to the Borrower the superseded Transferor Bank's 118 3 Note or Notes of such Borrower marked "Canceled" or if any such Note cannot be located by such Transferee Bank, a lost note indemnification agreement in form and substance reasonably acceptable to the Borrower. 6. Concurrently with the execution and delivery hereof, the Transferor Bank will provide to the Purchasing Bank (if it is not already a Bank under the Credit Agreement) conformed copies of all documents delivered to such Transferor Bank on the Closing Date in satisfaction of the conditions precedent set forth in the Credit Agreement and all written amendments and waivers thereto through the date of execution and delivery hereof. 7. Each of the parties to this Assignment and Acceptance Agreement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Assignment and Acceptance Agreement. 8. By executing and delivering this Assignment and Acceptance Agreement, the Transferor Bank and the Purchasing Bank confirm to and agree with each other and the Agent and the Banks, and in the case of the following clause (vi), the Purchasing Bank agrees for the benefit of the Borrower, as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claim, the Transferor Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement of the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other document, agreement or instrument executed or delivered pursuant thereto; (ii) the Transferor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any Subsidiary (collectively, the "Credit Party") or the performance or observance by any Credit Party of any of their obligations under the Agreement or any of the Loan Documents or any other instrument executed or delivered pursuant hereto; (iii) the Purchasing Bank confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.1, the financial statements delivered pursuant to Section 6.1 if any, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance Agreement; (iv) the Purchasing Bank will, independently and without reliance upon the Agent, the Transferor Bank 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 decisions in taking or not taking action under the Credit Agreement or the Loan Documents; (v) the Purchasing Bank appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under the Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, all in accordance with Section 9 of the Credit Agreement; and (vi) the Purchasing Bank agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. 119 4 9. Each party hereto represents and warrants to and agrees with the Agent that it is aware of and will comply with the provision of subsection 2.19 of the Credit Agreement. 10. Schedule I hereto sets forth the Commitments and the Commitment Percentages of the Transferor Bank and the Purchasing Bank after giving effect to the assignment contemplated hereby. 11. All capitalized terms used but not otherwise defined in this Assignment and Acceptance Agreement shall have the meanings ascribed to such terms in the Credit Agreement. 12. This Assignment and Acceptance Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance Agreement to be executed as of the date set forth above. Transferor Bank [ ] -------------------------- By: ---------------------------- Name: Title: Purchasing Bank [ ] -------------------------- By: ---------------------------- Name: Title: The foregoing assignment is hereby accepted for recordation and registration: CITIZENS BANK OF CONNECTICUT By: ------------------------------ Name: Title: Duly Authorized 120 5 121 SCHEDULE I TO ASSIGNMENT AND ACCEPTANCE AGREEMENT COMPLETION OF INFORMATION FOR ASSIGNMENT AND ACCEPTANCE AGREEMENT Item 1 Effective Date of Assignment _______________ ___, 19__ Item 2 Name of Transferor Bank: Item 3 Name of Purchasing Bank: Item 4 Revised Revolving Credit Commitment of Transferor Bank Item 5 Revised Revolving Credit Commitment Percentage of Transferor Bank Item 6 Revolving Credit Commitment of Purchasing Bank Item 7 Revolving Credit Commitment Percentage of Purchasing Bank Item 8 Letter of Credit Participations of Transferor Bank Item 9 Letter of Credit Participations of Purchasing Bank 122 2 SCHEDULE II TO ASSIGNMENT AND ACCEPTANCE AGREEMENT TO: The undersigned, as Agent under the Amended and Credit Agreement dated as of November __, 1999, among DAIRY MART CONVENIENCE STORES, INC., the banks, financial institutions and other Banks which are parties thereto, and CITIZENS BANK OF CONNECTICUT as Agent acknowledges receipt of three executed counterparts of a competed Assignment and Acceptance Agreement. Terms defined in such Assignment and Acceptance Agreement are used herein as therein defined. 1. Pursuant to such Assignment and Acceptance Agreement, you are advised that the Effective Date will be ________. 2. Pursuant to such Assignment and Acceptance Agreement, the Transferor Bank is required to deliver to the Agent on or before the Effective Date its Note or Notes, or a lost note indemnification agreement reasonably acceptable to the Borrower. 3. Pursuant to such Assignment and Acceptance Agreement, the Borrower is required to deliver to the Agent on or before the Effective Date the following Revolving Credit Notes, each dated ________________________: [Name of Transferor Bank] [Amount] [Name of Purchasing Bank] [Amount] 4. Pursuant to such Assignment and Acceptance Agreement, each Purchasing Bank is required to pay its Purchase Price to the Transferor Bank at or before 12:00 noon on the Effective Date in immediately available funds. Very truly yours, CITIZENS BANK OF CONNECTICUT AS AGENT By ----------------------------------- Name: Title: 123 EXHIBIT G --------- FORM OF COMPANY SECURITY AGREEMENT 124 COMPANY SECURITY AGREEMENT -------------------------- This COMPANY SECURITY AGREEMENT is made as of this ____ day of December, 1999 by and between DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation, with its chief executive office located at 300 Executive Parkway West, Hudson, Ohio 44236 (the "Debtor"), in favor of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, with an office located at 63 Eugene O'Neill Drive, New London, Connecticut 06320 as agent (in such capacity, the "Agent") for the banks, financial institutions and other lenders (the "Banks") which are or become parties to the Credit Agreement (as hereinafter defined). RECITALS -------- The Debtor, the Agent and the Banks are parties to a certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") pursuant to which the Banks have agreed to make loans, advances and other extensions of credit to Debtor. It is a condition precedent to the obligation of the Banks to make their respective loans, advances and other extensions of credit to the Debtor under the Credit Agreement that the Debtor shall have executed and delivered this Company Security Agreement to the Agent for the ratable benefit of the Banks. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to enter into the Credit Agreement and to induce the Banks to make their respective loans, advances and other extensions of credit to the Debtor under the Credit Agreement, the Debtor hereby agrees with the Agent, for the ratable benefit of the Banks, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined; the following terms which are defined in the Uniform Commercial Code in effect in the State of Connecticut on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Investment Property and Proceeds; and the following terms shall have the following meanings: "BANK ACCOUNT" means (i) a deposit, custody or other account (whether, in any case, time or demand or interest or non-interest bearing) maintained by the Debtor with the Agent or any Bank, (ii) all cash and securities from time to time held within such accounts and (iii) all dividends and other distributions payable on or with respect to, such account or such cash or securities. "CODE" means the Uniform Commercial Code as from time to time in effect in the State of Connecticut. 125 2 "COLLATERAL" shall have the meaning assigned to it in Section 2 of this Security Agreement. "CONTRACTS" means the separate contracts between the Debtor and its customers, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of the Debtor to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of the Debtor to damages arising out of, or for, breach or default in respect thereof and (c) all rights of the Debtor to perform and to exercise all remedies thereunder; but excluding any contracts, the assignment or hypothecation of which, for collateral purposes, would result in a default or require, or cause, a forfeiture or permit a revocation of material rights under such contract. "OBLIGATIONS" has the meaning set forth in the Credit Agreement. "PATENTS" means (a) all letters patent of the United States and all reissues and extensions thereof, (b) all applications for letters patent of the United States and all divisions, continuations and continuations-in-part thereof or any other country, including, without limitation, any thereof referred to in the Collateral Disclosure List and (c) all proceeds thereof, including the goodwill of the business connected with the use of and symbolized by the Patents. "PATENT LICENSE" means all agreements, whether written or oral, providing for the grant by the Debtor of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in the Collateral Disclosure List. "SECURITY AGREEMENT" means this Company Security Agreement, as amended, supplemented, restated or otherwise modified from time to time. "TRADEMARKS" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether registered in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof or otherwise, including, without limitation, any thereof referred to in the Collateral Disclosure List; (b) all renewals thereof; and (c) all proceeds thereof, including the goodwill of the business connected with the use of and symbolized by the Trademarks. "TRADEMARK LICENSE" means any agreement, written or oral, providing for the grant by the Debtor of any right to use any Trademark, including, without limitation, any thereof referred to in the Collateral Disclosure List. "VEHICLES" means all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state and, in any event, shall include, without limitation, the vehicles listed in the Collateral Disclosure List and all tires and other appurtenances to any of the foregoing. 126 3 2. GRANT OF SECURITY INTEREST. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Debtor hereby grants to the Agent for the ratable benefit of the Banks a security interest in all of the following property now owned or at any time hereafter acquired by the Debtor or in which the Debtor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (i) all Accounts; (ii) all Bank Accounts; (iii) all Chattel Paper; (iv) all Contracts; (v) all Documents; (vi) all Equipment; (vii) all General Intangibles; (viii) all Instruments; (ix) all Inventory; (x) all Investment Property; (xi) all Patents; (xii) all Patent Licenses; (xiii) all Trademarks; (xiv) all Trademark Licenses; (xv) all Vehicles; and (xvi) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing, all accessions and additions thereto and all substitutions and replacements therefore. 3. RIGHTS OF AGENT AND BANKS; LIMITATIONS ON AGENT'S AND BANKS' OBLIGATIONS. (a) DEBTOR REMAINS LIABLE UNDER ACCOUNTS AND CONTRACTS. Anything herein to the contrary notwithstanding, the Debtor shall remain liable under each of the Accounts and Contracts to observe and perform all the conditions and obligations to be observed and 127 4 performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. Neither the Agent nor any Bank shall have any obligation or liability under any Account (or any agreement giving rise thereto) or under any Contract by reason of or arising out of this Security Agreement or the receipt by the Agent or any such Bank of any payment relating to such Account or Contract pursuant hereto, nor shall the Agent or any Bank be obligated in any manner to perform any of the obligations of the Debtor under or pursuant to any Account (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) NOTICE TO ACCOUNT DEBTORS AND CONTRACTING PARTIES. Upon the request of the Agent at any time after the occurrence and during the continuance of an Event of Default, the Debtor shall notify account debtors on the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Agent for the ratable benefit of the Banks and that payments in respect thereof shall be made directly to the Agent. The Agent may in its own name or in the name of others communicate with account debtors on the Accounts and parties to the Contracts to verify with them to its satisfaction the existence, amount and terms of any Accounts or Contracts. (c) ANALYSIS OF ACCOUNTS. Subject to the provisions of the Credit Agreement, the Agent shall have the right, at its own expense, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Debtor shall furnish all such assistance and information as the Agent may reasonably require in connection therewith, provided that the making of the foregoing test verifications shall be at the expense of the Debtor if an Event of Default shall have occurred and be continuing. Subject to the provisions of the Credit Agreement, at any time upon the Agent's request and after the occurrence and during the continuance of an Event of Default, or in connection with the Debtor's annual audit, the Debtor, at its sole expense, shall cause its independent public accountants or others selected by the Debtor and satisfactory to the Agent to furnish to the Bank reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. (d) COLLECTIONS ON ACCOUNTS. The Agent hereby authorizes the Debtor to collect the Accounts subject to the Agent's direction and control as set forth in the Credit Agreement, and the Agent may curtail or terminate said authority upon the occurrence and during the continuance of an Event of Default. If required by the Agent upon the occurrence and during the continuance of an Event of Default, any payments of Accounts, when collected by the Debtor, shall be forthwith (and, in any event, within two Business Days) deposited by the Debtor in the exact form received, duly endorsed by the Debtor to the Agent if required, in a special collateral account maintained by the Agent, subject to withdrawal by the Agent only, as hereinafter provided, and, until so turned over, shall be held by the Debtor in trust for the Agent and the Banks, segregated from other funds of the Debtor. Each deposit of any such Proceeds shall be accompanied by a report identifying in reasonable detail the nature and source of the 128 5 payments included in the deposit. All Proceeds constituting collections of Accounts while held by the Agent (or by the Debtor in trust for the Agent and the Banks) shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as hereinafter provided. If an Event of Default shall have occurred and be continuing, at any time at the Agent's election, the Agent shall apply all or any part of the funds on deposit in said special collateral account on account of the Obligations in accordance with the Credit Agreement, and any part of such funds which the Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Agent to the Debtor or to whomsoever may be lawfully entitled to receive the same. At the Agent's request during the continuance of an Event of Default, the Debtor shall deliver to the Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts, including, without limitation, all original orders, invoices and shipping receipts. 4. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants that: (a) TITLE; NO OTHER LIENS. Except for the Lien granted to the Agent for the ratable benefit of the Banks pursuant to this Security Agreement, and the other Liens permitted to exist on the Collateral pursuant to the Credit Agreement, the Debtor owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Agent or any other Person holding a permitted Lien, for the ratable benefit of the Banks, pursuant to this Security Agreement or as may be permitted pursuant to the Credit Agreement. (b) PERFECTED FIRST PRIORITY LIENS. Except with respect to Vehicles referred to in Section 5(r), the Liens granted pursuant to this Security Agreement constitute perfected Liens on the Collateral (not constituting real property) in favor of the Agent, for the ratable benefit of the Banks, which are prior to all other Liens on the Collateral created by the Debtor and in existence on the date hereof, except as otherwise permitted in the Credit Agreement, based upon a search and review of the public files and records referenced in Section 4(a) hereof and which are enforceable as such against all creditors of and purchasers from the Debtor and against any owner or purchaser of the real property where any of the Equipment is located and any present or future creditor obtaining a Lien on such real property. (c) ACCOUNTS. The amount represented by the Debtor to the Agent from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be the correct amount actually owing by such account debtor or debtors thereunder in all material respects. No amount payable to the Debtor under or in connection with any Account is evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper) which has not been delivered to the Agent. The place where the Debtor keeps its records concerning the Accounts is set forth in the Collateral Disclosure List. (d) CONTRACTS. No consent of any party (other than the Debtor) to any Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Security Agreement. Each Contract is in full force and effect and constitutes 129 6 a valid and legally enforceable obligation of the parties thereto, except as enforceability may be limited by Bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Contracts by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any such Contract to any material adverse limitation, either specific or general in nature. Neither the Debtor nor (to the best of the Debtor's knowledge) any other party to any Contract is in default in a manner which could reasonably be expected to materially adversely affect the value of all such Contracts as Collateral or is reasonably likely to become in default in the performance or observance of any of the terms thereof in any material respect. The Debtor has fully performed all its current obligations under each Contract. The right, title and interest of the Debtor in, to and under each Contract are not subject to any defense, offset, counterclaim or claim which in the aggregate could reasonably be expected to have a Material Adverse Effect. No amount payable to the Debtor under or in connection with any Contract is evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper) which has not been delivered to the Agent. (e) INVENTORY AND EQUIPMENT. The Inventory and the Equipment are kept at the locations listed in the Collateral Disclosure List. (f) CHIEF EXECUTIVE OFFICER. The Debtor's chief executive office and chief place of business is set forth in the Collateral Disclosure List. (g) FARM PRODUCTS. None of the Collateral constitutes, or is the Proceeds of, Farm Products. (h) PATENTS AND TRADEMARKS. All Patents and Patent Licenses owned by the Debtor in its own name as of the date hereof are listed on the Collateral Disclosure List, which listing includes all Trademarks and Trademark Licenses owned by the Debtor in its own name as of the date hereof. To the best of the Debtor's knowledge, each Patent and Trademark is valid, subsisting, unexpired, enforceable and has not been abandoned. Except as set forth in the Collateral Disclosure List, none of such Patents and Trademarks is the subject of any licensing or franchise agreement. No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of any Patent or Trademark. Except as disclosed in the Credit Agreement, no action or proceeding is pending (i) seeking to limit, cancel or question the validity of any Patent or Trademark, or (ii) which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. (i) VEHICLES. A complete and correct list of all Vehicles owned by the Debtor is set forth in the Collateral Disclosure List. (j) GOVERNMENTAL OBLIGORS. None of the obligors on any Accounts, and none of the parties to any Contracts, is a Governmental Authority with respect to which the Federal Assignment of Claims Act is applicable. 130 7 (k) BANK ACCOUNTS. All deposit, custody, money-market or other accounts (whether, in any case, time or demand or interest or non-interest bearing) maintained by the Debtor with any bank or any other financial institution are Bank Accounts and are listed on the Collateral Disclosure List. 5. COVENANTS. The Debtor covenants and agrees with the Agent and the Banks that, from and after the date of this Security Agreement until the obligations are paid in full and the commitment terminated: (a) FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS AND CHATTEL PAPER. At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Debtor, the Debtor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Debtor also hereby authorizes the Agent to file any such financing or continuation statement without the signature of the Debtor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper), such instrument or Chattel Paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent to be held as Collateral pursuant to this Security Agreement. (b) INDEMNIFICATION. The Debtor agrees to pay, and to save the Agent and the Banks harmless from, any and all liabilities, reasonable costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay not caused by the Agent or the Banks in complying with any Requirement of Law applicable to any of the Collateral or (iii) subject to Section 10.5 of the Credit Agreement in connection with any of the transactions contemplated by this Security Agreement. In any suit, proceeding or action brought by the Agent or any Bank under any Account or Contract for any sum owing thereunder, or to enforce any provisions of any Account or Contract, the Debtor will save, indemnify and keep the Agent and such Bank harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Debtor. (c) MAINTENANCE OF RECORDS. The Debtor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts. The Debtor will mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. For the Agent's and the Banks' further 131 8 security, the Agent, for the ratable benefit of the Banks, shall have a security interest in all of the Debtor's books and records pertaining to the Collateral, and the Debtor shall turn over any such books and records to the Agent or to its representatives during normal business hours at the request of the Agent. (d) RIGHT OF INSPECTION. Subject to Section 6.6 of the Credit Agreement, the Agent and the Banks shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Debtor, and the Agent and the Banks or their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and the Debtor agrees to render to the Agent and the Banks, at the Debtor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Agent and the Banks and their respective representatives shall at any reasonable time also have the right to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests-therein. (e) COMPLIANCE WITH LAWS, ETC. The Debtor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof or to the operation of the Debtor's business; provided, however, that the Debtor may contest any Requirement of Law in any reasonable manner which shall not, in the sole opinion of the Agent, adversely affect the Agent's or the Banks' rights or the priority of its Liens on the Collateral. (f) COMPLIANCE WITH TERMS OF CONTRACTS, ETC. The Debtor will perform and comply in all material respects with all its obligations under the Contracts and all its other Contractual Obligations relating to the Collateral except where such nonperformance and noncompliance could not reasonably be expected to have a Material Adverse Effect. (g) PAYMENT OF OBLIGATIONS. The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings, (ii) such proceedings do not involve any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein and (iii) such charge is adequately reserved against on the Debtor's books in accordance with GAAP. (h) LIMITATION ON LIENS ON COLLATERAL. The Debtor will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Liens created hereby and other than as permitted pursuant to the Credit Agreement, and will defend the right, title and interest of the Agent and the Banks in and to any of the Collateral against the claims and demands of all Persons whomsoever. (i) LIMITATIONS ON DISPOSITIONS OF COLLATERAL. Subject to the provisions of the Credit Agreement, the Debtor will not sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so except for (x) sales of Inventory in the ordinary 132 9 course of its business and (y) so long as no Default or Event of Default has occurred and is continuing, the disposition in the ordinary course of business of property not material to the conduct of its business or as otherwise permitted under the Credit Agreement. (j) LIMITATIONS ON MODIFICATIONS, WAIVERS, EXTENSIONS OF CONTRACTS AND AGREEMENTS GIVING RISE TO ACCOUNTS. Except as otherwise set forth in the Credit Agreement, the Debtor will not (i) amend, modify, terminate or waive any provision of any Contract or any agreement giving rise to an account in any manner which could reasonably be expected to materially adversely affect the value of such Contracts or Accounts as Collateral when examined in the aggregate, (ii) fail to exercise promptly and diligently each and every material right which it may have under each Contract and each agreement giving rise to an Account (other than any right of termination) where such failure could have a material adverse effect on the value of such Contracts or Accounts when examined in the aggregate or (iii) fail to deliver to the Agent a copy of each material demand, notice or document received by it relating in any way to any Contract or any material agreement giving rise to an Account. (k) Intentionally Omitted. (l) MAINTENANCE OF EQUIPMENT. The Debtor will maintain each item of Equipment in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose except where the failure to maintain such Equipment could not reasonably be expected to have a Material Adverse Effect. (m) MAINTENANCE OF INSURANCE. Subject to the provisions of the Credit Agreement, the Debtor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles against loss by fire, explosion, theft and such other casualties in amounts comparable to amounts of insurance coverage obtained by similar businesses of similar size acting prudently and (ii) insuring the Debtor, the Agent and the Banks against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to be in such form and amounts and having such coverage as shall be comparable to forms, amounts and coverage, respectively, obtained by similar businesses of similar size acting prudently, with losses payable to the Debtor, the Agent and the Banks as their respective interests may appear. All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least thirty (30) days after receipt by the Agent of written notice thereof, (ii) name the Agent and the Banks as insured and (iii) be reasonably satisfactory in all other respects to the Agent. If required by the Agent, the Debtor shall deliver to the Agent a report of a reputable insurance broker with respect to such insurance as set forth in the Credit Agreement. (n) FURTHER IDENTIFICATION OF COLLATERAL. The Debtor will furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. 133 10 (o) NOTICES. The Debtor will advise the Agent promptly, in reasonable detail, at its address set forth in the Credit Agreement, (i) of any Lien (other than Liens created hereby or permitted under the Credit Agreement) on, or claim asserted against, any of the Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder. (p) CHANGES IN LOCATIONS, NAME, ETC. The Debtor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 4 (f) or remove its books and records from the location specified in Section 4(c), (ii) permit any of the Inventory or Equipment to be kept at a location other than those listed in the Collateral Disclosure List or (iii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Agent in connection with this Security Agreement would become seriously misleading, unless it shall have given the Agent at least thirty (30) days prior written notice thereof. (q) PATENTS AND TRADEMARKS. (i) The Debtor (either itself or through licensees) will, except with respect to any Trademark that the Debtor shall reasonably determine is of negligible economic value to it, (i) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) with respect to a registered Trademark, employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Agent, for the ratable benefit of the Banks, shall obtain a perfected security interest in such mark pursuant to this Security Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (ii) The Debtor will not, except with respect to any Patent that the Debtor shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. (iii) The Debtor will notify the Agent immediately if it knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding the Debtor's ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same. (iv) Whenever the Debtor, either by itself or through any Agent, employee, licensee or designee, shall file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other 134 11 country or any political subdivision thereof, the Debtor shall report such filing to the Agent within five (5) Business Days after the last day of the fiscal quarter in which such filing occurs. (v) The Debtor shall execute and deliver any and all agreements, instruments, documents, and papers as the Agent may request (including, without limitation, the Collateral Disclosure List, the Mortgage, Assignment and Security Agreement - Patents and the Mortgage, Assignment and Security Agreement - Trademarks attached hereto as Annex A-1 and A-2) to evidence the Agent's security interest for the ratable benefit of the Banks in any Patent or Trademark and the goodwill and general intangibles of the Debtor relating thereto or represented thereby, and the Debtor hereby constitutes the Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full and the commitment is terminated. (vi) The Debtor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of any registered Patents and Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (vii) In the event that any material Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, the Debtor shall promptly notify the Agent after it learns thereof and shall, unless the Debtor shall reasonably determine that such Patent or Trademark is of negligible economic value to the Debtor, promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as the Debtor shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark. (r) VEHICLES. The Debtor will maintain each Vehicle in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose. The Debtor will notify the Agent of each acquisition or sale of a vehicle, promptly following the acquisition or sale thereof. If an Event of Default shall occur and be continuing, at the request of the Agent the Debtor shall, within five (5) Business Days after such request, file applications for certificates of title indicating the Agent's first priority Lien for the ratable benefit of the Banks on the Vehicles covered by such certificates, together with any other necessary documentation, in each office in each jurisdiction which the Agent shall deem advisable to perfect its Liens on the Vehicles. (s) INVENTORY. None of the Inventory of the Debtor shall be evidenced by a warehouse receipt. 135 12 6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) POWERS. The Debtor hereby irrevocably constitutes and appoints the Agent and any of officer or Agent thereof with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Agent's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, the Debtor hereby gives the Agent the power and right, on behalf of the Debtor, without notice to or assent by the Debtor, to do the following: (i) in the case of any Account, at any time when the authority of the Debtor to collect the Accounts has been curtailed or terminated pursuant to the first sentence of Section 3(d) hereof, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and is continuing, in the name of the Debtor or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Agent for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; and (ii) to pay or discharge taxes and Liens levied or placed on the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and upon the occurrence and during the continuance of any Event of Default, (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Agent or as the Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; (G) to assign any Patent or Trademark (along with the goodwill of the business to which any such Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do, at the Agent's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve or realize upon the Collateral and the 136 13 Agent's and the Banks' Liens thereon and to effect the intent of this Security Agreement, all as fully and effectively as the Debtor might do. The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof . This power of attorney is a power coupled with an interest and shall be irrevocable. (b) OTHER POWERS. The Debtor also authorizes the Agent, at any time and from time to time, to execute, in connection with the sale provided for in Section 9 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) NO DUTY ON AGENT'S OR BANKS' PART. The powers conferred on the Agent and the Banks hereunder are solely to protect the Agent's and the Banks' interests in the Collateral and shall not impose any duty upon the Agent or any Bank to exercise any such powers. The Agent and the Bank shall be accountable only for amounts that they actually receives as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 7. PERFORMANCE BY AGENT OF DEBTOR'S OBLIGATIONS. If the Debtor fails to perform or comply with any of its agreements contained herein and the Agent, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Agent incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the rate set forth in 2.3 of the Credit Agreement, shall be payable by the Debtor to the Agent on demand and shall constitute Obligations secured hereby. 8. PROCEEDS. In addition to the rights of the Agent and the Banks specified in Section 3(d) with respect to payments of Accounts, it is agreed that if an Event of Default shall occur and be continuing (a) all Proceeds received by the Debtor consisting of cash, checks and other near-cash items shall be held by the Debtor in trust for the Agent and the Banks, segregated from other funds of the Debtor, and shall, forthwith upon receipt by the Debtor, be turned over to the Agent in the exact form received by the Debtor (duly endorsed by the Debtor to the Agent, if required), and (b) any and all such Proceeds received by the Agent (whether from the Debtor or otherwise) may, in the sole discretion of the Agent, be held by the Agent for the ratable benefit of the Banks as collateral security for, and/or then or at any time thereafter may be applied by the Agent against, the Obligations (whether matured or unmatured), such application to be made in accordance with the provisions of the Credit Agreement. Any balance of such Proceeds remaining after the Obligations shall have been paid in full and the Commitment shall have been terminated shall be paid over to the Debtor or to whomsoever may be lawfully entitled to receive the same. 9. REMEDIES. If an Event of Default shall occur and be continuing the Agent, on behalf of the Banks may exercise, in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, except as otherwise set forth in the Credit Agreement, the Agent, 137 14 without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Debtor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on, credit or for future delivery without assumption of any credit risk. The Agent or any Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is hereby waived or released. The Debtor further agrees, at the Agent's request, to assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at the Debtor's premises or elsewhere. The Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Banks hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Agent may elect, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(l)(c) of the Code, need the Agent account for the surplus, if any, to the Debtor. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands it may acquire against the Agent or any Bank arising out of the exercise by the Agent or any Bank of any of its rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. The Debtor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the obligations and the fees and disbursements of any attorneys employed by the Agent or any Bank to collect such deficiency. 10. LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar property for its own account. Neither the Agent, any Bank, nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Debtor or otherwise. 11. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 12. SEVERABILITY. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such 138 15 prohibition or 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. 13. PARAGRAPH HEADINGS. The paragraph headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. NO WAIVER; CUMULATIVE REMEDIES. Neither the Agent nor any Bank shall by any act (except by a written instrument pursuant to Section 15 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or such Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 15. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS, GOVERNING LAW. None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except as provided by the Credit Agreement. This Security Agreement shall be binding upon the successors and assigns of the Debtor and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns. This Security Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Connecticut. 16. NOTICES. Notices hereunder shall be given to the Debtor in care of the Debtor in the manner set forth in the Credit Agreement. 17. TERMINATION. Upon the payment and the performance of the Obligations in full and the termination of the Commitments, this Security Agreement shall terminate and the Agent shall deliver any release of the Liens created under this Security Agreement that the Debtor may reasonably request. 18. SPECIFIC RELEASES. So long as no Default or Event of Default has occurred and is continuing, if the Debtor shall sell, transfer, lease or otherwise dispose of any of the Collateral permitted by the terms of this Security Agreement, including, without limitation, Section 5(i) hereof, and the Credit Agreement, then the Agent shall deliver a release in respect of any Lien created under this Security Agreement in such disposed Collateral that the Debtor may reasonably request. IN WITNESS WHEREOF, the Debtor has caused this Security Agreement to be duly executed and delivered as of the date first above written. 139 16 DAIRY MART CONVENIENCE STORES, INC. By: ---------------------------------- Name: Title: CITIZENS BANK OF CONNECTICUT AS AGENT By: ---------------------------------- Name: Title: 140 17 ANNEX A-1 TO EXHIBIT H ---------------------- 141 18 ANNEX A-2 TO EXHIBIT H ---------------------- 142 EXHIBIT H --------- FORM OF SUBSIDIARY SECURITY AGREEMENT 143 SUBSIDIARY SECURITY AGREEMENT ----------------------------- This SUBSIDIARY SECURITY AGREEMENT is made as of this __ day of December, 1999 by and between _____________________________________, a ________ corporation, with its chief executive office located at _________________________(the "Debtor"), in favor of CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, with an office located 63 Eugene O'Neill Drive, New London, Connecticut 06320 as agent (in such capacity, the "Agent") for the banks, financial institutions and other lenders (the "Banks") which are or become parties to the Credit Agreement (as hereinafter defined). RECITALS -------- Dairy Mart Convenience Stores, Inc. (the "Borrower"), the Agent and the Banks are parties to a certain Credit Agreement of even date herewith (as amended and in effect from time to time, the "Credit Agreement") pursuant to which the Banks agreed severally to make loans, advances and other extensions of credit to Borrower. Debtor is a direct or indirect wholly owned subsidiary of Borrower and, as such, will receive a direct pecuniary benefit from the making of such loans, advances and extension of credit to Borrower. In connection with the execution and delivery of the Credit Agreement, Debtor agreed to guarantee the payment and performance of the obligations of Borrower under the Credit Agreement pursuant to a certain Guarantee Agreement of even date herewith (the "Guarantee"). It is a condition precedent to the obligation of the Banks to make their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement that the Debtor shall have amended and restated the terms and conditions of the Original Subsidiary Security Agreement. NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Banks to enter into the Credit Agreement and to induce the Banks to make and continue their respective loans, advances and other extensions of credit to the Borrower under the Credit Agreement, the Debtor hereby agrees with the Agent, for the ratable benefit of the Banks, as follows: 1. DEFINED TERMS. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined; the following terms which are defined in the Uniform Commercial Code in effect in the State of Connecticut on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Investment Property and Proceeds; and the following terms shall have the following meanings: 144 2 "BANK ACCOUNT" means (i) a deposit, custody or other account (whether, in any case, time or demand or interest or non-interest bearing) maintained by the Debtor with the Agent or any Bank, (ii) all cash and securities from time to time held within such accounts and (iii) all dividends and other distributions payable on or with respect to, such account or such cash or securities. "CODE" means the Uniform Commercial Code as from time to time in effect in the State of Connecticut. "COLLATERAL" shall have the meaning assigned to it in Section 2 of this Security Agreement. "CONTRACTS" means the separate contracts between the Debtor and its customers, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (a) all rights of the Debtor to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of the Debtor to damages arising out of, or for, breach or default in respect thereof and (c) all rights of the Debtor to perform and to exercise all remedies thereunder; but excluding any contracts, the assignment or hypothecation of which, for collateral purposes, would result in a default or require, or cause, a forfeiture or permit a revocation of material rights under such contract. "GUARANTEE" shall have the meaning assigned to it in the Preamble hereof. "OBLIGATIONS" has the meaning set forth in the Guarantee. "PATENTS" means (a) all letters patent of the United States and all reissues and extensions thereof, (b) all applications for letters patent of the United States and all divisions, continuations and continuations-in-part thereof or any other country, including, without limitation, any thereof referred to in the Collateral Disclosure List and (c) all proceeds thereof, including the goodwill of the business connected with the use of and symbolized by the Patents. "PATENT LICENSE" means all agreements, whether written or oral, providing for the grant by the Debtor of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in the Collateral Disclosure List. "SECURITY AGREEMENT" means this Amended and Restated Subsidiary Security Agreement, as amended, supplemented, restated or otherwise modified from time to time. "TRADEMARKS" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether registered in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof or otherwise, including, without limitation, any thereof referred to in the Collateral 145 3 Disclosure List; (b) all renewals thereof; and (c) all proceeds thereof, including the goodwill of the business connected with the use of and symbolized by the Trademarks. "TRADEMARK LICENSE" means any agreement, written or oral, providing for the grant by the Debtor of any right to use any Trademark, including, without limitation, any thereof referred to in the Collateral Disclosure List. "VEHICLES" means all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state and, in any event, shall include, without limitation, the vehicles listed in the Collateral Disclosure List and all tires and other appurtenances to any of the foregoing. 2. GRANT OF SECURITY INTEREST. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Debtor hereby grants to the Agent for the ratable benefit of the Banks a security interest in all of the following property now owned or at any time hereafter acquired by the Debtor or in which the Debtor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (i) all Accounts; (ii) all Bank Accounts; (iii) all Chattel Paper; (iv) all Contracts; (v) all Documents; (vi) all Equipment; (vii) all General Intangibles; (viii) all Instruments; (ix) all Inventory; (x) all Investment Property; (xi) all Patents; (xii) all Patent Licenses; (xiii) all Trademarks; (xiv) all Trademark Licenses; 146 4 (xv) all Vehicles; and (xvi) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing, all accessions and additions thereto and all substitutions and replacements therefore. 3. RIGHTS OF AGENT AND BANKS; LIMITATIONS ON AGENT'S AND BANKS' OBLIGATIONS. (a) DEBTOR REMAINS LIABLE UNDER ACCOUNTS AND CONTRACTS. Anything herein to the contrary notwithstanding, the Debtor shall remain liable under each of the Accounts and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. Neither the Agent nor any Bank shall have any obligation or liability under any Account (or any agreement giving rise thereto) or under any Contract by reason of or arising out of this Security Agreement or the receipt by the Agent or any such Bank of any payment relating to such Account or Contract pursuant hereto, nor shall the Agent or any Bank be obligated in any manner to perform any of the obligations of the Debtor under or pursuant to any Account (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) NOTICE TO ACCOUNT DEBTORS AND CONTRACTING PARTIES. Upon the request of the Agent at any time after the occurrence and during the continuance of an Event of Default, the Debtor shall notify account debtors on the Accounts and parties to the Contracts that the Accounts and the Contracts have been assigned to the Agent for the ratable benefit of the Banks and that payments in respect thereof shall be made directly to the Agent. The Agent may in its own name or in the name of others communicate with account debtors on the Accounts and parties to the Contracts to verify with them to its satisfaction the existence, amount and terms of any Accounts or Contracts. (c) ANALYSIS OF ACCOUNTS. Subject to the provisions of the Credit Agreement, the Agent shall have the right, at its own expense to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Debtor shall furnish all such assistance and information as the Agent may reasonably require in connection therewith, provided that the making of the foregoing test verifications shall be at the expense of the Debtor if an Event of Default shall have occurred and be continuing. Subject to the provisions of the Credit Agreement, at any time upon the Agent's request and after the occurrence and during the continuance of an Event of Default, or in connection with the Debtor's annual audit, the Debtor, at its sole expense, shall cause its independent public accountants or others selected by the Debtor and satisfactory to the Agent to furnish to the Bank reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. 147 5 (d) COLLECTIONS ON ACCOUNTS. The Agent hereby authorizes the Debtor to collect the Accounts subject to the Agent's direction and control as set forth in the Credit Agreement, and the Agent may curtail or terminate said authority upon the occurrence and during the continuance of an Event of Default. If required by the Agent upon the occurrence and during the continuance of an Event of Default, any payments of Accounts, when collected by the Debtor, shall be forthwith (and, in any event, within two Business Days) deposited by the Debtor in the exact form received, duly endorsed by the Debtor to the Agent if required, in a special collateral account maintained by the Agent, subject to withdrawal by the Agent only, as hereinafter provided, and, until so turned over, shall be held by the Debtor in trust for the Agent and the Banks, segregated from other funds of the Debtor. Each deposit of any such Proceeds shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. All Proceeds constituting collections of Accounts while held by the Agent (or by the Debtor in trust for the Agent and the Banks) shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as hereinafter provided. If an Event of Default shall have occurred and be continuing, at any time at the Agent's election, the Agent shall apply all or any part of the funds on deposit in said special collateral account on account of the Obligations in accordance with the Credit Agreement, and any part of such funds which the Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Agent to the Debtor or to whomsoever may be lawfully entitled to receive the same. At the Agent's request during the continuance of an Event of Default, the Debtor shall deliver to the Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts, including, without limitation, all original orders, invoices and shipping receipts. 4. REPRESENTATIONS AND WARRANTIES. The Debtor hereby represents and warrants that: (a) TITLE; NO OTHER LIENS. Except for the Lien granted to the Agent for the ratable benefit of the Banks pursuant to this Security Agreement, and the other Liens permitted to exist on the Collateral pursuant to the Credit Agreement, the Debtor owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Agent or any other Person holding a permitted Lien, for the ratable benefit of the Banks, pursuant to this Security Agreement or as may be permitted pursuant to the Credit Agreement. (b) PERFECTED FIRST PRIORITY LIENS. Except with respect to Vehicles referred to in Section 5(r), the Liens granted pursuant to this Security Agreement constitute perfected Liens on the Collateral (not constituting real property) in favor of the Agent, for the ratable benefit of the Banks, which are prior to all other Liens on the Collateral created by the Debtor and in existence on the date hereof, except as otherwise permitted in the Credit Agreement, based upon a search and review of the public files and records referenced in Section 4(a) hereof and which are enforceable as such against all creditors of and purchasers from the Debtor and against any owner or purchaser of the real property where any of the Equipment is located and any present or future creditor obtaining a Lien on such real property. 148 6 (c) ACCOUNTS. The amount represented by the Debtor to the Agent from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be the correct amount actually owing by such account debtor or debtors thereunder in all material respects. No amount payable to the Debtor under or in connection with any Account is evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper) which has not been delivered to the Agent. The place where the Debtor keeps its records concerning the Accounts is set forth in the Collateral Disclosure List. (d) CONTRACTS. No consent of any party (other than the Debtor) to any Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Security Agreement. Each Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto, except as enforceability may be limited by Bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of any of the Contracts by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any such Contract to any material adverse limitation, either specific or general in nature. Neither the Debtor nor (to the best of the Debtor's knowledge) any other party to any Contract is in default in a manner which could reasonably be expected to materially adversely affect the value of all such Contracts as Collateral or is reasonably likely to become in default in the performance or observance of any of the terms thereof in any material respect. The Debtor has fully performed all its current obligations under each Contract. The right, title and interest of the Debtor in, to and under each Contract are not subject to any defense, offset, counterclaim or claim which in the aggregate could reasonably be expected to have a Materially Adverse Effect. No amount payable to the Debtor under or in connection with any Contract is evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper) which has not been delivered to the Agent. (e) INVENTORY AND EQUIPMENT. The Inventory and the Equipment are kept at the locations listed in the Collateral Disclosure List. (f ) CHIEF EXECUTIVE OFFICER. The Debtor's chief executive office and chief place of business is set forth in the Collateral Disclosure List. (g) FARM PRODUCTS. None of the Collateral constitutes, or is the Proceeds of, Farm Products. (h) PATENTS AND TRADEMARKS. All Patents and Patent Licenses owned by the Debtor in its own name as of the date hereof are listed on the Collateral Disclosure List, which listing includes all Trademarks and Trademark Licenses owned by the Debtor in its own name as of the date hereof. To the best of the Debtor's knowledge, each Patent and Trademark is valid, subsisting, unexpired, enforceable and has not been abandoned. Except as set forth in the Collateral Disclosure List, none of such Patents and Trademarks is the subject of any licensing or franchise agreement. No holding, decision or judgment has been rendered by any Governmental 149 7 Authority which would limit, cancel or question the validity of any Patent or Trademark. Except as disclosed in the Credit Agreement, no action or proceeding is pending (i) seeking to limit, cancel or question the validity of any Patent or Trademark, or (ii) which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. (i) VEHICLES. A complete and correct list of all Vehicles owned by the Debtor is set forth in the Collateral Disclosure List. (j) GOVERNMENTAL OBLIGORS. None of the obligors on any Accounts, and none of the parties to any Contracts, is a Governmental Authority with respect to which the Federal Assignment of Claims Act is applicable. (k) BANK ACCOUNTS. All deposit, custody, money-market or other accounts (whether, in any case, time or demand or interest or non-interest bearing) maintained by the Debtor with any bank or any other financial institution are Bank Accounts and are listed on the Collateral Disclosure List. 5. COVENANTS. The Debtor covenants and agrees with the Agent and the Banks that, from and after the date of this Security Agreement until the obligations are paid in full and the commitment terminated: (a) FURTHER DOCUMENTATION; PLEDGE OF INSTRUMENTS AND CHATTEL PAPER. At any time and from time to time, upon the written request of the Agent, and at the sole expense of the Debtor, the Debtor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Debtor also hereby authorizes the Agent to file any such financing or continuation statement without the signature of the Debtor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper (other than Customer Contracts constituting Chattel Paper), such instrument or Chattel Paper shall be immediately delivered to the Agent, duly endorsed in a manner satisfactory to the Agent to be held as Collateral pursuant to this Security Agreement. (b) INDEMNIFICATION. The Debtor agrees to pay, and to save the Agent and the Banks harmless from, any and all liabilities, reasonable costs and expenses (including, without limitation, reasonable legal fees and expenses) (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay not caused by the Agent or the Banks in complying with any Requirement of Law applicable to any of the Collateral or (iii) subject to Section 10.5of the Credit Agreement in connection with any of the transactions contemplated by this Security Agreement. In any suit, proceeding or action brought by the Agent or any Bank under any Account or Contract for any sum owing thereunder, 150 8 or to enforce any provisions of any Account or Contract, the Debtor will save, indemnify and keep the Agent and such Bank harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Debtor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Debtor. (c) MAINTENANCE OF RECORDS. The Debtor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts. The Debtor will mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. For the Agent's and the Banks' further security, the Agent, for the ratable benefit of the Banks, shall have a security interest in all of the Debtor's books and records pertaining to the Collateral, and the Debtor shall turn over any such books and records to the Agent or to its representatives during normal business hours at the request of the Agent. (d) RIGHT OF INSPECTION. Subject to Section 6.6. of the Credit Agreement, the Agent and the Banks shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Debtor, and the Agent and the Banks or their respective representatives may examine the same, take extracts therefrom and make photocopies thereof, and the Debtor agrees to render to the Agent and the Banks, at the Debtor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Agent and the Banks and their respective representatives shall at any reasonable time also have the right to enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests-therein. (e) COMPLIANCE WITH LAWS, ETC. The Debtor will comply in all material respects with all Requirements of Law applicable to the Collateral or any part thereof or to the operation of the Debtor's business; provided, however, that the Debtor may contest any Requirement of Law in any reasonable manner which shall not, in the sole opinion of the Agent, adversely affect the Agent's or the Banks' rights or the priority of its Liens on the Collateral. (f) COMPLIANCE WITH TERMS OF CONTRACTS, ETC. The Debtor will perform and comply in all material respects with all its obligations under the Contracts and all its other Contractual Obligations relating to the Collateral except where such nonperformance and noncompliance could not reasonably be expected to have a Material Adverse Effect. (g) PAYMENT OF OBLIGATIONS. The Debtor will pay promptly when due all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of its income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if (i) the validity thereof is being contested in good faith by appropriate proceedings, (ii) such proceedings do not involve any material danger of the sale, forfeiture or 151 9 loss of any of the Collateral or any interest therein and (iii) such charge is adequately reserved against on the Debtor's books in accordance with GAAP. (h) LIMITATION ON LIENS ON COLLATERAL. The Debtor will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Liens created hereby and other than as permitted pursuant to the Credit Agreement, and will defend the right, title and interest of the Agent and the Banks in and to any of the Collateral against the claims and demands of all Persons whomsoever. (i) LIMITATIONS ON DISPOSITIONS OF COLLATERAL. Subject to the provisions of the Credit Agreement, the Debtor will not sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so except for (x) sales of Inventory in the ordinary course of its business and (y) so long as no Default or Event of Default has occurred and is continuing, the disposition in the ordinary course of business of property not material to the conduct of its business or as otherwise permitted under the Credit Agreement. (j) LIMITATIONS ON MODIFICATIONS, WAIVERS, EXTENSIONS OF CONTRACTS AND AGREEMENTS GIVING RISE TO ACCOUNTS. Except as otherwise set forth in the Credit Agreement, the Debtor will not (i) amend, modify, terminate or waive any provision of any Contract or any agreement giving rise to an account in any manner which could reasonably be expected to materially adversely affect the value of such Contracts or Accounts as Collateral when examined in the aggregate, (ii) fail to exercise promptly and diligently each and every material right which it may have under each Contract and each agreement giving rise to an Account (other than any right of termination) where such failure could have a material adverse effect on the value of such Contracts or Accounts when examined in the aggregate or (iii) fail to deliver to the Agent a copy of each material demand, notice or document received by it relating in any way to any Contract or any material agreement giving rise to an Account. (k) Intentionally Omitted. (l) MAINTENANCE OF EQUIPMENT. The Debtor will maintain each item of Equipment in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose except where the failure to maintain such Equipment could not reasonably be expected to have a Material Adverse Effect. (m) MAINTENANCE OF INSURANCE. Subject to the provisions of the Credit Agreement, the Debtor will maintain, with financially sound and reputable companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles against loss by fire, explosion, theft and such other casualties in amounts comparable to amounts of insurance coverage obtained by similar businesses of similar size acting prudently and (ii) insuring the Debtor, the Agent and the Banks against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to be in such form and amounts and having such coverage as shall be comparable to forms, amounts and coverage, respectively, obtained by similar businesses of similar size acting prudently, with losses payable to the Debtor, the Agent and the 152 10 Banks as their respective interests may appear. All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least thirty (30) days after receipt by the Agent of written notice thereof, (ii) name the Agent and the Banks as insured and (iii) be reasonably satisfactory in all other respects to the Agent. If required by the Agent, the Debtor shall deliver to the Agent a report of a reputable insurance broker with respect to such insurance as set forth in the Credit Agreement. (n) FURTHER IDENTIFICATION OF COLLATERAL. The Debtor will furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. (o) NOTICES. The Debtor will advise the Agent promptly, in reasonable detail, at its address set forth in the Credit Agreement, (i) of any Lien (other than Liens created hereby or permitted under the Credit Agreement) on, or claim asserted against, any of the Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder. (p) CHANGES IN LOCATIONS, NAME, ETC. The Debtor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 4 (f) or remove its books and records from the location specified in Section 4(c), (ii) permit any of the Inventory or Equipment to be kept at a location other than those listed in the Collateral Disclosure List or (iii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Agent in connection with this Security Agreement would become seriously misleading, unless it shall have given the Agent at least thirty (30) days prior written notice thereof. (q) PATENTS AND TRADEMARKS. (i) The Debtor (either itself or through licensees) will, except with respect to any Trademark that the Debtor shall reasonably determine is of negligible economic value to it, (i) continue to use each Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) with respect to a registered Trademark, employ such Trademark with the appropriate notice of registration, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Agent, for the ratable benefit of the Banks, shall obtain a perfected security interest in such mark pursuant to this Security Agreement, and (v) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated. (ii) The Debtor will not, except with respect to any Patent that the Debtor shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated. 153 11 (iii) The Debtor will notify the Agent immediately if it knows, or has reason to know, that any application or registration relating to any Patent or Trademark may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding the Debtor's ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same. (iv) Whenever the Debtor, either by itself or through any Agent, employee, licensee or designee, shall file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, the Debtor shall report such filing to the Agent within five (5) Business Days after the last day of the fiscal quarter in which such filing occurs. (v) The Debtor shall execute and deliver any and all agreements, instruments, documents, and papers as the Agent may request (including, without limitation, the Collateral Disclosure List, the Mortgage, Assignment and Security Agreement - Patents and the Mortgage, Assignment and Security Agreement - Trademarks attached hereto as Annex A-1 and A-2) to evidence the Agent's security interest for the ratable benefit of the Banks in any Patent or Trademark and the goodwill and general intangibles of the Debtor relating thereto or represented thereby, and the Debtor hereby constitutes the Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full and the commitment is terminated. (vi) The Debtor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of any registered Patents and Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (vii) In the event that any material Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, the Debtor shall promptly notify the Agent after it learns thereof and shall, unless the Debtor shall reasonably determine that such Patent or Trademark is of negligible economic value to the Debtor, promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as the Debtor shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark. (r) VEHICLES. The Debtor will maintain each Vehicle in good operating condition, ordinary wear and tear and immaterial impairments of value and damage by the elements excepted, and will provide all maintenance, service and repairs necessary for such purpose. The Debtor will notify the Agent of each acquisition or sale of a vehicle, promptly following the acquisition or sale thereof. If an Event of Default shall occur and be continuing, at 154 12 the request of the Agent the Debtor shall, within five (5) Business Days after such request, file applications for certificates of title indicating the Agent's first priority Lien for the ratable benefit of the Banks on the Vehicles covered by such certificates, together with any other necessary documentation, in each office in each jurisdiction which the Agent shall deem advisable to perfect its Liens on the Vehicles. (s) INVENTORY. None of the Inventory of the Debtor shall be evidenced by a warehouse receipt. 6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) POWERS. The Debtor hereby irrevocably constitutes and appoints the Agent and any of officer or Agent thereof with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Agent's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, the Debtor hereby gives the Agent the power and right, on behalf of the Debtor, without notice to or assent by the Debtor, to do the following: (i) in the case of any Account, at any time when the authority of the Debtor to collect the Accounts has been curtailed or terminated pursuant to the first sentence of Section 3(d) hereof, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and is continuing, in the name of the Debtor or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Agent for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; and (ii) to pay or discharge taxes and Liens levied or placed on the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and upon the occurrence and during the continuance of any Event of Default, (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Agent or as the Agent shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Debtor with respect to any Collateral; (F) to settle, compromise or adjust any suit, 155 13 action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Agent may deem appropriate; (G) to assign any Patent or Trademark (along with the goodwill of the business to which any such Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do, at the Agent's option and the Debtor's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve or realize upon the Collateral and the Agent's and the Banks' Liens thereon and to effect the intent of this Security Agreement, all as fully and effectively as the Debtor might do. The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof . This power of attorney is a power coupled with an interest and shall be irrevocable. (b) OTHER POWERS. The Debtor also authorizes the Agent, at any time and from time to time, to execute, in connection with the sale provided for in Section 9 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) NO DUTY ON AGENT'S OR BANKS' PART. The powers conferred on the Agent and the Banks hereunder are solely to protect the Agent's and the Banks' interests in the Collateral and shall not impose any duty upon the Agent or any Bank to exercise any such powers. The Agent and the Bank shall be accountable only for amounts that they actually receives as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 7. PERFORMANCE BY AGENT OF DEBTOR'S OBLIGATIONS. If the Debtor fails to perform or comply with any of its agreements contained herein and the Agent, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Agent incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the rate set forth in 2.3(c) of the Credit Agreement, shall be payable by the Debtor to the Agent on demand and shall constitute Obligations secured hereby. 8. PROCEEDS. In addition to the rights of the Agent and the Banks specified in Section 3(d) with respect to payments of Accounts, it is agreed that if an Event of Default shall occur and be continuing (a) all Proceeds received by the Debtor consisting of cash, checks and other near-cash items shall be held by the Debtor in trust for the Agent and the Banks, segregated from other funds of the Debtor, and shall, forthwith upon receipt by the Debtor, be turned over to the Agent in the exact form received by the Debtor (duly endorsed by the Debtor to the Agent, if required), and (b) any and all such Proceeds received by the Agent (whether from the Debtor or otherwise) may, in the sole discretion of the Agent, be held by the Agent for the ratable benefit of the Banks as collateral security for, and/or then or at any time thereafter may be applied by the Agent against, the Obligations (whether matured or unmatured), such application to be made in accordance with the provisions of the Credit Agreement. Any balance of such Proceeds 156 14 remaining after the Obligations shall have been paid in full and the Commitment shall have been terminated shall be paid over to the Debtor or to whomsoever may be lawfully entitled to receive the same. 9. REMEDIES. If an Event of Default shall occur and be continuing the Agent, on behalf of the Banks may exercise, in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, except as otherwise set forth in the Credit Agreement, the Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Debtor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on, credit or for future delivery without assumption of any credit risk. The Agent or any Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Debtor, which right or equity is hereby waived or released. The Debtor further agrees, at the Agent's request, to assemble the Collateral and make it available to the Agent at places which the Agent shall reasonably select, whether at the Debtor's premises or elsewhere. The Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Banks hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Agent may elect, and only after such application and after the payment by the Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(l)(c) of the Code, need the Agent account for the surplus, if any, to the Debtor. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands it may acquire against the Agent or any Bank arising out of the exercise by the Agent or any Bank of any of its rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. The Debtor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the obligations and the fees and disbursements of any attorneys employed by the Agent or any Bank to collect such deficiency. 10. LIMITATION ON DUTIES REGARDING PRESERVATION OF COLLATERAL. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Agent deals with similar property for its own account. Neither the Agent, any Bank, nor any of their respective directors, officers, employees or agents shall be liable for 157 15 failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Debtor or otherwise. 11. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 12. SEVERABILITY. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or 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. 13. PARAGRAPH HEADINGS. The paragraph headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. NO WAIVER; CUMULATIVE REMEDIES. Neither the Agent nor any Bank shall by any act (except by a written instrument pursuant to Section 15 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or such Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 15. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS, GOVERNING LAW. None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except as provided by the Credit Agreement. This Security Agreement shall be binding upon the successors and assigns of the Debtor and shall inure to the benefit of the Agent and the Banks and their respective successors and assigns. This Security Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Connecticut. 16. NOTICES. Notices hereunder shall be given to the Debtor in care of the Borrower in the manner set forth in the Credit Agreement. 17. TERMINATION. Upon the payment and the performance of the Obligations in full and the termination of the Commitments, this Security Agreement shall terminate and the Agent shall deliver any release of the Liens created under this Security Agreement that the Debtor may reasonably request. 158 16 18. SPECIFIC RELEASES. So long as no Default or Event of Default has occurred and is continuing, if the Debtor shall sell, transfer, lease or otherwise dispose of any of the Collateral permitted by the terms of this Security Agreement, including, without limitation, Section 5(i) hereof, and the Credit Agreement, then the Agent shall deliver a release in respect of any Lien created under this Security Agreement in such disposed Collateral that the Debtor may reasonably request. IN WITNESS WHEREOF, the Debtor has caused this Security Agreement to be duly executed and delivered as of the date first above written. [_______________________________] By: ------------------------------------- Name: Title: Duly Authorized CITIZENS BANK OF CONNECTICUT AS AGENT By: ------------------------------------- Name: Title: Duly Authorized 159 17 ANNEX A-1 TO EXHIBIT I ---------------------- 160 18 ANNEX A-2 TO EXHIBIT I ---------------------- 161 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), effective as of January 28, 2000, is by and among DAIRY MART CONVENIENCE STORES, INC. (a Delaware corporation) (the "Company"), the banks and other financial institutions listed on Schedule I to the Credit Agreement (defined below) (collectively, together with any banks or financial institutions from time to time parties to the Credit Agreement, the "Banks") and CITIZENS BANK OF CONNECTICUT, a Connecticut stock savings bank, as agent for the Banks (in such capacity, the "Agent"). W I T N E S S E T H: ------------------- WHEREAS, the Company, the Banks, and the Agent have entered into a Credit Agreement dated as of December 28, 1999 (the "Credit Agreement"), establishing a revolving credit facility in favor of the Company; and WHEREAS, the parties desire to amend the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. The following defined terms are hereby added to Section 1.1 of the Credit Agreement in the appropriate alphabetical sequence: "ALLOCATED G&A" means, with respect to any period, general and administrative expenses and depreciation and amortization expense allocated by the Company to the Discontinued Store Segment. "DISCONTINUED BUSINESS SEGMENTS" means the certain Company operating segments consisting of (i) the Discontinued Store Segment, and (ii) the Company's financing subsidiary, Financial Opportunities, Inc., with respect to which the Company has determined to discontinue operations by sale or closure of such operating segments. "DISCONTINUED STORE SEGMENT" means the certain Company operating segment consisting of older or under-performing stores more specifically identified on Schedule I to this Amendment; provided, however, that Schedule I may be modified from time to time by the Company by delivery to the Agent of a certificate from the Company attaching a revised list of older or under-performing stores to be sold or closed or revised Allocated G&A. 2. The definition of "ADJUSTED CONSOLIDATED INDEBTEDNESS" is hereby deleted in its entirety and substituted therefor is the following: "ADJUSTED CONSOLIDATED INDEBTEDNESS" that amount that is equal to Consolidated Indebtedness reduced by an amount equal to the sum of (i) Cash and Cash 162 Equivalents, (ii) that portion of the Company's assets (as shown on its balance sheet) which represents real property owned by the Company and used for stores with respect to which the Company is party to a fully binding commitment to enter into a sale-leaseback arrangement within sixty days following the date of such calculation, and (iii) the book value of the real and personal property (including but not limited to, land, buildings, leasehold improvements, equipment, inventory, and notes receivable) owned by the Company and used in connection with the Discontinued Business Segments. 3. The definition of "CONSOLIDATED NET INCOME" is hereby amended by inserting the following after (ii): "or (iii) net income (loss) (including, without limitation, Allocated G&A) associated with the Discontinued Business Segments, provided that the exclusion of net loss, if any, shall not exceed $6,700,000 for any four consecutive fiscal quarters ending on an FQED." 4. The definition of "Minimum Consolidated Net Worth" shall be amended by inserting the following sentence at the end of the definition: "For the purpose of calculating Minimum Consolidated Net Worth, Consolidated Net Worth shall be increased by the amount of net loss, or decreased by the amount of net income, associated with the Discontinued Business Segments." 5. The last line of the covenant grid in Section 7.1(b) of the Credit Agreement is hereby deleted in its entirety and the following substituted therefor: The FQED ending on or about April 30, 2000 2.00 to 1.00 The FQED ending on or about July 31, 2000 2.15 to 1.00 The FQED ending on or about October 31, 2000 and thereafter 2.25 to 1.00 6. In the event that a Discontinued Business Segment is not sold or closed by the Company prior to February 4, 2001, the definitions and the amendments to the Credit Agreement set forth in this Amendment shall automatically be amended effective for the FQED to occur on April 29, 2001, to reflect the terms and conditions set forth in the Credit Agreement in effect immediately prior to the effectiveness of this Amendment. 7. Except as expressly set forth in this Amendment, the Credit Agreement shall remain in full force and effect and unmodified hereby. IN WITNESS WHEREOF, the parties have executed and delivered this Amendment as of the day and year first above written. Page 2 163 DAIRY MART CONVENIENCE STORES, INC. By: /s/ Susan Adams ---------------------------------- Authorized Officer CITIZENS BANK OF CONNECTICUT, as Agent and as a Bank By: /s/ Karen Booth ---------------------------------- Authorized Officer NATIONAL CITY BANK By: /s/ Michael Sweeney ---------------------------------- Authorized Officer PROVIDENT BANK By: /s/ James M. Hojnacki ---------------------------------- Authorized Officer Page 3 164 SCHEDULE I To First Amendment to Credit Agreement [Store List and Break-Down of General & Administrative Expenses] Page 4 EX-10.7 4 EXHIBIT 10.7 1 Exhibit 10.7 EMPLOYMENT AGREEMENT This Agreement is effective January 1, 2000, by and between DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation with its principal offices at 300 Executive Parkway West, Hudson, Ohio 44236 (the "Company"), and ROBERT B. STEIN, JR., with his residence located at 90 Grey Fox Run, Bentleyville, OH 44022 (the "Employee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company desires to continue to secure the services of the Employee in the capacities set forth herein, and the Employee has agreed to continue to supply his services in such capacities, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following capitalized terms used herein shall have the respective meanings set forth below. Other capitalized terms used herein are defined elsewhere in this Agreement. "CAUSE" shall mean (i) the Employee's willful breach of duty in the course of his employment, or his habitual neglect of his employment duties, (ii) an act of fraud or theft committed by the Employee against the Company or (iii) the Employee having been convicted by a court of competent jurisdiction of a felony. For purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be 2 -2- done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company and its subsidiaries. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of the entire membership of the Company's Board of Directors (the "Board") other than directors who are employees of the Company at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the such membership of the Board, the Employee was guilty of conduct set forth above in this definition and specifying the particulars thereof in detail. "DATE OF TERMINATION" shall mean (i) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties during such thirty (30) day period), and (ii) if the Employee's employment is terminated for Cause or Good Reason or for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days, and in the case of a termination for Good Reason shall not be less than thirty (30) nor more than ninety (90) days, respectively, from the date such Notice of Termination is given). "DISABILITY" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any questions as to the existence of the Employee's Disability upon which he and the Company 3 -3- cannot agree shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's immediate family or his legal representative), and approved by the Company; said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to the Employee shall be final and conclusive for all purposes of this Agreement. "GOOD REASON" shall mean the occurrence, without the Employee's express written consent, of any of the following circumstances: (i) the assignment to the Employee of any duties or responsibilities inconsistent with his status as Chief Executive Officer and President of the Company, his removal from that position, or a diminution in the nature or status of his responsibilities from those in effect immediately prior to the date hereof or the employment by the Company of an executive officer more senior to the Employee; (ii) a reduction by the Company in the Employee's Base Salary (as defined in Paragraph 5 hereof) or fringe benefits as in effect on the date hereof or as the same may be increased from time to time during the Employment Term (as hereinafter defined in Paragraph 3 hereof); (iii) any failure by the Board to renominate the Employee for election as a director of the Company, except in connection with his death or the termination of this employment by him for other than Good Reason or by the Company for his death, Disability or for Cause; (iv) a change in the identity of a majority of the directors that constitutes the Board on the date hereof 4 -4- and following such change the Employee is subject to, in the reasonable opinion of the Employee, (x) unreasonable demands regarding his business time and efforts to be expended on behalf of the Company, (y) abusive or embarrassing treatment or (z) other material adverse changes in his working environment and conditions from those in effect on the date hereof; (v) relocation of the Employee's principal place of employment by more than 60 miles from its location as of the date hereof; (vi) a material breach of this Agreement by the Company that remains uncured for a period of 30 days after Employee has provided the Company's Board of Directors written notice that specifically identifies, in reasonable detail, the manner in which the Company materially breached the Agreement; or (vii) notwithstanding the foregoing, the occurrence of a "Change of Control" and the further occurrence of any event listed in items (i) through (vi) hereof within two years following a Change of Control. "CHANGE OF CONTROL" shall mean any one or more of the following: (i) If any "person" (as the terms used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the Company's outstanding securities; (ii) If the individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority of the 5 -5- Board, PROVIDED, HOWEVER, that any person becoming a director subsequent to the date hereof whose election or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board, but excluding, for this purpose, any such person whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; (iii) A merger, consolidation, reorganization, sale of all or substantially all of the assets of the Company or similar transaction occurs in which the Company is not the resulting entity, other than a transaction following which (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; or 6 -6- (iv) A tender offer is completed for 20% or more of the voting securities of the Company then outstanding. "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. 2. EMPLOYMENT. The Company shall employ the Employee, and the Employee shall serve the Company, upon the terms and conditions hereinafter set forth. 3. TERM. The employment of the Employee by the Company hereunder commenced as of January 1, 2000 and, unless sooner terminated on an earlier date in accordance with the provisions hereinafter provided, shall terminate on December 31, 2002; PROVIDED, HOWEVER, that commencing on January 1, 2001 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year such that the remaining unexpired term shall be three years unless, not later than December 31 of such calendar year, either the Company or the Employee shall have given notice to the other party that it or he does not wish to extend the term of this Agreement. The period commencing on January 1, 2000 and ending on December 31, 2002 or such earlier or later date to which the term of the Employee's employment hereunder may be shortened or extended as provided in this Agreement is referred to herein as the "Employment Term." 4. DUTIES. During the Employment Term, the Employee shall: 7 -7- (i) Serve as Chief Executive Officer and President of the Company, faithfully and to the best of his ability, subject to the direction and supervision of the Board; (ii) Serve as an officer and/or director of, and shall perform such services on behalf of, any subsidiary or other affiliate of the Company as may be designated by the Board, all without further compensation other than that provided for in this Agreement; and (iii) Devote his full business time, energy and skill to such employment and shall not, without prior written approval of the Board, directly or indirectly, engage or participate in, or become employed by, or become an officer or partner of, or render advisory services to or provide other services in connection with, any business activity other than that of the Company or any of its subsidiaries or affiliates as provided above; PROVIDED, HOWEVER, that the Employee shall be permitted to (x) serve as a board member of and render services to charitable organizations of his choice and (y) personally invest in any corporation, partnership or other entity, so long as any such investment does not require or involve the active participation of the Employee in the management of the business of any such corporation, partnership or other entity such as to materially interfere with the execution of the Employee's duties hereunder and does not otherwise violate any provision of this Agreement. 5. SALARY. During the term of this Agreement, the Company shall pay to the Employee a salary for his services (the "Base Salary") at a rate not less than $400,000 per year, payable in accordance with the regular payroll practices of the Company. The Base Salary shall be subject to annual review by the Board; PROVIDED, HOWEVER, that such salary may be increased, but not decreased, in the sole discretion of the Board. 8 -8- 6. BONUS ARRANGEMENTS. In addition to the Base Salary provided for in Paragraph 5 hereof, the Board, or a duly authorized committee thereof, may authorize and instruct the Company to pay to the Employee, pursuant to an incentive compensation plan formally adopted by the Board or a committee thereof or otherwise, bonus payments ("Discretionary Bonus") dependent upon the Employee's individual performance and contribution for a given fiscal year, the Company's financial performance for such fiscal year and/or such other criteria as the Board, or such designated committee thereof, shall determine. The payment of any Discretionary Bonus to be made to the Employee shall be in the sole discretion of the Board, or such designated committee thereof and may be paid in cash or, if mutually agreeable to the Board (or such designated committee thereof) and the Employee, in stock, other securities of the Company, or other assets of the Company and upon such other terms as they may mutually agree. 7. EXPENSES. It is contemplated that, in connection with his employment hereunder, the Employee may be required to incur reasonable and necessary travel, business entertainment and other business expenses. The Company agrees to reimburse the Employee for all reasonable and necessary travel, business entertainment and other business expenses incurred or expended by him incident to the performance of his duties hereunder, upon submission by the Employee to the Company of vouchers or expense statements (i) satisfactorily evidencing the incurrence of such expenses and (ii) that would enable the Company to deduct such expenses from its income under applicable tax laws. 8. EMPLOYEE BENEFITS, VACATION. (a) The Employee shall be fully vested and entitled to participate in any and all life insurance, 9 -9- medical insurance, disability insurance, pension, incentive and savings and other employee benefit plans which are made available by the Company during the Employment Term to executives of the Company of the Employee's rank, to the extent that the Employee qualifies under the eligibility provisions of such plans. (b) The Employee shall be entitled to vacations (taken consecutively or in segments), aggregating four (4) weeks for each fiscal year of the Company during the Employment Term, to be taken at times consistent with the effective discharge of the Employee's duties. Unused vacation time shall not accumulate from year to year and, in the event any such unused vacation time is remaining at the end of the fiscal year, the Employee shall not be entitled to be paid for any such remaining time. 9. AUTOMOBILE. During the Employment Term, the Company will, at the Company's sole cost and expense (including, without limitation, insurance, gasoline and upkeep and repairs), provide the Employee with an automobile for his use in accordance with past practice. 10. PERMANENT DISABILITY. In the event of the Disability of the Employee during the Employment Term, the Company shall have the right, following the sending of a Notice of Termination to the Employee, to terminate his employment hereunder. Effective on the Date of Termination, the Company shall be discharged and released from any further obligations under the Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), other than (x) the obligation to continue to make periodic payments to the Employee of his Base Salary then in effect (reduced by any amounts received by the Employee pursuant to any temporary disability plan or program 10 -10- maintained by the Company and any federal or state disability plan or program) for the period, if any, from the commencement of the period of Disability through and, if necessary, after the Date of Termination until the time in respect of which full payments to the Employee or his representatives are commenced under the Company's permanent disability plan or program or (y) pursuant to the next sentence, if applicable. Notwithstanding the foregoing, if at the time the Employee's employment hereunder is terminated in the event of Disability the Company does not maintain a permanent disability plan or program or if the Employee does not participate in a permanent disability plan or program offered or sponsored by the Company, then the Company shall pay to the Employee, within 30 days after the Date of Termination, an amount equal to (i) 100% of the annual Base Salary in effect at the time of the Notice of Termination in accordance with the provisions of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the Date of Termination. Notwithstanding the foregoing, the Employee shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination pursuant to Paragraph 13(a) hereof. Disability benefits, if any, due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 11. DEATH. In the event of the death of the Employee during the Employment Term, the Base Salary to which the Employee is entitled pursuant to Paragraph 5 hereof shall continue to be paid through the date of death and the Company shall pay an additional amount equal to the sum of (i) 100% of the annual Base Salary in effect at the time of death in accordance with the provisions 11 -11- of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the date of death. Such additional sum shall be paid in lump sum within 30 days after the date of death to the last beneficiary designated by the Employee by written notice to the Company, or, failing such designation, to his estate. The Employee shall have the right to name, from time to time, any one person as beneficiary hereunder, or with the consent of the Company to make other forms of designation of beneficiary or beneficiaries. The Employee's designated beneficiary or personal representative, as the case may be, shall accept the payments provided for in this Paragraph 11 in full discharge and release of the Company of and from any further obligations under this Agreement. Any other benefits due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 12. TERMINATION. (a) If the Employee's employment hereunder is terminated by the Company for Cause or by the Employee other than for Good Reason, the Company shall pay the Employee his full Base Salary through the Date of Termination and shall pay any additional amounts to be paid to the Employee pursuant to any compensation plans or programs then in effect and thereupon the Company shall have no further obligations under this Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), but the Employee shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination 12 -12- pursuant to Paragraph 13(a) hereof. (b) If the Employee's employment by the Company shall be terminated by (x) the Company other than for Cause, his death, or Disability or (y) the Employee for Good Reason, then the Employee shall be entitled to the benefits provided below: (i) The Company shall pay the Employee his full Base Salary and annual bonus in effect at the time the Notice of Termination is given through the Date of Termination, no later than the fifth day following the Date of Termination, plus all other amounts to which he is entitled under any compensation plan of the Company applicable to him, at the time such payments are due. For purposes of this Paragraph 12(b)(i) and (ii) and the other provisions of this Agreement, the Employee's "annual bonus in effect at the time the Notice of Termination is given" shall mean the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the date on which the Notice of Termination is given. (ii) The Company shall pay the Employee, on a date that is no later than the fifth day following the Date of Termination, as severance pay and in consideration of the Employee's continued obligations provided for in Paragraph 13(a) and (b) hereof, a payment equal to 3 times the sum of (x) his full Base Salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to the Employee pursuant to this Paragraph 12(b)(ii) shall not be reduced by the amount of any other payment or the value of any benefit received or to be received by him in 13 -13- connection with his termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an affiliate, predecessor or successor of the Company). (iii) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or in connection with his termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined below, the Company shall pay to the Employee, at the time specified in Paragraph 12(b)(iv) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Paragraph 12(b) (iii), and any interest, penalties or additions to tax payable by him with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to the Employee ("Tax 14 -14- Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280(b)(2) of the Code, or such "excess parachute payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of his residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (iv) The Gross-Up Payments provided for in Paragraph 12(b) (iii) hereof shall be made upon the earlier of (A) the payment to the Employee of any Contract Payment or other Payment or (B) the imposition upon him or payment by him of any Excise Tax. (v) If it is established pursuant to a final determination of a court or an Internal Revenue 15 -15- Service proceeding or the opinion of Tax Counsel that the Excise Tax is less than the amount taken into account under Paragraph 12(b)(iii) hereof, the Employee shall repay to the Company within five days of his receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by him if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by him on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (vi) On the Date of Termination, the Company shall at its sole cost and expense transfer unrestricted ownership and legal title, free and clear of any liens or other encumbrances, to the automobile made available by the Company for the Employee's use as of the Notice of Termination, including, without limitation, payment or reimbursement by the Company of any sales or other similar taxes due and owing as a result of such transfer. (vii) For the period of time from the Date of Termination through the earlier of three years thereafter or the date on which the Employee and his dependents become eligible for 16 -16- substantially equivalent coverage provided by a subsequent employer, the Company shall provide the Employee and his eligible dependents with continued coverage under all health, medical, dental and hospitalization plans maintained by the Company or its successor during such time period on the same terms and conditions applicable to executive officers of the Company. (viii) Upon the Date of Termination all options to purchase stock and other rights to purchase or own stock (including grants of stock) held by the Employee that are not vested shall immediately vest and become exercisable and all options to purchase stock and other rights to purchase or own stock (including grants of stock) then held by him shall remain in effect and, in the case of rights to purchase stock, be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (ix) Upon the Date of Termination, the Company shall assign and transfer to the Employee, or his designee, all of its right, title and interest in and to the life insurance policies covering the Employee's life that were held by the Company as of such date for the benefit of the Employee. From and after the Date of Termination, the Employee shall, at his election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Date of Termination. For avoidance of doubt, the Company will not assign any life insurance policy it owns for its own benefit insuring Employee's life or any cash 17 -17- surrender value relating thereto. (x) Upon the Date of Termination, the Company will assign to the Employee all of its right, title and interest in and to the personal computer of the Company that Employee maintains in his household for use for the benefit of the Company. (xi) The Employee shall not be required to mitigate the amount of any payment provided for in this Paragraph 12(b) by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in the Paragraph 12(b) be reduced by any compensation or benefit earned by the Employee as the result of employment by another employer after the Date of Termination or otherwise. The Employee shall accept the payments and other benefits provided for in the Paragraph 12(b) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. (c) In the event that the Company elects to terminate the Employee's Employment Term hereunder pursuant to the proviso to the first sentence of Paragraph 3 hereof, the Employee shall be entitled to all of the payments and benefits provided for in Paragraphs 12(b) (i) - (x) hereof, except that the payment and consideration provided for in Paragraph 12(b) (ii) hereof to which the Employee will be entitled will be equal to the sum of (x) his full Base Salary in effect for the last fiscal year of the Company completed during the Employment Term and (y) the highest of the aggregate 18 -18- bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods completed during the Employment Term. All references in Paragraph 12(b) to the date of the "Notice of Termination" or "Date of Termination" shall for purposes of this Paragraph 12(c) be deemed to be references to the last day of the Employment Term. The Employee shall accept the payments and other benefits provided for in this Paragraph 12(c) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. 13. RESTRICTIVE COVENANTS AND CONFIDENTIALITY: INJUNCTIVE RELIEF. (a) The Employee agrees, as a condition to the performance by the Company of its obligation hereunder, that during the Employment Term and, except if the Employee's employment is terminated by the Company for Disability or for Cause or by the Employee other than for Good Reason, during the further period of one (1) year after the end of such Employment Term, the Employee shall not, without the prior written approval of the Company, directly or indirectly through any other person, firm or corporation, (i) engage or participate or make any financial investment in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business enterprise, whether for compensation or otherwise, which is in competition with any of the business operations or activities of the Company and its subsidiaries then existing in all geographical places where the Company and its subsidiaries does or did business during the Employment Term, or (ii) solicit, raid, entice or induce any person who on the Date of Termination of employment of the Employee is, or within 19 -19- the last twelve (12) months of the Employee's employment by the Company was, an employee of the Company or any of its subsidiaries, to become employed by any person, firm or corporation, and the Employee shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, or (iii) solicit any person or entity who on the Date of Termination is a vendor of the Company to terminate its relationship with the Company. Nothing herein contained, however, shall restrict the Employee from making any investments in any company, partnership or other entity, so long as such investment does not require or involve the active participation of the Employee in the management of any business or enterprise which is in competition with any of the business operations or activities of the Company. (b) Recognizing that the knowledge, information and relationship with customers, suppliers, and agents, and the knowledge of the Company's and its subsidiary companies' business methods, systems, plans and policies which he shall hereafter establish, receive or obtain as an employee of the Company or its subsidiary companies, are valuable and unique assets of the respective businesses of the Company and its subsidiary companies, the Employee agrees that, during and after the Employment Term he shall not (otherwise than pursuant to his duties hereunder) disclose, publish, or furnish to any person, firm or corporation (other than to representatives of the Company and its affiliates in furtherance of the performance of the Employee's services hereunder) any confidential or proprietary information, systems, programs, know how or trade secrets or any other knowledge, information, documents or materials, the confidentiality of which the Company and its affiliates take reasonable measures to protect, acquired by the Employee during the term of this Agreement as a result of the performance of his services 20 -20- hereunder. (c) The Employee represents and acknowledges that, in light of the payments to be made by the Company to the Employee hereunder and for other good and valid reasons, the restrictions stated in Paragraphs 13(a) and 13(b) on the activities in which he may engage upon termination of his employment with the Company are reasonable, the locations designated above are reasonable because they are limited to the locations in which the Company and its subsidiaries did business during the Employment Term, and the period of time designated above is reasonable because it extends only for 12 months following the termination of his employment with the Company. (d) The Employee acknowledges that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to confidential information vital to the Company's and its subsidiary companies' businesses. By reason of this, the Employee consents and agrees that if he violates any of the provisions of Paragraphs 13(a) or 13(b) the Company and its subsidiary companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the Employee from committing or continuing any such violation of this Agreement, and the Employee shall not object to any such application. 14. DEDUCTIONS AND WITHHOLDING. The Employee agrees that the Company shall withhold from any and all payments required to be made to the Employee pursuant to this Agreement, all federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 21 -21- 15. ATTORNEYS' FEES. The Company shall pay to the Employee all legal fees and expenses reasonably incurred by him in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). 16. NOTICES. All notices or other documents to be given hereunder by either party hereto to the other shall be in writing and delivered personally or sent postage prepaid by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of delivery, or if sent by certified or registered mail, return receipt requested, shall be deemed to be delivered on the third business day after the date of mailing. The postal receipt specifying a mailing date shall be sufficient proof of the date of notice. Notices shall be sent to the following addresses until a notice of change of address by like notice has been duly provided: To the Employee: Robert B. Stein, Jr. - --------------- 90 Grey Fox Run Bentleyville, OH 44022 To the Company: Dairy Mart Convenience Stores, Inc. - -------------- 300 Executive Parkway West Hudson, OH 44236 Attn: Gregory G. Landry 17. ASSIGNABILITY, BINDING EFFECT AND SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of the Employee, and shall inure to the benefit of and be binding upon the Company and its successors and assigns. Notwithstanding the foregoing, the obligations of the Employee may not be delegated and, except as expressly provided in Paragraph 11 hereof relating to the designation 22 -22- of beneficiaries, the employee may not assign, pledge, encumber, hypothecate or otherwise dispose of this Agreement, or any of his rights hereunder, and any such attempted delegation or disposition shall be null and void and without effect. The provisions of Paragraphs 10, 11, 12, 13 and 15 hereof shall survive termination of this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, within 10 days of becoming successor, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it if no such succession had taken place. 18. COMPLETE UNDERSTANDING; AMENDMENT. This Agreement constitutes the complete understanding between the parties with respect to the employment of the Employee hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein and this Agreement supersedes all prior oral and written agreements with respect to the subject matter hereof. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. Waiver by either party hereto of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. 19. GOVERNING LAW. This Agreement shall be governed by the laws of the state of Ohio without reference to the conflicts of laws principles thereof. 20. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not effect in any way the meaning or interpretation of this Agreement. 23 -23- 21. SEVERABILITY. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable, the remainder of this Agreement shall not be affected thereby, and each remaining provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 24 -24- IN WITNESS WHEREOF, the parties hereto set their hands as of the day and year first above written. DAIRY MART CONVENIENCE STORES, INC. By: /s/ GREGORY G. LANDRY ----------------------------- Gregory G. Landry, Executive Vice President And By: /s/ JOHN W. EVERETS ------------------------- John W. Everets, Chairman of the Compensation Committee Agreed to as of this 16th day of December, 1999 /s/ ROBERT B. STEIN, JR. -------------------- Robert B. Stein, Jr. EX-10.8 5 EXHIBIT 10.8 1 Exhibit 10.8 EMPLOYMENT AGREEMENT -------------------- This Agreement is effective January 1, 2000, by and between DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation with its principal offices at 300 Executive Parkway West, Hudson, Ohio 44236 (the "Company"), and GREGORY G. LANDRY, with his residence located at 1803 Forest Oaks Drive, Hudson, Ohio 44236 (the "Employee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company desires to continue to secure the services of the Employee in the capacities set forth herein, and the Employee has agreed to continue to supply his services in such capacities, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following capitalized terms used herein shall have the respective meanings set forth below. Other capitalized terms used herein are defined elsewhere in this Agreement. "CAUSE" shall mean (i) the Employee's willful breach of duty in the course of his employment, or his habitual neglect of his employment duties, (ii) an act of fraud or theft committed by the Employee against the Company or (iii) the Employee having been convicted by a court of competent jurisdiction of a felony. For purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in 2 -2- the best interests of the Company and its subsidiaries. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of the entire membership of the Company's Board of Directors (the "Board") other than directors who are employees of the Company at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the such membership of the Board, the Employee was guilty of conduct set forth above in this definition and specifying the particulars thereof in detail. "DATE OF TERMINATION" shall mean (i) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties during such thirty (30) day period), and (ii) if the Employee's employment is terminated for Cause or Good Reason or for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days, and in the case of a termination for Good Reason shall not be less than thirty (30) nor more than ninety (90) days, respectively, from the date such Notice of Termination is given). "DISABILITY" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Any questions as to the existence of the Employee's Disability upon which he and the Company cannot agree shall be determined by a qualified independent physician selected by the Employee 3 -3- (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's immediate family or his legal representative), and approved by the Company; said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to the Employee shall be final and conclusive for all purposes of this Agreement. "GOOD REASON" shall mean the occurrence, without the Employee's express written consent, of any of the following circumstances: (i) the assignment to the Employee of any duties or responsibilities inconsistent with his status as Executive Vice President and Chief Financial Officer of the Company, his removal from that position, or a diminution in the nature or status of his responsibilities from those in effect immediately prior to the date hereof; (ii) a reduction by the Company in the Employee's Base Salary (as defined in Paragraph 5 hereof) or fringe benefits as in effect on the date hereof or as the same may be increased from time to time during the Employment Term (as hereinafter defined in Paragraph 3 hereof); (iii) any failure by the Board to renominate the Employee for election as a director of the Company, except in connection with his death or the termination of this employment by him for other than Good Reason or by the Company for his death, Disability or for Cause; (iv) a change in the executive officer to whom the Employee reports on the date hereof and following such change the Employee is subject to, in the reasonable opinion of the Employee, (x) unreasonable demands regarding his business time and efforts to be expended on behalf of the 4 -4- Company, (y) abusive or embarrassing treatment or (z) other material adverse changes in his working environment and conditions from those in effect on the date hereof; (v) relocation of the Employee's principal place of employment by more than 60 miles from its location as of the date hereof; (vi) a material breach of this Agreement by the Company that remains uncured for a period of 30 days after Employee has provided the Company's Board of Directors written notice that specifically identifies, in reasonable detail, the manner in which the Company materially breached the Agreement; or (vii) notwithstanding the foregoing, the occurrence of a "Change of Control" and the further occurrence of any event listed in items (i) through (vi) hereof within two years following a Change of Control. "CHANGE OF CONTROL" shall mean any one or more of the following: (i) If any "person" (as the terms used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the Company's outstanding securities; (ii) If the individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, PROVIDED, HOWEVER, that any person becoming a director subsequent to the date hereof whose election or nomination for election by the Company's stockholders, was approved by a 5 -5- vote of at least three-quarters of the directors then comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board, but excluding, for this purpose, any such person whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; (iii) A merger, consolidation, reorganization, sale of all or substantially all of the assets of the Company or similar transaction occurs in which the Company is not the resulting entity, other than a transaction following which (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; or (iv) A tender offer is completed for 20% or more of the voting securities of the Company then outstanding. 6 -6- "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. 2. EMPLOYMENT. The Company shall employ the Employee, and the Employee shall serve the Company, upon the terms and conditions hereinafter set forth. 3. TERM. The employment of the Employee by the Company hereunder commenced as of January 1, 2000 and, unless sooner terminated on an earlier date in accordance with the provisions hereinafter provided, shall terminate on December 31, 2002; PROVIDED, HOWEVER, that commencing on January 1, 2001 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year such that the remaining unexpired term shall be three years unless, not later than December 31 of such calendar year, either the Company or the Employee shall have given notice to the other party that it or he does not wish to extend the term of this Agreement. The period commencing on January 1, 2000 and ending on December 31, 2002 or such earlier or later date to which the term of the Employee's employment hereunder may be shortened or extended as provided in this Agreement is referred to herein as the "Employment Term." 4. DUTIES. During the Employment Term, the Employee shall: (i) Serve as Executive Vice President and Chief Financial Officer of the Company, faithfully and to the best of his ability, subject to the direction and supervision of the Board; 7 -7- (ii) Serve as an officer and/or director of, and shall perform such services on behalf of, any subsidiary or other affiliate of the Company as may be designated by the Board, all without further compensation other than that provided for in this Agreement; and (iii) Devote his full business time, energy and skill to such employment and shall not, without prior written approval of the Board, directly or indirectly, engage or participate in, or become employed by, or become an officer or partner of, or render advisory services to or provide other services in connection with, any business activity other than that of the Company or any of its subsidiaries or affiliates as provided above; PROVIDED, HOWEVER, that the Employee shall be permitted to (x) serve as a board member of and render services to charitable organizations of his choice and (y) personally invest in any corporation, partnership or other entity, so long as any such investment does not require or involve the active participation of the Employee in the management of the business of any such corporation, partnership or other entity such as to materially interfere with the execution of the Employee's duties hereunder and does not otherwise violate any provision of this Agreement. 5. SALARY. During the term of this Agreement, the Company shall pay to the Employee a salary for his services (the "Base Salary") at a rate not less than $275,000 per year, payable in accordance with the regular payroll practices of the Company. The Base Salary shall be subject to annual review by the Board; PROVIDED, HOWEVER, that such salary may be increased, but not decreased, in the sole discretion of the Board. 6. BONUS ARRANGEMENTS. In addition to the Base Salary provided for in Paragraph 5 hereof, the Board, or a duly authorized committee thereof, may authorize and instruct the Company to pay to 8 -8- the Employee, pursuant to an incentive compensation plan formally adopted by the Board or a committee thereof or otherwise, bonus payments ("Discretionary Bonus") dependent upon the Employee's individual performance and contribution for a given fiscal year, the Company's financial performance for such fiscal year and/or such other criteria as the Board, or such designated committee thereof, shall determine. The payment of any Discretionary Bonus to be made to the Employee shall be in the sole discretion of the Board, or such designated committee thereof and may be paid in cash or, if mutually agreeable to the Board (or such designated committee thereof) and the Employee, in stock, other securities of the Company, or other assets of the Company and upon such other terms as they may mutually agree. 7. EXPENSES. It is contemplated that, in connection with his employment hereunder, the Employee may be required to incur reasonable and necessary travel, business entertainment and other business expenses. The Company agrees to reimburse the Employee for all reasonable and necessary travel, business entertainment and other business expenses incurred or expended by him incident to the performance of his duties hereunder, upon submission by the Employee to the Company of vouchers or expense statements (i) satisfactorily evidencing the incurrence of such expenses and (ii) that would enable the Company to deduct such expenses from its income under applicable tax laws. 8. EMPLOYEE BENEFITS, VACATION. (a) The Employee shall be fully vested and entitled to participate in any and all life insurance, medical insurance, disability insurance, pension, incentive and savings and other employee benefit plans which are made available by the Company during the Employment Term to 9 -9- executives of the Company of the Employee's rank, to the extent that the Employee qualifies under the eligibility provisions of such plans. (b) The Employee shall be entitled to vacations (taken consecutively or in segments), aggregating four (4) weeks for each fiscal year of the Company during the Employment Term, to be taken at times consistent with the effective discharge of the Employee's duties. Unused vacation time shall not accumulate from year to year and, in the event any such unused vacation time is remaining at the end of the fiscal year, the Employee shall not be entitled to be paid for any such remaining time. 9. AUTOMOBILE. During the Employment Term, the Company will, at the Company's sole cost and expense (including, without limitation, insurance, gasoline and upkeep and repairs), provide the Employee with an automobile for his use in accordance with past practice. 10. PERMANENT DISABILITY. In the event of the Disability of the Employee during the Employment Term, the Company shall have the right, following the sending of a Notice of Termination to the Employee, to terminate his employment hereunder. Effective on the Date of Termination, the Company shall be discharged and released from any further obligations under the Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), other than (x) the obligation to continue to make periodic payments to the Employee of his Base Salary then in effect (reduced by any amounts received by the Employee pursuant to any temporary disability plan or program maintained by the Company and any federal or state disability plan or program) for the period, if any, from the commencement of the period of Disability through and, if necessary, after the Date 10 -10- of Termination until the time in respect of which full payments to the Employee or his representatives are commenced under the Company's permanent disability plan or program or (y) pursuant to the next sentence, if applicable. Notwithstanding the foregoing, if at the time the Employee's employment hereunder is terminated in the event of Disability the Company does not maintain a permanent disability plan or program or if the Employee does not participate in a permanent disability plan or program offered or sponsored by the Company, then the Company shall pay to the Employee, within 30 days after the Date of Termination, an amount equal to (i) 100% of the annual Base Salary in effect at the time of the Notice of Termination in accordance with the provisions of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the Date of Termination. Notwithstanding the foregoing, the Employee shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination pursuant to Paragraph 13(a) hereof. Disability benefits, if any, due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 11. DEATH. In the event of the death of the Employee during the Employment Term, the Base Salary to which the Employee is entitled pursuant to Paragraph 5 hereof shall continue to be paid through the date of death and the Company shall pay an additional amount equal to the sum of (i) 100% of the annual Base Salary in effect at the time of death in accordance with the provisions of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by 11 -11- the Employee in respect of the last three twelve month periods preceding the date of death. Such additional sum shall be paid in lump sum within 30 days after the date of death to the last beneficiary designated by the Employee by written notice to the Company, or, failing such designation, to his estate. The Employee shall have the right to name, from time to time, any one person as beneficiary hereunder, or with the consent of the Company to make other forms of designation of beneficiary or beneficiaries. The Employee's designated beneficiary or personal representative, as the case may be, shall accept the payments provided for in this Paragraph 11 in full discharge and release of the Company of and from any further obligations under this Agreement. Any other benefits due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 12. TERMINATION. (a) If the Employee's employment hereunder is terminated by the Company for Cause or by the Employee other than for Good Reason, the Company shall pay the Employee his full Base Salary through the Date of Termination and shall pay any additional amounts to be paid to the Employee pursuant to any compensation plans or programs then in effect and thereupon the Company shall have no further obligations under this Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), but the Employee shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination pursuant to Paragraph 13(a) hereof. (b) If the Employee's employment by the Company shall be terminated by (x) the Company other 12 -12- than for Cause, his death, or Disability or (y) the Employee for Good Reason, then the Employee shall be entitled to the benefits provided below: (i) The Company shall pay the Employee his full Base Salary and annual bonus in effect at the time the Notice of Termination is given through the Date of Termination, no later than the fifth day following the Date of Termination, plus all other amounts to which he is entitled under any compensation plan of the Company applicable to him, at the time such payments are due. For purposes of this Paragraph 12(b)(i) and (ii) and the other provisions of this Agreement, the Employee's "annual bonus in effect at the time the Notice of Termination is given" shall mean the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the date on which the Notice of Termination is given. (ii) The Company shall pay the Employee, on a date that is no later than the fifth day following the Date of Termination, as severance pay and in consideration of the Employee's continued obligations provided for in Paragraph 13(a) and (b) hereof, a payment equal to 3 times the sum of (x) his full Base Salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to the Employee pursuant to this Paragraph 12(b)(ii) shall not be reduced by the amount of any other payment or the value of any benefit received or to be received by him in connection with his termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an 13 -13- affiliate, predecessor or successor of the Company). (iii) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or in connection with his termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined below, the Company shall pay to the Employee, at the time specified in Paragraph 12(b)(iv) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Paragraph 12(b) (iii), and any interest, penalties or additions to tax payable by him with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of the Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors and reasonably acceptable to the Employee ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280(b)(2) of the Code, or such "excess parachute 14 -14- payments" (in whole or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments or (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of his residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (iv) The Gross-Up Payments provided for in Paragraph 12(b) (iii) hereof shall be made upon the earlier of (A) the payment to the Employee of any Contract Payment or other Payment or (B) the imposition upon him or payment by him of any Excise Tax. (v) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax is less than the amount taken into account under Paragraph 12(b)(iii) hereof, the Employee shall repay to 15 -15- the Company within five days of his receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by him if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by him on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (vi) On the Date of Termination, the Company shall at its sole cost and expense transfer unrestricted ownership and legal title, free and clear of any liens or other encumbrances, to the automobile made available by the Company for the Employee's use as of the Notice of Termination, including, without limitation, payment or reimbursement by the Company of any sales or other similar taxes due and owing as a result of such transfer. (vii) For the period of time from the Date of Termination through the earlier of three years thereafter or the date on which the Employee and his dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide the Employee and his eligible dependents with continued coverage under all 16 -16- health, medical, dental and hospitalization plans maintained by the Company or its successor during such time period on the same terms and conditions applicable to executive officers of the Company. (viii) Upon the Date of Termination all options to purchase stock and other rights to purchase or own stock (including grants of stock) held by the Employee that are not vested shall immediately vest and become exercisable and all options to purchase stock and other rights to purchase or own stock (including grants of stock) then held by him shall remain in effect and, in the case of rights to purchase stock, be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (ix) Upon the Date of Termination, the Company shall assign and transfer to the Employee, or his designee, all of its right, title and interest in and to the life insurance policies covering the Employee's life that were held by the Company as of such date for the benefit of the Employee. From and after the Date of Termination, the Employee shall, at his election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Date of Termination. For avoidance of doubt, the Company will not assign any life insurance policy it owns for its own benefit insuring Employee's life or any cash surrender value relating thereto. (x) Upon the Date of Termination, the Company will assign to the Employee all of its right, 17 -17- title and interest in and to the personal computer of the Company that Employee maintains in his household for use for the benefit of the Company. (xi) The Employee shall not be required to mitigate the amount of any payment provided for in this Paragraph 12(b) by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in the Paragraph 12(b) be reduced by any compensation or benefit earned by the Employee as the result of employment by another employer after the Date of Termination or otherwise. The Employee shall accept the payments and other benefits provided for in the Paragraph 12(b) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. (c) In the event that the Company elects to terminate the Employee's Employment Term hereunder pursuant to the proviso to the first sentence of Paragraph 3 hereof, the Employee shall be entitled to all of the payments and benefits provided for in Paragraphs 12(b) (i) - (x) hereof, except that the payment and consideration provided for in Paragraph 12(b) (ii) hereof to which the Employee will be entitled will be equal to the sum of (x) his full Base Salary in effect for the last fiscal year of the Company completed during the Employment Term and (y) the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods completed during the Employment Term. All references in Paragraph 12(b) to the date of the "Notice of 18 -18- Termination" or "Date of Termination" shall for purposes of this Paragraph 12(c) be deemed to be references to the last day of the Employment Term. The Employee shall accept the payments and other benefits provided for in this Paragraph 12(c) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. 13. RESTRICTIVE COVENANTS AND CONFIDENTIALITY: INJUNCTIVE RELIEF. (a) The Employee agrees, as a condition to the performance by the Company of its obligation hereunder, that during the Employment Term and, except if the Employee's employment is terminated by the Company for Disability or for Cause or by the Employee other than for Good Reason, during the further period of one (1) year after the end of such Employment Term, the Employee shall not, without the prior written approval of the Company, directly or indirectly through any other person, firm or corporation, (i) engage or participate or make any financial investment in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business enterprise, whether for compensation or otherwise, which is in competition with any of the business operations or activities of the Company and its subsidiaries then existing in all geographical places where the Company and its subsidiaries does or did business during the Employment Term, or (ii) solicit, raid, entice or induce any person who on the Date of Termination of employment of the Employee is, or within the last twelve (12) months of the Employee's employment by the Company was, an employee of the Company or any of its subsidiaries, to become employed by any person, firm or corporation, and the Employee shall not approach any such employee for such purpose or 19 -19- authorize or knowingly approve the taking of such actions by any other person, or (iii) solicit any person or entity who on the Date of Termination is a vendor of the Company to terminate its relationship with the Company. Nothing herein contained, however, shall restrict the Employee from making any investments in any company, partnership or other entity, so long as such investment does not require or involve the active participation of the Employee in the management of any business or enterprise which is in competition with any of the business operations or activities of the Company. (b) Recognizing that the knowledge, information and relationship with customers, suppliers, and agents, and the knowledge of the Company's and its subsidiary companies' business methods, systems, plans and policies which he shall hereafter establish, receive or obtain as an employee of the Company or its subsidiary companies, are valuable and unique assets of the respective businesses of the Company and its subsidiary companies, the Employee agrees that, during and after the Employment Term he shall not (otherwise than pursuant to his duties hereunder) disclose, publish, or furnish to any person, firm or corporation (other than to representatives of the Company and its affiliates in furtherance of the performance of the Employee's services hereunder) any confidential or proprietary information, systems, programs, know how or trade secrets or any other knowledge, information, documents or materials, the confidentiality of which the Company and its affiliates take reasonable measures to protect, acquired by the Employee during the term of this Agreement as a result of the performance of his services hereunder. (c) The Employee represents and acknowledges that, in light of the payments to be made by the 20 -20- Company to the Employee hereunder and for other good and valid reasons, the restrictions stated in Paragraphs 13(a) and 13(b) on the activities in which he may engage upon termination of his employment with the Company are reasonable, the locations designated above are reasonable because they are limited to the locations in which the Company and its subsidiaries did business during the Employment Term, and the period of time designated above is reasonable because it extends only for 12 months following the termination of his employment with the Company. (d) The Employee acknowledges that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he will have access to confidential information vital to the Company's and its subsidiary companies' businesses. By reason of this, the Employee consents and agrees that if he violates any of the provisions of Paragraphs 13(a) or 13(b) the Company and its subsidiary companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the Employee from committing or continuing any such violation of this Agreement, and the Employee shall not object to any such application. 14. DEDUCTIONS AND WITHHOLDING. The Employee agrees that the Company shall withhold from any and all payments required to be made to the Employee pursuant to this Agreement, all federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 15. ATTORNEYS' FEES. The Company shall pay to the Employee all legal fees and expenses reasonably incurred by him in connection with this Agreement (including all such fees and expenses, if any, 21 -21- incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). 16. NOTICES. All notices or other documents to be given hereunder by either party hereto to the other shall be in writing and delivered personally or sent postage prepaid by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of delivery, or if sent by certified or registered mail, return receipt requested, shall be deemed to be delivered on the third business day after the date of mailing. The postal receipt specifying a mailing date shall be sufficient proof of the date of notice. Notices shall be sent to the following addresses until a notice of change of address by like notice has been duly provided: To the Employee: Gregory G. Landry - --------------- 1803 Forest Oaks Drive Hudson, OH 44236 To the Company: Dairy Mart Convenience Stores, Inc. - -------------- 300 Executive Parkway West Hudson, OH 44236 Attn: Robert B. Stein, Jr. 17. ASSIGNABILITY, BINDING EFFECT AND SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of the Employee, and shall inure to the benefit of and be binding upon the Company and its successors and assigns. Notwithstanding the foregoing, the obligations of the Employee may not be delegated and, except as expressly provided in Paragraph 11 hereof relating to the designation of beneficiaries, the employee may not assign, pledge, encumber, hypothecate or otherwise dispose of this Agreement, or any of his rights hereunder, and any such attempted delegation or 22 -22- disposition shall be null and void and without effect. The provisions of Paragraphs 10, 11, 12, 13 and 15 hereof shall survive termination of this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, within 10 days of becoming successor, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it if no such succession had taken place. 18. COMPLETE UNDERSTANDING; AMENDMENT. This Agreement constitutes the complete understanding between the parties with respect to the employment of the Employee hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein and this Agreement supersedes all prior oral and written agreements with respect to the subject matter hereof. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. Waiver by either party hereto of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breach waived. 19. GOVERNING LAW. This Agreement shall be governed by the laws of the state of Ohio without reference to the conflicts of laws principles thereof. 20. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not effect in any way the meaning or interpretation of this Agreement. 21. SEVERABILITY. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid 23 -23- and unenforceable, the remainder of this Agreement shall not be affected thereby, and each remaining provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 24 -24- IN WITNESS WHEREOF, the parties hereto set their hands as of the day and year first above written. DAIRY MART CONVENIENCE STORES, INC. By: /s/ ROBERT B. STEIN, JR. ------------------------ Robert B. Stein, Jr., President And By: /s/ JOHN W. EVERETS ------------------- John W. Everets, Chairman of the Compensation Committee Agreed to as of this 16th day of December, 1999 /s/ GREGORY G. LANDRY ----------------- Gregory G. Landry EX-10.25 6 EXHIBIT 10.25 1 Exhibit 10.25 EMPLOYMENT AGREEMENT -------------------- This Agreement is effective January 18, 2000, by and between DAIRY MART CONVENIENCE STORES, INC., a Delaware corporation with its principal offices at 300 Executive Parkway West, Hudson, Ohio 44236 (the "Company") and WAYNE COLLEY, with his residence located at 5000 Burnt Store Road, Punta Gorda, Florida 33955 (the "Employee"). WITNESSETH: ----------- WHEREAS, the Company desires to secure the services of the Employee in the capacities set forth herein, and the Employee has agreed to supply his services in such capacities, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following capitalized terms used herein shall have the respective meanings set forth below. Other capitalized terms used herein are defined elsewhere in this Agreement. "CAUSE" shall mean (i) the Employee's willful breach of duty in the course of his employment, or his habitual neglect of his employment duties, (ii) an act of fraud or theft committed by the Employee against the Company or (iii) the Employee having been convicted by a court of competent jurisdiction of a felony. For purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or 2 2 omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interests of the Company and its subsidiaries. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of the entire membership of the Company's Board of Directors (the "Board") other than directors who are employees of the Company at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the such membership of the Board, the Employee was guilty of conduct set forth above in this definition and specifying the particulars thereof in detail. "DATE OF TERMINATION" shall mean (i) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties during such thirty (30) day period), and (ii) if the Employee's employment is terminated for Cause or Good Reason or for any other reason (other than Disability or death), the date specified in the Notice of Termination (which, in the case of a termination for Cause shall not be less than thirty (30) days, and in the case of a termination for Good Reason shall not be less than thirty (30) nor more than ninety (90) days, respectively, from the date such Notice of Termination is given). "DISABILITY" shall mean permanent and total disability as such term is defined under Section 22(e)(3) of the Internal Revenue code of 1986, as amended (the "Code"). Any questions as to the existence of the Employee's Disability upon which he and the Company cannot agree shall be determined by a qualified independent physician selected by the 3 3 Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's immediate family of his legal representative), and approved by the Company; said approval not to be unreasonably withheld. The determination of such physician made in writing to the Company and to the Employee shall be final and conclusive for all purposes of this Agreement. "GOOD REASON" shall mean the occurrence, without the Employee's express written consent, of any of the following circumstances: (i) the assignment to the Employee of any duties or responsibilities inconsistent with his status as Executive Vice President and Chief Operating Officer of the Company, his removal from that position, or a diminution in the nature or status of his responsibilities from those in effect immediately prior to the date hereof: (ii) a reduction by the Company in the Employee's Base Salary (as defined in Paragraph 5 hereof) or fringe benefits as in effect on the date hereof or as the same may be increased from time to time during the Employment Term (as hereinafter defined in Paragraph 3 hereof); (iii) relocation of the Employee's principal place of employment by more than 60 miles from its location as of the date hereof; (iv) a material breach of this Agreement by the Company that remains uncured for a period of 30 days after Employee has provided the Company's Board of Directors written notice that specifically identifies, in reasonable detail, the manner in which the Company materially breached the Agreement; or (v) notwithstanding the foregoing, the occurrence of a "Change of Control" and 4 4 the further occurrence of any event listed in items (i) through (iii) below within two years following a Change of Control. (i) the assignment to the Employee of any duties or responsibilities inconsistent with his status as Executive Vice President and Chief Operating Officer of the Company, his removal from that position, or a diminution in the nature or status of his responsibilities from those in effect immediately prior to the date hereof: (ii) a reduction by the Company in the Employee's Base Salary (as defined in Paragraph 5 hereof) or fringe benefits as in effect on the date hereof or as the same may be increased from time to time during the Employment Term (as hereinafter defined in Paragraph 3 hereof); (iii) a change in the executive officer to whom the Employee reports on the date hereof and following such change the Employee is subject to, in the reasonable opinion of the Employee, (x) unreasonable demands regarding his business time and efforts to be expended on behalf of the company, (y) abusive or embarrassing treatment or (z) other material adverse changes in his working environment and conditions from those in effect on the date hereof; "CHANGE OF CONTROL" shall mean any one or more of the following: (i) If any "person" (as the terms used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the Company's outstanding securities; (ii) If the individuals who constitute the Board on the date hereof (the 5 5 "Incumbent Board") cease for any reason to constitute at least a majority of the Board, PROVIDED, HOWEVER, that any person becoming a director subsequent to the date hereof whose election or nomination for election by the Company's stockholders, was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board shall be considered as though he were a member of the Incumbent Board, but excluding, for this purpose, any such person whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; (iii) A merger, consolidation, reorganization, sale of all or substantially all of the assets of the Company or similar transaction occurs in which the Company is not the resulting entity, other than a transaction following which (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally 6 6 in the election of directors of the Company; or, (iv) A tender offer is completed for 20% or more of the voting securities of the Company then outstanding. "NOTICE OF TERMINATION" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. 2. EMPLOYMENT. The Company shall employ the Employee, and the Employee shall serve the Company, upon the terms and conditions hereinafter set forth. 3. TERM. The employment of the Employee by the Company hereunder commenced as of January 18, 2000 and, unless sooner terminated on an earlier date in accordance with the provisions hereinafter provided, shall terminate on December 31, 2002; PROVIDED, HOWEVER, that commencing on January 1, 2001 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year such that the remaining unexpired term shall be three years unless, not later than December 31 of such calendar year, either the Company or the Employee shall have given notice to the other party that it or he does not wish to extend the term of this Agreement. The period commencing on January 18, 2000 and ending December 31, 2002 or such earlier or later date to which the term of the Employee's employment hereunder may be shortened or extended as provided in this Agreement is referred to herein as the "Employment Term." 4. DUTIES. During the Employment Term, the Employee shall: (i) Serve as Executive Vice President and Chief Operating Officer of the 7 7 Company, faithfully and to the best of his ability, subject to the direction and supervision of the Board; (ii) Serve as an officer and/or director of, and shall perform such services on behalf of, any subsidiary or other affiliate of the Company as may be designated by the Board, all without further compensation other than that provided for in this Agreement; and (iii) Devote his full business time, energy and skill to such employment and shall not, without prior written approval of the Board, directly or indirectly, engage or participate in, or become employed by, or become an officer or partner of, or render advisory services to or provide other services in connection with, any business activity other than that of the Company or any of its subsidiaries or affiliates as provided above; PROVIDED, HOWEVER, that the Employee shall be permitted to (x) serve as a board member or and render services to charitable organizations of his choice and (y) personally invest in any corporation, partnership or other entity, so long as any such investment does not require or involve the active participation of the Employee in the management of the business of any such corporation, partnership or other entity such as to materially interfere with the execution of the Employee's duties hereunder and does not otherwise violate any provision of this Agreement. 5. SALARY. During the term of this Agreement, the Company shall pay to the Employee a salary for his services (the "Base Salary") at a rate not less than $250,000 per year, payable in accordance with the regular payroll practices of the Company. The Base Salary shall be subject to annual review by the Board; PROVIDED, HOWEVER, that such salary may be increased, but not decreased, in the sole discretion of the Board. 8 8 6. BONUS ARRANGEMENTS. In addition to the Base Salary provided for in Paragraph 5 hereof, the Board, or a duly authorized committee thereof, may authorize and instruct the Company to pay to the Employee, pursuant to an incentive compensation plan formally adopted by the Board or a committee thereof or otherwise, bonus payments ("Discretionary Bonus") dependent upon the Employee's individual performance and contribution for a given fiscal year, the Company's financial performance for such fiscal year and/or such other criteria as the Board, or such designated committee thereof, shall determine. The payment of any Discretionary Bonus to be made to the Employee shall be in the sole discretion of the Board, or such designated committee thereof and may be paid in cash or, if mutually agreeable to the Board (or such designated committee thereof) and the Employee, in stock, other securities of the Company, or other assets of the Company and upon such other terms as they may mutually agree. 7. EXPENSES. It is contemplated that, in connection with his employment hereunder, the Employee may be required to incur reasonable and necessary travel, business entertainment and other business expenses. The Company agrees to reimburse the Employee for all reasonable and necessary travel, business entertainment and other business expenses incurred or expended by him incident to the performance of his duties hereunder, upon submission by the Employee to the Company of vouchers or expense statements (i) satisfactorily evidencing the incurrence of such expenses and (ii) that would enable the Company to deduct such expenses from its income under applicable tax laws. 8. EMPLOYEE BENEFITS, VACATION. (a) The Employee shall be fully vested and entitled to participate in any 9 9 and all life insurance, medical insurance, disability insurance, pension, incentive and savings and other employee benefit plans which are available by the Company during the Employment Term to executives of the Company of the Employee's rank, to the extent that the Employee qualifies under the eligibility provisions of such plans. (b) The Employee shall be entitled to vacations (taken consecutively or in segments), aggregating four (4) weeks for each fiscal year of the Company during the Employment Term, to be taken at times consistent with the effective discharge of the Employee's duties. Unused vacation time shall not accumulate from year to year and, in the event any such unused vacation time is remaining at the end of the fiscal year, the Employee shall not be entitled to be paid for any such remaining time. 9. AUTOMOBILE. The Employee shall be entitled to, at the Employee's option, either (i) a monthly automobile allowance of $500 (as may be adjusted, from time to time in accordance with the Company's Fleet and Stipend Policies), or (ii) a "Director/Vice President level" automobile in accordance with the Company's Fleet and Stipend Policies. 10. PERMANENT DISABILITY. In the event of the Disability of the Employee during the Employment Term, the Company shall have the right, following the sending of a Notice of Termination to the Employee, to terminate his employment hereunder. Effective on the Date of Termination, the Company shall be discharged and released from any further obligations under the Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), other than (x) the obligation to continue to make periodic payments to the Employee of his Base Salary then in effect (reduced by any amounts received by the Employee pursuant to any temporary 10 10 disability plan or program maintained by the Company and any federal or state disability plan or program) for the period, if any, from the commencement of the period of Disability through and, if necessary, after the Date of Termination until the time in respect of which full payments to the Employee or his representatives are commenced under the company's permanent disability plan or program or (y) pursuant to the next sentence, if applicable. Notwithstanding the foregoing, if at the time of the Employee's employment hereunder is terminated in the event of Disability the Company does not maintain a permanent disability plan or program or if the Employee does not participate in a permanent disability plan or program offered or sponsored by the Company, then the Company shall pay to the Employee, within 30 days after the Date of Termination, an amount equal to (i) 100% of the annual Base Salary in effect at the time of the Notice of Termination in accordance with the provisions of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the Date of Termination. Notwithstanding the foregoing, the Employee shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination pursuant to Paragraph 13(a) hereof. Disability benefits, if any, due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 11. DEATH. In the event of the death of the Employee during the Employment Term, the Base Salary to which the Employee is entitled pursuant to Paragraph 5 hereof shall continue to be paid through the date of death and the Company shall pay an additional 11 11 amount equal to the sum of (i) 100% of the annual Base Salary in effect at the time of death in accordance with the provisions of Paragraph 5 hereof and (ii) an amount equal to the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the date of death. Such additional sum shall be paid in lump sum within 30 days after the date of death to the last beneficiary designated by the Employee by written notice to the Company, or, failing such designation, to his estate. The Employee shall have the right to name, from time to time, any one person as beneficiary hereunder, or with the consent of the Company to make other forms of designation of beneficiary or beneficiaries. The Employee's designated beneficiary or personal representative, as the case may be, shall accept the payments provided for in this Paragraph 11 in full discharge and release of the Company of and from any further obligations under this Agreement. Any other benefits due under applicable plans and programs of the Company shall be determined under the provisions of such plans and programs. 12. TERMINATION. (a) If the Employee's employment hereunder is terminated by the Company for Cause or by the Employee other than for Good Reason, the Company shall pay the Employee his full Base Salary through the Date of Termination and shall pay any additional amounts to be paid to the Employee pursuant to any compensation plans or programs then in effect and thereupon the Company shall have no further obligations under this Agreement (including, but not limited to, any obligation to pay any bonus in respect of the fiscal year in which termination occurs, or any fiscal year thereafter), but the Employee 12 12 shall have the continuing obligations provided for in Paragraph 13(b) hereof, but shall be released from any obligations after the Date of Termination pursuant to Paragraph 13(a) hereof. (b) If the Employee's employment by the Company shall be terminated by (x) the Company other than for Cause, his death, or Disability or (y) the Employee for Good Reason, then the Employee shall be entitled to the benefits provided below: (i) The company shall pay the Employee his full Base Salary and annual bonus in effect at the time the Notice of Termination is given through the Date of Termination, no later than the fifth day following the Date of Termination, plus all other amounts to which he is entitled under any compensation plan of the Company applicable to him, at the time such payments are due. For purposes of this Paragraph 12(b)(i) and (ii) and the other provisions of this Agreement, the Employee's "annual bonus in effect at the time the Notice of Termination is given" shall mean the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods preceding the date on which the Notice of Termination is given. (ii) The Company shall pay the Employee, on a date that is no later than the fifth day following the Date of Termination, as severance pay and in consideration of the Employee's continued obligations provided for in Paragraph 13(a) and (b) hereof, a payment equal to 100% of the sum of (x) his full Base Salary and (y) annual bonus, in each case in effect at the time the Notice of Termination is given. The payment to be made to the Employee pursuant to this Paragraph 12(b)(ii) shall not be reduced by the amount of any 13 13 other payment or the value of any benefit received or to be received by him in connection with his termination of employment (whether payable pursuant to the terms of this Agreement or any other agreement, plan or arrangement with the Company or an affiliate, predecessor or successor of the Company). (iii) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or in connection with his termination of employment pursuant to any plan or arrangement or other agreement with the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code, as determined below, the Company shall pay to the Employee, at the time specified in Paragraph 12(b)(iv) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of the Excise Tax on Contract Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Paragraph 12(b)(iii), and any interest, penalties or additions to tax payable by him with respect thereto, shall be equal to the total present value of the Contract Payments and Other Payments at the time such Payments are to be made. For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amounts of such Excise Tax, (1) the total amount of Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that, in the opinion of independent tax counsel selected by the Company's independent auditors 14 14 and reasonably acceptable to the Employee ("Tax Counsel"), a Payment (in whole or in part) does not constitute a "parachute payment" within the meaning of Section 280(b)(2) of the Code, or such "excess parachute payments" (in which or in part) are not subject to the Excise Tax, (2) the amount of the Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Payments of (B) the amount of "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code (after applying clause (1) hereof), and (3) the value of any noncash benefits or any deferred payment or benefit shall be determined by Tax Counsel in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay federal income tax at the highest marginal rates of federal income taxation applicable to individuals in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation applicable to individuals as are in effect in the state and locality of his residence in the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes that can be obtained from deduction of such state and local taxes, taking into account any limitations applicable to individuals subject to federal income tax at the highest marginal rates. (iv) The Gross-Up Payments provided for in Paragraph 12(b)(iii) hereof shall be made upon the earlier of (A) the payment to the Employee of any Contract Payment or other Payment or (B) the imposition upon him or payment by him of any Excise Tax. (v) If it is established pursuant to a final determination of a court or 15 15 an Internal Revenue Service proceeding or the opinion of the Tax Counsel that the Excise Tax is less than the amount taken in to account under Paragraph 12(b)(iii) hereof, the Employee shall repay to the Company within five days of his receipt of notice of such final determination or opinion the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by him if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction) plus any interest received by him on the amount of such repayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess within five days of the Company's receipt of notice of such final determination or opinion. (vi) For the period of time from the Date of Termination through the earlier of three years thereafter or the date on which the Employee and his dependents become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall provide the Employee and his eligible dependents with continued coverage under all health, medical, dental and hospitalization plans maintained by the Company or its successor during such time period on the same terms and conditions applicable to executive officers of the Company. (vii) Upon the Date of Termination all options to purchase stock and 16 16 other rights to purchase or own stock (including grants of stock) held by the Employee that are not vested shall immediately vest and become exercisable and all options to purchase stock and other rights to purchase or own stock (including grants of stock) then held by him shall remain in effect and, in the case of rights to purchase stock, be exercisable for 18 months after the Date of Termination, notwithstanding any other provisions that otherwise would be applicable. (viii) Upon the Date of Termination, the Company shall assign and transfer to the Employee, or his designee, all of its right, title and interest in and to the life insurance policies covering the Employee's life that were held by the Company as of such date for the benefit of the Employee. From and after the Date of Termination, the Employee shall, at his election, assume and pay any and all premiums and other costs associated with the continuation of such policies. The Company shall execute and deliver any and all appropriate instruments necessary to evidence the foregoing assignment and transfer as promptly as practicable after the Date of Termination. For avoidance of doubt, the Company will not assign any life insurance policy it owns for its own benefit insuring Employee's life or any cash surrender value relating thereto. (ix) The Employee shall not be required to mitigate the amount of any payment provided for in this Paragraph 12(b) by seeking other employment or otherwise, nor, except as otherwise specifically provided herein, shall the amount of any payment or benefit provided for in the Paragraph 12(b) be reduced by any compensation or benefit earned by the Employee as the result of employment by another employer after the Date of Termination or otherwise. 17 17 The Employee shall accept the payments and other benefits provided for in the Paragraph 12(b) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. (c) In the event that the Company elects to terminate the Employee's Employment Term hereunder pursuant to the proviso in the first sentence of Paragraph 3 hereof, the Employee shall be entitled to all of the payments and benefits provided for in Paragraphs 12(b)(i) - (viii) hereof, except that the payment and consideration provided for in Paragraph 12(b)(ii) hereof to which the Employee will be entitled will be equal to the sum of (x) his full Base Salary in effect for the last fiscal year of the Company completed during the Employment Term and (y) the highest of the aggregate bonus payments (including Discretionary Bonus payments pursuant to Paragraph 6 hereof) made to or earned by the Employee in respect of the last three twelve month periods completed during the Employment Term. All references in Paragraph 12(b) to the date of the "Notice of Termination" or "Date of Termination" shall for purposes of this Paragraph 12(c) be deemed to be references to the last day of the employment Term. The Employee shall accept the payments and other benefits provided for in this Paragraph 12(c) in full discharge and release of the Company of and from any further obligations under this Agreement but the Employee shall have the continuing obligations provided for in Paragraphs 13(a) and 13(b) hereof. 13. RESTRICTIVE COVENANTS AND CONFIDENTIALITY: INJUNCTIVE RELIEF. (a) The Employee agrees, as a condition to the performance by the Company of its obligation hereunder, that during the Employment Term and, except if the 18 18 Employee's employment is terminated by the Company for Disability or for Cause or by the Employee other than for Good Reason, during the further period of one (1) year after the end of such Employment Term, the Employee shall not, without the prior written approval of the Company, directly or indirectly through any other person, firm, or corporation, (i) engage or participate or make any financial investment in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business enterprise, whether for compensation or otherwise, which is in competition with any of the business operations or activities of the Company and its subsidiaries then existing in all geographical places where the Company and its subsidiaries does or did business during the Employment term, or (ii) solicit, raid, entice or induce any person who on the Date of Termination of employment of the Employee is, or within the last twelve (12) months of the Employee's employment by the Company was, an employee of the Company or any of its subsidiaries, to become employed by any person, firm or corporation, and the Employee shall not approach any such employee for such purpose or authorize or knowingly approve the taking of such actions by any other person, or (iii) solicit any person or entity who on the Date of Termination is a vendor of the Company to terminate its relationship with the Company. Nothing herein contained, however, shall restrict the Employee from making any investments in any company, partnership or other entity, so long as such investment does not require or involve the active participation of the Employee in the management of any business or enterprise which is in competition with any of the business operations or activities of the Company. (b) Recognizing that the knowledge, information and relationship with 19 19 customers, suppliers, and agents, and the knowledge of the Company's and its subsidiary companies' business methods, systems, plans and policies which he shall hereafter establish, receive or obtain as an employee of the Company or its subsidiary companies, are valuable and unique assets of the respective businesses of the Company and its subsidiary companies, the Employee agrees that, during and after the Employment Term he shall not (otherwise than pursuant to his duties hereunder) disclose, publish, or furnish to any person, firm or corporation (other than to representatives of the Company and its affiliates in furtherance of the performance of the Employee's services hereunder) any confidential or propriety information, systems, programs, know how or trade secrets or any other knowledge, information, documents or materials, the confidentiality of which the Company and its affiliates take reasonable measures to protect, acquired by the Employee during the term of this Agreement as a result of the performance of his services hereunder. (c) The Employee represents and acknowledges that, in light of the payments to be made by the Company to the Employee hereunder and for other good and valid reasons, the restrictions stated in Paragraphs 13(a) and 13(b) on the activities in which he may engage upon termination of his employment with the Company are reasonable, the locations designated above are reasonable because they are limited to the locations in which the Company and its subsidiaries did business during the Employment Term, and the period of time designated above is reasonable because it extends only for 12 months following the termination of his employment with the Company. (d) The Employee acknowledges that the services to be rendered by him are of a special, unique and extraordinary character and, in connection with such services, he 20 20 will have access to confidential information vital to the Company's and its subsidiary companies' businesses. By reason of this, the Employee consents and agrees that if he violates any of the provisions of Paragraphs 13(a) or 13(b) the Company and its subsidiary companies would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to apply to any court of competent jurisdiction for an injunction restraining the employee from committing or continuing any such violation of this Agreement, and the Employee shall not object to any such application. 14. DEDUCTIONS AND WITHHOLDING. The employee agrees that the Company shall withhold from any and all payments required to be made to the Employee pursuant to this agreement, all federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes and/or regulations from time to time in effect. 15. ATTORNEY'S FEES. The Company shall pay to the Employee all legal fees and expenses reasonably incurred by him in connection with this Agreement (including all such fees and expenses, if any, incurred in contesting or disputing in good faith the nature of any such termination for purposes of this Agreement or in seeking to obtain or enforce any right or benefit provided by this Agreement). 16. NOTICES. All notices or other documents to be given hereunder by either party hereto to the other shall be in writing and delivered personally or sent postage prepaid by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of delivery, or if sent by certified or registered mail, return receipt 21 21 requested, shall be deemed to be delivered on the third business day after the date of mailing. The postal receipt specifying a mailing date shall be sufficient proof of the date of notice. Notices shall be sent to the following addresses until a notice of change of address by like notice has been duly provided: To the Employee: Mr. Wayne Colley - --------------- 5000 Burnt Store Rd. Punta Gorda, Florida 33955 To the Company: Dairy Mart Convenience Stores, Inc. - --------------- 300 Executive Parkway West Hudson, Ohio 44236 Attn: Robert B. Stein, Jr. 17. ASSIGNABILITY, BINDING EFFECT AND SURVIVAL. This Agreement shall inure to the benefit of and shall be binding upon the heirs, executors, administrators, successors and legal representatives of the Employee, and shall inure to the benefit of and be binding upon the Company and its successors and assigns. Notwithstanding the foregoing, the obligations of the Employee may not be delegated and, except as expressly provided in Paragraph 11 hereof relating to the designation of beneficiaries, the employee may not assign, pledge, encumber, hypothecate or otherwise dispose of this Agreement, or any of his rights hereunder, and any such attempted delegation or disposition shall be null and void and without effect. The provisions of Paragraphs 10, 11, 12, 13 and 15 hereof shall survive termination of this Agreement. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, within 10 days of becoming successor, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is 22 22 required to perform it if no such succession had taken place. 18. COMPLETE UNDERSTANDING; AMENDMENT. This Agreement constitutes the complete understanding between the parties with respect to the employment of the Employee hereunder, and no statement, representation, warranty or covenant has been made by either party with respect thereto except as expressly set forth herein and this Agreement supersedes all prior oral and written agreements with respect to the subject matter hereof. This Agreement shall not be altered, modified, amended or terminated except by written instrument signed by each of the parties hereto. Waiver by either party hereto of any breach hereunder by the other party shall not operate as a waiver of any other breach, whether similar to or different from the breech waived. 19. GOVERNING LAW. This Agreement shall be governed by the laws of the state of Ohio without reference to the conflicts of laws principles thereof. 20. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not effect in any way the meaning or interpretation of this Agreement. 21. SEVERABILITY. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable, the remainder of this Agreement shall not be affected thereby, and each remaining provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. IN WITNESS HEREOF, the parties hereto set their hands as of the day and year first above written. 23 23 DAIRY MART CONVENIENCE STORES, INC. By: /s/ ROBERT B. STEIN, JR. ------------------------------- Robert B. Stein, Jr., President And By:/s/ JOHN W. EVERETS ---------------------------- John W. Everets, Chairman of the Compensation Committee Agreed to as of this18th day of January, 2000 /s/ WAYNE COLLEY ------------ Wayne Colley EX-10.26 7 EXHIBIT 10.26 1 Exhibit 10.26 DAIRY MART CONVENIENCE STORES, INC. NONQUALIFIED DEFERRED COMPENSATION PLAN (EFFECTIVE AS OF JANUARY 1, 2000) 2 DAIRY MART CONVENIENCE STORES, INC. NONQUALIFIED DEFERRED COMPENSATION PLAN TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I ESTABLISHMENT 1.1 Establishment......................................................................1 1.2 Purpose............................................................................1 ARTICLE II DEFINITIONS "Accounting Period"................................................................1 2.2 "Beneficiary"......................................................................1 2.3 "Change in Control"................................................................1 2.4 "Code".............................................................................2 2.5 "Committee"........................................................................2 2.6 "Company"..........................................................................2 2.7 "Compensation".....................................................................2 2.8 "Deferred Compensation Account"....................................................2 2.9 "Deferred Compensation Award"......................................................2 2.10 "Deferred Compensation Election"...................................................2 2.11 "401(k) Plan"......................................................................2 2.12 "Investment Earnings"..............................................................2 2.13 "Matching Account" ................................................................2 2.14 "Matching Award"...................................................................2 2.15 "Normal Retirement Date"...........................................................2 2.16 "Participant"......................................................................3 2.17 "Plan Year"........................................................................3 2.18 "Pour-Over Adjustment" ............................................................3 2.19 "Pour-Over Election" ..............................................................3 2.20 "Termination of Employment"........................................................3 2.21 "Valuation Date"...................................................................3 ARTICLE III PARTICIPATION 3.1 Eligibility........................................................................3 3.2 Duration of Participation..........................................................3 3.3 Reemployment.......................................................................3
3
ARTICLE IV DEFERRED COMPENSATION AND MATCHING AWARDS 4.1 Deferred Compensation Awards.......................................................4 4.2 Matching Awards....................................................................4 ARTICLE V POUR-OVER ELECTIONS 5.1 Pour-Over Election.................................................................4 5.2 Pour-Over Amounts..................................................................5 5.3 Pour-Over Adjustments..............................................................5 ARTICLE VI PLAN ACCOUNTS 6.1 Accounts...........................................................................5 6.2 Credits to Accounts................................................................6 6.3 Charges to Accounts................................................................6 6.4 Investment Earnings................................................................6 6.5 Investment Preference Elections....................................................7 ARTICLE VII DISTRIBUTION OF BENEFITS 7.1 Entitlement to Benefit.............................................................7 7.2 Time and Manner of Payment.........................................................7 7.3 Beneficiary Designations...........................................................8 7.4 Vesting............................................................................8 7.5 Effect of Termination of Employment on Pour-Over Election..........................8 7.6 Forfeitures........................................................................9 7.7 Source of Payments.................................................................9 7.8 Maintenance of Accounts............................................................9 ARTICLE VIII ADMINISTRATION 8.1 Administration.....................................................................9 8.2 General Creditor...................................................................9 8.3 Facility of Payment................................................................9 8.4 Non-Alienation of Benefits.........................................................10 8.5 Withholding for Taxes..............................................................10 8.6 No Employment Rights...............................................................10 8.7 Committee Determinations Final.....................................................10 8.8 Amendment or Termination...........................................................10 8.9 Establishment of Trust Permitted...................................................10 8.10 Indemnification....................................................................10
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ARTICLE IX CLAIMS PROCEDURE 9.1 Initial Claim for Payment..........................................................11 9.2 Review of Claim Denial.............................................................11 ARTICLE X MISCELLANEOUS 10.1 Gender and Number..................................................................11 10.2 Successors.........................................................................12 10.3 Controlling Law....................................................................12 10.4 Limitation on Liability............................................................12
-4- 5 DAIRY MART CONVENIENCE STORES, INC. NONQUALIFIED DEFERRED COMPENSATION PLAN EFFECTIVE JANUARY 1, 2000 ARTICLE I ESTABLISHMENT ------------- 1.1 ESTABLISHMENT. Dairy Mart Convenience Stores, Inc. ("Company") hereby establishes the Dairy Mart Convenience Stores, Inc. Nonqualified Deferred Compensation Plan ("Plan") effective as of January 1, 2000. 1.2 PURPOSE. The purpose of the Plan is to provide supplemental retirement benefits to selected management level and/or highly compensated employees. The Plan is intended to be an unfunded "top-hat" plan which is exempt from most of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). ARTICLE II DEFINITIONS ----------- The following Sections of this Article II provide definitions of terms used throughout this Plan, and whenever used herein in a capitalized form, except as otherwise expressly provided, the terms shall be deemed to have the following meanings: 2.1 "ACCOUNTING PERIOD" means each calendar quarter. 2.2 "BENEFICIARY" means any person (including any trust, estate or other entity) designated by a Participant in accordance with Section 7.3 to receive any benefit payable under the Plan in the event of the Participant's death. 2.3 "CHANGE IN CONTROL" means the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of 6 the Company or of the sale of all or substantially all of the Company's assets. 2.4 "CODE" means the Internal Revenue Code of 1986, as amended from time to time. 2.5 "COMMITTEE" means the committee appointed by the Compensation Committee of the board of directors of the Company to administer the Plan or, if no such committee is appointed, the Committee shall be the Compensation Committee of the board of directors of the Company. 2.6 "COMPANY" means Dairy Mart Convenience Stores, Inc., or any successor corporation, partnership or other entity by merger, consolidation, purchase or otherwise. 2.7 "COMPENSATION" means the cash compensation payable to a Participant by the Company or a subsidiary during a Plan Year, which is payable in the form of a salary or bonus. 2.8 "DEFERRED COMPENSATION ACCOUNT" means the bookkeeping record established and maintained on behalf of each Participant to record Deferred Compensation Awards, Investment Earnings and other amounts credited to the Participant, and distributions and other amounts charged to the Participant, pursuant to the terms of the Plan. Each Deferred Compensation Account represents an unfunded commitment of the Company to pay in the future the amounts credited thereunder, subject to all of the terms and conditions of the Plan. 2.9 "DEFERRED COMPENSATION AWARD" means an amount to be credited to a Participant's Deferred Compensation Account pursuant to Section 4.1. 2.10 "DEFERRED COMPENSATION ELECTION" means the election made by a Participant in accordance with Section 4.1 to reduce his Compensation by a specific amount, and to have such amount credited to the Plan as a Deferred Compensation Award, pursuant to Article IV. 2.11 "401(K) PLAN" means the Dairy Mart Convenience Stores, Inc. 401(k) Savings and Profit Sharing Plan, as may be amended from time to time. 2.12 "INVESTMENT EARNINGS" means the amounts credited to a Participant's Deferred Compensation Account and/or Matching Account from time to time pursuant to Section 6.4. 2.13 "MATCHING ACCOUNT" means the bookkeeping record established and maintained on behalf of each Participant to record Matching Awards, Investment Earnings and other amounts credited to the Participant, and distributions and other amounts charged to the Participant, pursuant to the terms of the Plan. Each Matching Account represents an unfunded commitment of the Company to pay in the future the amounts credited thereunder, subject to all of the terms and conditions of the Plan. 2.14 "MATCHING AWARD" means an amount to be credited to a Participant's Matching Account pursuant to Section 4.2. -6- 7 2.15 "NORMAL RETIREMENT DATE" means the date on which a Participant attains age 65. 2.16 "PARTICIPANT" means any employee of the Company or a subsidiary who is participating in the Plan as provided in Article III. 2.17 "PLAN YEAR" means the twelve consecutive month period beginning each January 1 and ending the following December 31. 2.18 "POUR-OVER ADJUSTMENT" means an amount by which a Participant's Deferred Compensation Account or Matching Account is reduced in accordance with Section 5.3 in connection with a Pour-Over Election. 2.19 "POUR-OVER ELECTION" means an election made by a Participant in accordance with Section 5.1 to have amounts deducted from his Deferred Compensation and/or Matching Accounts under this Plan, in connection with (i) a corresponding employer contribution of equal amounts to the 401(k) Plan for benefit of such Participant, or (ii) a corresponding employer payment of equal amounts to the Participant in cash. 2.20 "TERMINATION OF EMPLOYMENT" means the date a person ceases to be a common-law employee of the Company or a subsidiary for any reason. A transfer of employment from one division or affiliate of the Company to another division or affiliate of the Company will not constitute a Termination of Employment for purposes of this Plan. 2.21 "VALUATION DATE" means each business day in the Plan Year. ARTICLE III PARTICIPATION ------------- 3.1 ELIGIBILITY. The Committee, in its sole discretion, shall designate in writing the employees of the Company or its subsidiaries who shall become Participants in the Plan, and the effective date of their participation. Participation must be prospective and not retroactive. The Committee shall limit its selections so that the Plan primarily covers a select group of management level and/or highly compensated employees. 3.2 DURATION OF PARTICIPATION. A Participant shall cease to be a Participant on the date the balance of his Deferred Compensation and Matching Accounts is reduced to zero. 3.3 REEMPLOYMENT. The reemployment of a former Participant by the Company or a subsidiary shall not entitle such individual to become a Participant hereunder. Such individual shall not become a Participant until the individual is again designated as such in accordance with Section 3.1. -7- 8 ARTICLE IV DEFERRED COMPENSATION AND MATCHING AWARDS ----------------------------------------- 4.1 DEFERRED COMPENSATION AWARDS. Each Participant may elect to defer all or a portion of his Compensation for any Plan Year. Each election hereunder shall (a) be made in writing prior to the first day of the Plan Year in which the Compensation will be earned, (b) specify the amount to be deferred from each paycheck, either as a fixed dollar amount or as a percentage of the Participant's Compensation, and (c) be irrevocable. Separate deferral elections may be made with respect to the salary and bonus portions of a Participant's Compensation. Notwithstanding the foregoing, a new Participant may make a mid-year deferral election with respect to Compensation to be earned after the effective date of such election, but only with respect to his first Plan Year of participation hereunder. Amounts deferred from the salary and bonus portions of a Participant's Compensation shall be Deferred Compensation Awards hereunder, effective as of the date of each paycheck and/or bonus check from which an amount is deferred. All Deferred Compensation Awards shall be credited to the Participant's Deferred Compensation Account in accordance with Section 6.2. 4.2 MATCHING AWARDS. For each pay period and bonus check, the Committee shall award an amount to each Participant based on the Participant's Deferred Compensation Award for such pay period or bonus check. Such an award, if any, shall be known as a Matching Award and shall be determined pursuant to a matching formula established by the Committee, in its sole discretion. For the 2000 Plan Year and until changed by the Plan Committee, each Matching Award shall be equal to 50% of the Participant's Deferred Compensation Award, provided said Deferred Compensation Award does not exceed 6% of the Participant's Compensation for such pay period or bonus check, and that Compensation will be limited to $170,000 (or as adjusted under Code Section 401(a)(17)) for this purpose. The 6% of Compensation cap for any pay period or bonus check shall be reduced by the amount of any compensation which is recognized under the 401(k) Plan to produce a matching contribution under that plan for the same pay period or bonus check. The Committee shall have the right to change the matching formula from time to time, but the formula shall be applied uniformly to all Participants, and any decrease in the matching formula will not be effective until the first day of the next Plan Year after such change is determined by the Committee and communicated to the Participants in writing. All Matching Awards shall be credited to the Participant's Matching Account in accordance with Section 6.2. Notwithstanding the foregoing, no Matching Award shall be credited with respect to a Deferred Compensation Award which is distributable to the Participant in cash at the end of a Plan Year pursuant to the Participant's Pour-Over Election. ARTICLE V POUR-OVER ELECTIONS ------------------- 5.1 POUR-OVER ELECTION. Each Participant who is also a participant in the 401(k) Plan may elect to have a portion of his Deferred Compensation and Matching Awards deducted from -8- 9 his Accounts at the end of any Plan Year, in exchange for (i) an employer contribution of an equal amount to the Participant's corresponding accounts under the 401(k) Plan, or (ii) a distribution of an equal amount to the Participant by the employer in cash. An annual election under this Section 5.1 shall be made at the same time and in the same manner as the Participant's Deferred Compensation Election under Section 4.1. The amount to be exchanged under a Pour-Over Election shall be determined under Section 5.2. All Pour-Over Elections are subject to Section 7.5. 5.2 POUR-OVER AMOUNTS. The amount which shall be subject to a Pour-Over Election for any Participant for any Plan Year shall be known as the Pour-Over Amount and shall be equal to the sum of (1) the Participant's Deferred Compensation Pour-Over Amount for such Plan Year, and (2) the Participant's Matching Pour-Over Amount for such Plan Year. A Participant's Deferred Compensation Pour-Over Amount for any Plan Year shall be the lesser of (i) his total Deferred Compensation Award for the Plan Year, (ii) $10,500 (or such higher amount as applies to the 401(k) Plan under Code Section 402(g) for such Plan Year), (iii) the maximum dollar amount that could be allocated to his Participant Elective Deferrals Account under the 401(k) Plan without causing the 401(k) Plan to fail the nondiscrimination limitations of Code Section 401(k) for such Plan Year, or (iv) zero, if the Participant received a financial hardship withdrawal under the 401(k) Plan during the Plan Year. A Participant's Matching Pour-Over Amount for any Plan Year shall be lesser of (i) the Matching Award attributable to his Deferred Compensation Pour-Over Amount, or (ii) the maximum dollar amount that could be allocated to his Company Matching Contributions Account under the 401(k) Plan without causing the 401(k) Plan to fail the nondiscrimination limitations of Code Section 401(m) for such Plan Year. The foregoing amounts shall be determined by the Committee, in its sole discretion, based on information available to the Committee under this Plan and information provided to the Committee by the Company and its subsidiaries with respect to the 401(k) Plan. The Committee shall not be responsible for investigating or verifying the accuracy of information provided to it by the Company and its subsidiaries in this regard. 5.3 POUR-OVER ADJUSTMENTS. Subject to Section 7.5, the Pour-Over Amount of each Participant who makes a Pour-Over Election under Section 5.1 shall be charged to his Accounts as of the last day of the Plan Year to which such election relates. The portion of the adjustment which relates to the Deferred Compensation Pour-Over Amount shall be made to the Deferred Compensation Account and the portion which relates to the Matching Pour-Over Amount shall be made to the Matching Account. ARTICLE VI PLAN ACCOUNTS ------------- 6.1 ACCOUNTS. The Committee shall establish and maintain a Deferred Compensation -9- 10 Account for each Participant who has made a Deferred Compensation Election pursuant to Section 4.1, to which Deferred Compensation Awards, Investment Earnings, and other amounts shall be credited as set forth in Section 6.2 and against which distributions and other amounts shall be charged as set forth in Section 6.3. The Committee shall also establish and maintain a Matching Account for each Participant to which Matching Awards, Investment Earnings and other amounts shall be credited as set forth in Section 6.2 and against which distributions and other amounts shall be charged as set forth in Section 6.3. 6.2 CREDITS TO PLAN ACCOUNTS. (a) DEFERRED COMPENSATION ACCOUNT. As of each payroll period and distribution of bonus checks, each Participant's Deferred Compensation Account shall be credited with the amount of their Deferred Compensation Award for such payroll period and/or bonus check, respectively. As of each Valuation Date, each Participant's Deferred Compensation Account shall be credited with (i) an amount of Investment Earnings as determined by the Committee in accordance with Section 6.4, and (ii) any other amount which the Committee reasonably determines should be credited, such as corrective additions for amounts not previously credited by mistake. (b) MATCHING ACCOUNT. As of each payroll period and distribution of bonus checks, each Participant's Matching Account shall be credited with the amount of their Matching Award for such payroll period and/or bonus check, respectively. As of each Valuation Date, each Participant's Matching Account shall be credited with (i) an amount of Investment Earnings as determined by the Committee in accordance with Section 6.4, and (ii) any other amount which the Committee reasonably determines should be credited, such as corrective additions for amounts not previously credited by mistake. 6.3 CHARGES TO ACCOUNTS. (a) DEFERRED COMPENSATION ACCOUNT. As of each Valuation Date, each Participant's Deferred Compensation Account shall be charged with (i) the amount of any distribution to the Participant (or his Beneficiary), (ii) the amount of any Pour-Over Adjustment required under Section 5.3, (iii) the amount of any negative Investment Earnings as determined by the Committee in accordance with Section 6.4, and (iv) any other amount which the Committee reasonably determines should be charged, such as corrective subtractions for amounts not previously charged by mistake or certain administrative or other expenses. (b) MATCHING ACCOUNT. As of each Valuation Date, each Participant's Matching Account shall be charged with (i) the amount of any distribution to the Participant (or his Beneficiary), (ii) the amount of any Pour-Over Adjustment required under Section 5.3, (iii) the amount of any negative Investment Earnings as determined by the Committee in accordance with Section 6.4, and (iv) any other amount which the Committee reasonably determines should be charged, such as corrective subtractions for amounts not previously charged by mistake or certain administrative or other expenses. -10- 11 6.4 INVESTMENT EARNINGS. As of each Valuation Date, the Committee shall determine an amount to be credited or charged to each Participant's Accounts, which shall be deemed Investment Earnings. The Investment Earnings shall be based on the balance of the Participant's Accounts as of the preceding Valuation Date, increased by any credits and reduced by any charges to the Participant's Accounts since such date, and the investment rates of return established by the Committee for the period since the preceding Valuation Date. The separate investment rates of return for each hypothetical investment fund shall be established by the Committee as of each Valuation Date and shall be uniformly applied to all Participants. The investment rate of return for each hypothetical investment fund shall be determined by the Committee, in its sole and absolute discretion, and shall be based on the market rates of return of the investment category upon which the hypothetical investment fund is based, and such other factors as the Committee deems relevant. If a Participant fails to elect investment fund preferences under Section 6.5, the Committee shall apply the investment rate of return of the most conservative hypothetical investment fund choice. 6.5 INVESTMENT PREFERENCE ELECTIONS. Each Participant may file an Investment Preference Election form with the Committee to express his investment category preferences under the Plan. A Participant's election will affect the amount of Investment Earnings to be credited or charged to the Participant's Accounts under Sections 6.2 and 6.3, but such election will have no legal effect on the actual investment of the Company's general assets or on the actual investment of any assets held by a trust which is established under Section 8.9. A Participant's Investment Preference Election will be effective on the next Valuation Date after it is received, acknowledged and processed by the Committee and shall remain in effect until the next Valuation Date after a new Investment Preference Election is properly filed with, acknowledged and processed by the Committee. The Committee shall establish such other rules and procedures as it deems necessary or appropriate with respect to Participant investment preference elections hereunder. ARTICLE VII DISTRIBUTION OF BENEFITS ------------------------ 7.1 ENTITLEMENT TO BENEFIT. Each Participant shall be entitled to a benefit hereunder upon incurring a Termination of Employment for any reason. The amount of such benefit shall be equal to the sum of (i) the entire balance of the Participant's Deferred Compensation Account, and (ii) the vested balance of the Participant's Matching Account (as determined under Section 7.4 below). 7.2 TIME AND MANNER OF PAYMENT. Except as otherwise provided below, a Participant's benefit shall be paid in a single sum within sixty (60) days after his Termination of Employment. Notwithstanding the foregoing, a Participant may file an advance election with the Committee to (i) receive his vested benefit in substantially equal annual installments over 3, 5 or 10 years, and/or (ii) to defer the payment of a lump sum or the commencement of annual installment payments to the later of his Termination of Employment or attaining a specified age. -11- 12 An election to receive annual installments and/or defer the payment date, shall only apply to benefits accruing after the date of such election. Such an election must be made on a distribution election form provided by the Committee for that purpose, and such election shall not be effective until acknowledged in writing by the Plan Committee. A Participant may change his distribution election at any time, provided that the change will (i) be limited to the form and time of payment options offered in this section, (ii) be effective prospectively only, and (iii) have no effect on amounts accrued under the Plan prior to the effective date of such new election. If a Participant incurs a Termination of Employment by reason of death or dies after his Termination of Employment but before his entire vested benefit has been distributed to him, his vested benefit or the remainder of his vested benefit shall be distributed to his designated Beneficiary in a single sum as soon as administratively practicable after the date of death. 7.3 BENEFICIARY DESIGNATIONS. Each Participant may designate a Beneficiary (or Beneficiaries) on a beneficiary designation form provided by the Committee for that purpose. The Participant may change such designation of Beneficiary at any time by filing a new beneficiary designation form with the Committee. No designation of Beneficiary or change of Beneficiary shall be effective until filed with and acknowledged by the Committee in writing. If more than one primary or contingent Beneficiary shall be designated, the multiple Beneficiaries in such class shall share equally, unless different percentages or amounts are clearly specified on the beneficiary designation form which is in effect on the Participant's date of death. If the Participant shall fail to file a valid beneficiary designation form, or if all persons designated shall have predeceased the Participant, the Company shall distribute the benefit payable under the Plan in a single sum to the Participant's estate. 7.4 VESTING. A Participant's Deferred Compensation Account should be fully (100%) vested at all times. A Participant's Matching Account shall become vested under the following schedule: YEARS OF VESTING SERVICE VESTED PERCENTAGE ------------------------ ----------------- Less than 1 year 0% 1 year but less than 2 years 20% 2 years but less than 3 years 40% 3 years but less than 4 years 60% 4 years but less than 5 years 80% 5 years or more 100% For purposes of this Section 7.4, Years of Vesting Service shall be equal to the Participant's years of vesting service under the 401(k) Plan. Notwithstanding the foregoing, a Participant shall be fully (100%) vested in his Matching Account in the event (i) he terminates employment from the Company or a subsidiary due to death, permanent disability or after reaching age 65, or (ii) of a Change in Control of the Company as defined in Section 2.3. The existence of a "permanent disability" shall be determined by the Committee, in its sole and reasonable discretion, based on such evidence as it deems necessary and appropriate to make such determination. -12- 13 7.5 EFFECT OF TERMINATION OF EMPLOYMENT ON POUR-OVER ELECTION. If a Participant who made a Pour-Over Election in accordance with Section 5.1 incurs a Termination of Employment from the Company or a subsidiary during the Plan Year to which such election relates, the Pour-Over Election shall be null and void and of no effect. Any Deferred Compensation and Matching Awards with respect to such Participant during the Plan Year and prior to such Termination of Employment shall be credited to his Accounts in accordance with Article VI and no Pour-Over Amount or Pour-Over Adjustment shall occur with respect to such Participant for such Plan Year. 7.6 FORFEITURES. The portion of a Participant's Matching Account which is not vested upon a Participant's Termination of Employment under Section 7.4 above, shall be forfeited and the Participant's Matching Account shall automatically be reduced by the amount of such forfeiture effective as of the date of such Termination of Employment. 7.7 SOURCE OF PAYMENTS. The amount of any benefit payable under this Article VII shall be distributed from the general assets of the Company or a subsidiary, to the extent not paid from a trust established pursuant to Section 8.9. No Participant or Beneficiary shall have any right or claim to any insurance contract maintained by the Company or any trust established under Section 8.9, or to the proceeds thereof, with respect to benefits payable hereunder. 7.8 MAINTENANCE OF ACCOUNTS. A Participant's Accounts shall continue to be maintained until all amounts credited thereto (including earnings thereon) have been distributed or forfeited. ARTICLE VIII ADMINISTRATION -------------- 8.1 ADMINISTRATION. Full power and authority to construe, interpret and administer the Plan shall be vested in the Committee. The Committee shall make each determination provided for under the Plan and promulgate such rules and regulations as it considers necessary and appropriate for the implementation and management of the Plan. 8.2 GENERAL CREDITOR. Notwithstanding any provision of the Plan to the contrary, the Participant's benefits hereunder shall at all times be reflected on the Company's books as a general unsecured and unfunded obligation of the Company, and the Plan shall not give any person any right or security interest in any asset of the Company nor shall it imply any trust or segregation of assets by the Company, other than as described in Section 8.9. Each Participant is solely an unsecured creditor of the Company with respect to any amounts payable to such Participant hereunder. 8.3 FACILITY OF PAYMENT. If the Participant or his Beneficiary is entitled to payments under the Plan, and in the Committee's opinion such person becomes in any way incapacitated so as to be unable to manage his financial affairs, the Committee may authorize the Company or a -13- 14 subsidiary to make payments to the Participant's or Beneficiary's legal representative, or to one or more of the Participant's or Beneficiary's relatives by blood, adoption or marriage for such person's benefit, or the Committee may authorize the Company or a subsidiary to make payments for the benefit of the Participant or Beneficiary in any manner that it considers advisable. Any payment made in accordance with the preceding sentence shall be a full and complete discharge of any liability for such payment hereunder. 8.4 NON-ALIENATION OF BENEFITS. All rights and benefits under the Plan are personal to the Participant and no right or interest of a Participant or any other person arising under the Plan is subject to voluntary or involuntary alienation, sale, transfer or assignment, prior to the distribution of such benefit hereunder. 8.5 WITHHOLDING FOR TAXES. Notwithstanding any contrary provision of the Plan, the Company, a subsidiary or trustee of a trust described in Section 8.9 may withhold from any payment made by it with respect to the Plan, such amount or amounts as may be required for purposes of complying with the tax withholding provisions of the Code or any state or local income tax act or for purposes of paying any estate, inheritance or other tax attributable to any amounts payable hereunder. In the event a benefit is paid in the form of property distributed in kind, the Company or a subsidiary may condition the payment of the benefit upon satisfaction of applicable withholding obligations by any reasonable method, including payment by the Participant of the amount required to be withheld. 8.6 NO EMPLOYMENT RIGHTS. The Plan is not a contract of employment, and participation in the Plan will not give any Participant the right to be retained in the employ of the Company or a subsidiary, nor any right or claim to any benefit under the Plan, unless the right or claim has specifically accrued and vested under the Plan. 8.7 COMMITTEE DETERMINATIONS FINAL. Each determination provided for in the Plan shall be made by the Committee under such procedures as it may from time to time prescribe and shall be made in the sole and reasonable discretion of the Committee. Any such determination shall be final and conclusive on all persons. 8.8 AMENDMENT OR TERMINATION. The Company may, through written resolution of the Compensation Committee of its board of directors, in its sole and reasonable discretion, terminate or amend the Plan from time to time. No such termination or amendment shall alter a Participant's right to receive a distribution of amounts previously credited to his Accounts which are vested under Article VII; provided, however, that if the Company is liquidated, it shall have the exclusive right to determine the value of each Participant's Accounts, as of a date established by the Company, and to pay any unpaid distribution in any manner which the Company determines to be just and equitable. 8.9 ESTABLISHMENT OF TRUST PERMITTED. The Company may, in its sole discretion, establish a grantor trust, as described under Section 671 of the Code, which is subject to the claims of the general creditors of the Company and its subsidiaries, for purposes of accumulating assets to provide benefits hereunder. The establishment of such a trust shall not affect the -14- 15 Company's liability to pay benefits hereunder, except that the Company's liability shall be offset by any payments actually made to a Participant or Beneficiary under such a trust. 8.10 INDEMNIFICATION. The Company shall indemnify and hold harmless each member of the Committee and each officer and employee of the Company to whom are delegated duties, responsibilities, and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon such delegate or agent (including but not limited to reasonable attorney fees) which arise as a result of actions or failure to act in connection with the operation and administration of the Plan to the extent lawfully allowable and to the extent that such claim, liability, fine, penalty or expense is not paid for by liability insurance purchased or paid for by the Company. Notwithstanding the foregoing, the Company shall not indemnify any person for any such amount incurred through any settlement or compromise of any action unless the Company consents in writing to such settlement or compromise. ARTICLE IX CLAIMS PROCEDURE ---------------- 9.1 INITIAL CLAIM FOR PAYMENT. Each Participant or Beneficiary shall submit a claim for payment to the Committee (or to such other person as may be designated by the Committee) in such manner as is prescribed by the Committee. A Participant shall have no right to seek review of a denial of payment or to bring any action in any court to enforce a claim for payment prior to filing a claim for payment and exhausting the rights to review delineated under Section 9.2. 9.2 REVIEW OF CLAIM DENIAL. If a claim is denied, in whole or in part, the claimant shall have the right to request that the Committee review the denial, provided that the claimant files a written request for review with the Committee within sixty (60) days after the date on which the claimant received written notification of the denial. A claimant (or a claimant's duly authorized representative) may review pertinent documents and submit issues and comments in writing to the Committee. Within sixty (60) days after a request for review is received, the review shall be made and the claimant shall be advised in writing of the decision on review, unless special circumstances require an extension of time for processing the review, in which case the claimant shall be given a written notification within such initial sixty (60) day period specifying the reasons for the extension and when such review shall be completed (provided that such review shall be completed within one hundred and twenty (120) days after the date on which the request for review was filed). The decision on review shall be forwarded to the claimant in writing and shall include specific reasons for the decision and references to Plan provisions upon which the decision is based. A decision on review shall be final and binding on all persons for all purposes. If a claimant shall fail to file a request for review in accordance with the procedures herein outlined, such claimant shall have no rights to review and shall have no right to bring action in any court and the denial of the claim shall become final and binding on all persons for all purposes. The foregoing claim procedures, although similar to claim procedures -15- 16 used by employee pension benefit plans covered by ERISA, shall not be construed to render this Plan covered by ERISA. ARTICLE X MISCELLANEOUS ------------- 10.1 GENDER AND NUMBER. Where the context permits, words denoting men include women, the plural includes the singular, and the singular includes the plural. 10.2 SUCCESSORS. Any successor to the Company, by merger, consolidation, purchase or otherwise, shall be substituted hereunder for the Company, and the Plan shall be binding upon all successors to and assigns of the Company, and the Company will require any successor or assign (whether direct or indirect, by merger, consolidation, purchase or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form satisfactory to the Committee, expressly, absolutely and unconditionally to assume and agree to perform the obligations under this Plan in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. 10.3 CONTROLLING LAW. The Plan shall be construed in accordance with the laws of the State of Ohio. 10.4 LIMITATION ON LIABILITY. Neither the Company nor any employee, officer or director of the Company in any manner guarantees the payments to be made under this Plan against loss or depreciation, and to the extent not prohibited by federal or state law, none of them shall be liable (except for his own gross negligence or willful misconduct), for any act or failure to act, done or omitted in good faith, with respect to the Plan. The Company shall not be responsible for any act or failure to act of any agent appointed to administer the Plan. Executed this 29th day of December, 1999, but effective as of January 1, 2000. DAIRY MART CONVENIENCE STORES, INC. By: /s/ ROBERT B. STEIN, JR. ------------------------ -16- EX-23 8 EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACOUNTANTS 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. Cleveland, Ohio April 21, 2000 EX-27 9 EXHIBIT 27
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 JAN-29-2000 JAN-30-1999 JAN-29-2000 7,702 155 20,499 2,063 34,804 67,257 171,952 61,006 209,799 69,148 90,628 0 0 69 6,800 209,799 581,119 581,119 435,867 573,196 0 0 11,583 (3,660) 1,164 (2,496) 0 0 0 (2,496) (0.51) (0.51)
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