-----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, MC1JXDBb7NCVTMlNUm6sWulqMhp0TphxbYHcAHc5MWgg0Lhx5dH+RbR3Zo6b4b52 uQ3+BIgiPONHz5OSdAhfMg== 0000950152-01-501557.txt : 20010509 0000950152-01-501557.hdr.sgml : 20010509 ACCESSION NUMBER: 0000950152-01-501557 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010203 FILED AS OF DATE: 20010507 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-K SEC ACT: SEC FILE NUMBER: 001-11627 FILM NUMBER: 1624627 BUSINESS ADDRESS: STREET 1: 210 BROADWAY EAST CITY: CUYAHOGA FALLS STATE: OH ZIP: 44222 BUSINESS PHONE: 2037414444 10-K 1 l88054ae10-k.txt DAIRY MART CONVENIENCE STORES, INC. FORM 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001 [ ] 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 [ ] As of April 27, 2001, 5,002,026 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 $15,682,931. 2 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 complete a merger, implement business segmentation and restructuring plans, upgrade and remodel store locations, build new stores and increase gasoline sales, reduce the impact of under-performing stores, sell or lease certain assets, the Company's 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 complete the merger or otherwise pursue the Company's alternative business strategy, each 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 areas, 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 547 stores under the "Dairy Mart" name in seven states located in the Midwest and Southeast, of which 103 stores are franchised. Dairy Mart stores offer a wide range of products and services which cater to the convenience needs of its customers, including gasoline, 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. 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. On March 15, 2001, in connection with a previously-disclosed review of the Company's strategic alternatives, including a possible sale, the Company executed a merger agreement (the "Merger Agreement") pursuant to which DM Acquisition Corp. agreed to acquire the Company in a cash merger for $4.50 per share. DM Acquisition Corp. is controlled by Robert B. Stein, Jr., the Chairman, President and Chief Executive Officer of the Company. The Merger Agreement provides that DM Acquisition Corp. will be merged with and into the Company and that each share of the Company's Common Stock outstanding immediately prior to the merger, other than those owned by Mr. Stein and his affiliates, will be converted into the right to receive $4.50 per share in cash. The Company's board of directors, based on the unanimous recommendation of a special committee of 2 3 independent directors, has approved the transaction and recommended that the Company's stockholders approve the transaction. In connection with the merger, the Company will solicit its senior subordinated noteholders to exchange their subordinated notes of the Company and receive, for each $10,000 in principal amount of the old notes, $3,870 in principal amount of new notes of the Company, $6,191.30 in cash and a warrant to purchase Common Stock of the Company that will not become exercisable until after the merger is completed. The Company has entered into an exchange and voting agreement pursuant to which holders of approximately 70% of the senior subordinated notes have agreed to participate in the exchange. The Merger Agreement is subject to customary conditions, including completion of necessary financing arrangements and approval of holders of a majority (excluding those shares held by persons who will have an interest in the buyout entity) of the shares of the Company's Common Stock voting at a special meeting. If the merger is completed, the Company will no longer be a public company. There can be no assurance, however, that the Company or DM Acquisition Corp. will be able to complete the merger. In addition, the Company has reinitiated and modified a previously announced comprehensive program to improve the Company's profitability and reduce debt (the "Business Segmentation Plan"). Under the Business Segmentation Plan, the Company will attempt to sell or otherwise close approximately 200 stores that do not meet internal profitability criteria, reduce corporate and field overhead and apply proceeds from the sale of stores to reduce outstanding borrowings. However, as a result of experiencing further losses from operations, the Company has modified and accelerated the portion of the Business Segmentation Plan that relates to a reduction in corporate overhead. Under this modification, the Company has commenced a business restructuring plan (the "Business Restructuring Plan") pursuant to which certain general and administrative overhead costs have been reduced in advance of those cost reductions which can only be achieved after the underperforming stores are sold or closed. Accordingly, in the first quarter of fiscal year 2002, approximately 30 executive, managerial and administrative positions were eliminated. These staff reductions and associated costs are expected to result in savings of approximately $3.0 million per year. The Company has commenced implementing each of these plans and intends to complete them whether or not the merger is completed. There can be no assurance, however, that either of these plans will be successfully completed as contemplated. 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. 276 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 February 3, 2001, the Company operated and franchised retail convenience stores in the following states:
NUMBER OF STORES --------- Ohio........................................................ 346 Kentucky.................................................... 113 Pennsylvania................................................ 30 Michigan.................................................... 29 Indiana..................................................... 19 Tennessee................................................... 8 North Carolina.............................................. 2 --- Total Stores................................................ 547 ===
3 4 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:
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ------------------------------ ------------------------------ ------------------------------ COMPANY FRANCHISE COMPANY FRANCHISE COMPANY FRANCHISE OPERATED OPERATED TOTAL OPERATED OPERATED TOTAL OPERATED OPERATED TOTAL -------- --------- ----- -------- --------- ----- -------- --------- ----- At beginning of period.... 475 128 603 477 141 618 469 158 627 Opened or acquired........ 9 -- 9 18 -- 18 25 -- 25 Closed or sold............ (42) (23) (65) (25) (8) (33) (16) (18) (34) Transferred (net)......... 2 (2) -- 5 (5) -- (1) 1 -- --- --- --- --- --- --- --- --- --- End of period............. 444 103 547 475 128 603 477 141 618 === === === === === === === === ===
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 2001, the Company closed 28 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 37 stores were sold to independent operators in fiscal year 2001. Additional stores may be closed during fiscal 2002 as part of the Business Segmentation Plan. NEW STORES A major component of the Company's growth strategy has been 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 2001, the Company opened nine new stores, all of which offer gasoline through modern facilities, including credit card readers in the gasoline dispensers. The Company has put on hold additional new store development pending the outcome of the previously-mentioned merger. 4 5 TECHNOLOGICAL UPGRADE/RETAIL AUTOMATION IMPLEMENTATION The table and discussion below summarizes the Company's plans with respect to technology upgrades and retail automation initiatives:
ACTUAL/PROJECTED COMPLETION ------------------------------------------- PHASE/INITIATIVE FY' 99 FY' 00 FY' 01 FY' 02 ---------------- ------- ------- ------- ------- Phases I & II:......... POS Rollout and Implement Host Accounting System 100% Phase III:.... Implement Store-Level Computer Systems 50% 50% Phase IV:..... Implement Centralized Automated Pricebook 25% 25% 50% Phase V:...... Implement Evolution Initiatives * Payroll Time & Attendance 100% * Automated Item Level Receiving 20% 80% * Scanning for higher volume locations 10% 90% Phase VI...... Item Level/Scanning Initiatives * Pricebook Exception System 10% 90% * Scanning for lower volume locations 50% 50% * Item Sales Analysis System 10% 90% * Shelf Tag Implementation 25% 75%
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. Phase six is expected to produce labor savings at the store related to the Shelf Tag Implementation for scanning stores because merchandise will no longer be required to be individually price marked. Scanning in the lower volume stores will achieve the same benefits as mentioned above. The Pricebook Exception system allows for automated credit memos in the event that a vendor's pricebook differs from the Company's. The Item Sales Analysis System will assist the Company in evaluating item level product movement and improve purchasing decisions. GASOLINE OPERATIONS Gasoline sales accounted for approximately 48% of total revenue in fiscal year 2001, 40% in fiscal year 2000 and 35% in fiscal year 1999. As of February 3, 2001, 276 stores sold gasoline. 5 6 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 the prices of nationally advertised brands and comparable to the prices of 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 some 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 February 3, 2001, 72 of the Company's locations 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. These 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 2001, the Company's operating results have been adversely impacted by higher wholesale gasoline prices and competitive pressures which prevented the Company from fully recovering these higher wholesale costs in the form of higher retail selling 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 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 276 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 37 store locations, including 13 Mr. Heros(R), 13 Taco Bells(R) and eight Subways(R). The Company has entered into an agreement with Restaurants Developers Corporation to develop Mr. Hero(R) quick-serve restaurants 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 six Mr. Hero(R) locations in fiscal year 2001. 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. During fiscal year 2001, the Company closed 14 quick-serve restaurants that failed to meet performance criteria. The convenience store and gasoline operations in these 14 locations continue to operate. 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 brand-name 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 a seven-year agreement to provide ATM services at all of its locations. In an effort to build customer traffic and sales, the ATM service was initially priced free to the customer. Effective April 1, 2000, in an effort to improve the Company's overall profitability, the Company began charging $.99 per 6 7 transaction at most locations. Subsequently, the fee was increased to $1.50 per transaction in September 2000. The Company believes that the current fee is competitively priced. FRANCHISE OPERATIONS The Company franchises 103 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 February 3, 2001, there were 38 full franchise locations and 65 limited franchise locations. INTERNATIONAL OPERATIONS The Company conducts business outside the United States as a licensor or as a consultant. The Company's agreements with convenience store operators in South Korea and Malaysia expired during fiscal year 2001 and these agreements were not renewed. In fiscal year 2000, the Company entered into a consulting arrangement with a convenience store operator in Aruba. The Company does not consider the revenue it receives under these agreements to be material to its revenues as a whole. 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 monthly basis. COMPETITION AND OTHER EXTERNAL INFLUENCES 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. The Company's competitors generally 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. Weather conditions have a significant effect on the Company's sales, as convenience store customers are more likely to go to stores to purchase convenience goods and services, particularly higher profit margin items such as fast food items, fountain drinks and other beverages, when weather conditions are favorable. Accordingly, the Company's stores generally experience higher revenues and profit margins during the warmer weather months, which fall within the Company's second and third fiscal quarters. EMPLOYEES As of February 3, 2001, 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. 7 8 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 for those of its stores for which it is primarily responsible for performing environmental compliance and remediation. 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. A more complete discussion of environmental remediation liabilities is included in the Notes to the Consolidated Financial Statements. ITEM 2. PROPERTIES The Company's stores are generally located in suburban areas, and are situated close to single-family homes and apartments to attract neighborhood shoppers. The stores are located in Ohio, Kentucky, Pennsylvania, Michigan, Indiana, Tennessee, and North Carolina. A typical Dairy Mart store ranges between 2,400 and 3,800 square feet and is a free-standing structure. Of the 547 stores in operation as of February 3, 2001, 75 were owned by the Company and 472 were leased. In addition, the Company owns eight locations and is the primary lessee for 27 locations not currently operated as Dairy Mart stores. The Company's policy is to endeavor to lease or sublease these 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 88 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. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in an action brought by a former supplier of certain dairy products to convenience stores formerly owned by the Company in Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores"). The action is entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. District Court for the State of Connecticut). This action was commenced on April 17, 1997, by New England Dairies, Inc. ("NED") alleging that the Company committed an anticipatory breach of a supply agreement entered into between NED and the Company on April 25, 1995 ("the Agreement"), when the Company entered into a contract with a third party to sell all company-owned and franchised convenience stores in New England, without requiring the third party purchaser to assume the Agreement. NED's complaint alleges lost profits in the amount of $3.7 million. The defendants are contesting the claims and, at this time, the Company is not able to determine what the results of this litigation will 8 9 be. Trial of this case was completed on December 7, 2000, and it is not known when the judge will issue his ruling. The Company has recognized no provision for any possible loss in the accompanying financial statements. The Company was the plaintiff in an action commenced on April 20, 2000, entitled Dairy Mart Convenience Stores, Inc. v. RLI Insurance Group and RLI Insurance Company and RLI Corporation, Civil Action Number 5:00 CV 1043 (U.S. District Court for the Northern District of Ohio, Eastern Division), brought against RLI Insurance Group to recover $3.0 million under the Company's directors and officers excess liability insurance policy for legal fees incurred in the course of defending certain directors and officers of the Company in derivative litigation of Dairy Mart Convenience Stores, Inc. The Company recorded the $3.0 million as a receivable. On November 28, 2000, the Company reached an agreement in principle with RLI Insurance Group to settle the litigation for $1.8 million. Accordingly, a reduction in accounts receivable and other costs related to this settlement was recognized in the amount of $1.3 million during fiscal year 2001 and was included in general and administrative expenses. 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 the 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 table below sets forth the high and low sales prices per share of the Dairy Mart Common Stock as quoted on the American Stock Exchange during its fiscal year ended February 3, 2001.
HIGH LOW ---- --- FISCAL YEAR ENDED FEBRUARY 3, 2001: First Quarter............................................. 3 1/8 1 7/8 Second Quarter............................................ 4 5/8 2 1/4 Third Quarter............................................. 5 3/8 3 3/4 Fourth Quarter............................................ 5 1/4 2
The high and low sales price per share on Common Stock A from January 30, 2000 through February 9, 2000 was 3 3/8 and 3 1/4 respectively. The high and low sales price per share on Common Stock B from January 30, 2000 through February 9, 2000 was 3 1/2 and 3 1/8 respectively. The table below 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 its fiscal year ended January 29, 2000.
CLASS A CLASS B COMMON COMMON STOCK 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
9 10 There were approximately 2,200 holders of the Company's Common Stock as of April 27, 2001. Included in this number are shares held in nominee or street names. ITEM 6. SELECTED FINANCIAL DATA FIVE FISCAL YEARS ENDED FEBRUARY 3, 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- OPERATING RESULTS: Revenues.............................. $723,671 $588,551 $481,598 $505,654 $585,746 Interest expense, net................. 14,183 11,583 10,806 10,612 10,877 Income (loss) before income taxes..... (24,073) (3,660) 175 (1,999) (2,529) Net income (loss)..................... (29,451) (2,496) 25 (1,468) (1,836) EARNINGS (LOSS) PER SHARE: Net earnings (loss) per share-- basic and diluted........................ (5.96) (.51) .01 (.31) (.41) BALANCE SHEET DATA: Property and equipment, net........... $111,448 $110,946 $ 98,829 $ 82,589 $ 89,448 Total assets.......................... 190,717 209,799 181,331 167,647 177,805 Long-term obligations(a).............. 135,600 123,135 108,507 96,448 110,428 Stockholders' equity (deficit)........ (22,272) 6,869 9,257 8,988 10,214 OTHER DATA: Earnings before interest expense, income taxes, depreciation and amortization (EBITDA)(b)........... $ 5,023 $ 21,338 $ 21,079 $ 19,319 $ 20,092
- --------------- (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, or in isolation from, Generally Accepted Accounting Principles (GAAP) measurements such as net income (loss) or cash flow from operations. 10 11 FINANCIAL HIGHLIGHTS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS, EXCEPT NUMBER OF LOCATIONS, GROSS PROFIT PER GALLON AND PER SHARE DATA)
2001 2000 1999 -------- -------- -------- FINANCIAL DATA: Revenues: Merchandise sales........................................ $375,122 $353,545 $307,048 Gasoline sales........................................... 347,759 233,926 170,627 Other.................................................... 790 1,080 3,923 -------- -------- -------- Total revenues........................................... 723,671 588,551 481,598 -------- -------- -------- Net income (loss).......................................... $(29,451) $ (2,496) $ 25 -------- -------- -------- STORE DATA: Company operated: Gross profit............................................. $115,546 $111,664 $103,229 Average sales per store(1)............................ $ 794 $ 729 $ 647 Average gross profit per store(1)..................... $ 250 $ 236 $ 222 Number of stores at year end............................. 444 475 477 Franchise operated: Franchise fees........................................... $ 9,085 $ 9,678 $ 10,255 Average sales per store(1)............................ $ 656 $ 642 $ 612 Average franchise fees per store(1)................... $ 80 $ 71 $ 68 Number of stores at year end............................. 103 128 141 Total stores: Gross profit............................................. $124,631 $121,342 $113,484 Average sales per store(1)............................ $ 747 $ 689 $ 608 Average combined gross profit and franchise fees per store(1)............................................ $ 217 $ 199 $ 185 Number of stores at year end............................. 547 603 618 GASOLINE DATA: Gallons sold............................................. 238,054 202,648 169,916 Gross profit............................................. $ 22,260 $ 22,568 $ 20,085 Average gallons sold per location..................... 838 753 590 Gross profit per gallon.................................. $ .0935 $ .1114 $ .1182 Number of gasoline locations at year end................. 276 283 282 OTHER DATA: Weighted-average number of shares in basic EPS........... 4,945 4,869 4,823 Book value per share(2).................................. $ (3.23) $ 1.02 $ 1.38
- --------------- (1) The calculation of average sales per store, average gross profit per store, average franchise fees per store and gasoline gallons per store is based on a weighted-average number of stores open during fiscal years 2001, 2000 and 1999, respectively. (2) The calculation uses total outstanding shares including the dilutive effect of stock options, stock grants and stock warrants as of February 3, 2001, January 29, 2000 and January 30,1999, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Since the end of the Company's fiscal year 2001, the Company has entered into the Merger Agreement and commenced the initiation of a Business Restructuring Plan and a Business Segmentation Plan. For a more 11 12 complete discussion of the Merger Agreement, the Business Restructuring Plan and the Business Segmentation Plan, see Item 1. Business--General. CONSOLIDATED STATEMENTS OF OPERATIONS (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FOR THE FISCAL YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
2001 2000 1999 ------ ------ ------ Revenues.................................................... $723.7 $588.5 $481.6 Cost of goods sold and expenses: Cost of goods sold........................................ 576.0 443.5 344.1 Operating and administrative expenses..................... 157.5 137.1 126.5 Interest expense, net..................................... 14.2 11.6 10.8 ------ ------ ------ 747.7 592.2 481.4 Income (loss) before income taxes........................... (24.1) (3.7) 0.2 Benefit (provision) from income taxes....................... (5.4) 1.2 (0.2) ------ ------ ------ Net income (loss)......................................... $(29.5) $ (2.5) $ 0.0 Income (loss) per share................................... $(5.96) $(0.51) $ 0.01
FISCAL YEAR 2001 RESULTS COMPARED TO FISCAL YEAR 2000 RESULTS: Revenues Revenues for fiscal year 2001 increased $135.2 million compared to fiscal year 2000. The Company's fiscal year ends on the Saturday closest to January 31. There were 53 weeks included in the fiscal year ended February 3, 2001 and 52 weeks in the fiscal year ended January 29, 2000. A summary of revenues by functional area is shown below:
2001 2000 ------ ------ (IN MILLIONS) Convenience stores.......................................... $375.2 $353.6 Gasoline.................................................... 347.7 233.9 Other....................................................... .8 1.0 ------ ------ Total............................................. $723.7 $588.5 ====== ======
Convenience store revenues increased $21.6 million, or 6.1%, in fiscal year 2001 compared to fiscal year 2000. This increase is the result of the inclusion of 53 weeks in fiscal year 2001, as described above, a 2.8% increase in comparable Company-operated store sales and the opening of nine new stores during fiscal year 2001, partially offset by the closure or sale of 65 under-performing stores. Gasoline revenues increased $113.8 million in fiscal year 2001 compared to fiscal year 2000 as a result of the inclusion of 53 weeks in fiscal year 2001, an increase in the average selling price of gasoline of 30.7 cents per gallon and an increase in total gallons sold of 35.4 million, or 17.5%. The increase in gallons sold is primarily a result of opening 27 convenience stores during fiscal years 2000 and 2001, all of which have expanded gasoline facilities resulting in substantially higher average gasoline sales than the Company's older, less modern convenience stores that sell gasoline. Gallons of gasoline sold for comparable stores that sell gasoline decreased 2.3% from fiscal year 2000 to fiscal year 2001. 12 13 Gross Profit Gross profit increased $2.7 million from fiscal year 2000 to fiscal year 2001. A summary of gross profit by functional area is shown below:
2001 2000 ------ ------ (IN MILLIONS) Convenience Stores.......................................... $124.7 $121.4 Gasoline.................................................... 22.2 22.6 Other....................................................... .8 1.0 ------ ------ Total..................................................... $147.7 $145.0 ====== ======
Convenience store gross profits increased by $3.3 million in fiscal year 2001 compared to fiscal year 2000. 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 34.3% in fiscal year 2000 to 33.2% in fiscal year 2001. Convenience store gross profit margins decreased primarily because cigarette sales increased relative to total sales and cigarette sales carry a lower gross profit margin than merchandise sales in total. In addition, the gross profit margin on cigarette sales decreased as a result of increases in wholesale cigarette costs during fiscal year 2001. Gasoline gross profits decreased $0.4 million in fiscal year 2001 compared to fiscal year 2000. This decrease was primarily attributable to a 1.7 cent per gallon decrease in gasoline gross profit partially offset by the increase in gasoline gallons sold, described above. Gasoline gross profit was 9.4 cents per gallon in fiscal year 2001 compared to 11.1 cents per gallon in fiscal year 2000. Average product cost per gallon increased 31% in fiscal year 2001 compared to fiscal year 2000 as a result of increases in crude oil prices and wholesale gasoline costs during fiscal year 2001. However, competitive pressures in the Company's major market areas held the increase in the average retail price per gallon to 27%. In addition, credit card fees paid by the Company increased $1.8 million, or 83%, during fiscal year 2001 as a result of the higher average retail price of gasoline and the higher relative proportion of gasoline purchases made using credit cards. Operating and Administrative Expenses Operating and administrative expenses increased $20.4 million in fiscal year 2001 compared to fiscal year 2000. A summary of operating and administrative expenses is shown below:
2001 2000 ------ ------ (IN MILLIONS) Operating expenses.......................................... $124.9 $111.4 General & administrative expenses........................... 32.6 25.7 ------ ------ Total..................................................... $157.5 $137.1 ====== ======
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 unemployment environment and highly competitive labor market. Advertising expenses were increased to promote the Company's food service offerings. Depreciation and store occupancy costs increased as a result of 27 new stores opened during fiscal years 2000 and 2001. General and administrative expenses increased as a result of (1) higher liability and health insurance costs, (2) increases in costs incurred to sell or close under-performing stores, (3) costs associated with corporate governance activities, including the previously announced review of the Company's strategic alternatives, and (4) a $1.3 million charge related to the settlement of a lawsuit involving the recovery of costs associated with a previously settled shareholder derivative action. The settlement is described more fully in the Legal Proceedings section of this document. 13 14 Interest Expense, Inflation and Taxes Interest expense, net, was $14.2 million in fiscal year 2001 and $11.6 million in fiscal year 2000. The increase was primarily attributable to an increase in capital lease borrowings, an increase in the average outstanding balance of the senior revolving credit facility and an increase in interest rates. As noted in the analyses above, the Company experienced increases in the cost of tobacco products, gasoline and wages during fiscal year 2001. The effective tax rate for the Company was a provision of 22.3% for fiscal year 2001 and a benefit of 31.8% for fiscal year 2000. In fiscal year 2001, the Company fully offset net deferred tax assets by recording a valuation allowance of $4.8 million because of the uncertainty of realizing certain tax credits and loss carryforwards in the future. The recording of the valuation allowance had no impact on the Company's net cash provided by operating activities. FISCAL YEAR 2000 RESULTS COMPARED TO FISCAL YEAR 1999 RESULTS: Revenues Revenues for fiscal year 2000 increased $106.9 million compared to fiscal year 1999. There were 52 weeks included in the fiscal years ended January 29, 2000 and January 30, 1999. A summary of revenues by functional area is shown below:
2000 1999 ------ ------ (IN MILLIONS) Convenience stores.......................................... $353.6 $307.1 Gasoline.................................................... 233.9 170.6 Other....................................................... 1.0 3.9 ------ ------ Total..................................................... $588.5 $481.6 ====== ======
Convenience store revenues increased $46.5 million, or 15.1%, in fiscal year 2000 compared to fiscal year 1999. This increase is the result of an 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 $63.3 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. The increase in gallons sold is primarily a result of opening 18 convenience stores during fiscal year 2000 all of which have expanded gasoline facilities resulting in substantially higher average gasoline sales than the Company's older, less modern convenience stores that sell gasoline. Gallons of gasoline sold for comparable stores increased 4.9% from fiscal year 1999 to fiscal year 2000. 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.......................................... $121.4 $113.5 Gasoline.................................................... 22.6 20.1 Other....................................................... 1.0 3.9 ------ ------ Total..................................................... $145.0 $137.5 ====== ======
14 15 Convenience store gross profit increased by $7.9 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 36.9% in fiscal year 1999 to 34.3% in fiscal year 2000. 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 $2.5 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 per gallon. Gasoline gross profit was 11.4 cents per gallon in fiscal year 2000 compared to 11.8 cents per gallon in fiscal year 1999. Gasoline gross profit was negatively impacted by increases in crude oil prices and wholesale gasoline costs in the fourth quarter of fiscal year 2000, and was substantially lower than the gross profit 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 primarily as a result of a $3.0 million one-time fee recognized through the termination of a long-term ATM (automated teller machine) agreement earned in fiscal year 1999. 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.......................................... $111.4 $100.2 General & administrative expenses........................... 25.7 26.3 ------ ------ Total..................................................... $137.1 $126.5 ====== ======
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 unemployment environment and highly competitive labor market. Advertising expenses were increased to promote the Company's food service offerings. 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 (1) $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 and (2) $0.5 million of expenses in fiscal year 2000 related to costs incurred relative to the Company's pursuit of a long-term gasoline supply and branding relationship for its Ohio and Michigan markets. Liquidity and Capital Resources The Company has a $30.0 million senior revolving credit facility (the "Credit Facility"). The Company can issue up to $15.0 million of letters of credit under the facility. The facility is due and payable on September 15, 2002. As of February 3, 2001, the Company had $24.3 million in outstanding revolving credit loans and $5.2 million in outstanding letters of credit under the facility. On October 28, 2000, the terms of the Credit Facility were amended to change certain financial covenants for the fiscal third quarter and to require the Company to (1) make a prepayment of $20.0 million of the outstanding revolving loan amounts on or before March 15, 2001 and (2) to reduce annually the outstanding revolving loan amounts to zero for 30 consecutive days during the period from July 1 through September 30. The Company paid 15 16 the participating lenders $300,000 in connection with entering into this amendment to the Credit Facility. On March 14, 2001, the terms of the Credit Facility were further amended to eliminate the requirement that the Company prepay $20 million of the outstanding revolving loan amounts on or before March 15, 2001. The Company paid the participating lenders $500,000 in connection with entering into this amendment to the Credit Facility. On May 7, 2001, the terms of the Credit Facility were further amended to (1) waive any default or event of default under the Credit Facility arising from any failure to comply with financial ratio covenants; (2) amend financial ratio covenants for the four quarters of fiscal year 2002; (3) eliminate the requirement to reduce annually the outstanding revolving loan amounts to zero for 30 consecutive days during the period from July 1 through September 30; and (4) change the maturity date from April 30, 2003 to September 15, 2002. The Company paid the participating lenders $750,000 in connection with entering into this amendment to the Credit Facility and will be obligated to pay those lenders an additional $250,000 on September 1, 2001, if the merger is not completed by that date. The ability of the Company to be in compliance with certain financial ratio covenants in the future is dependent upon the Company realizing improved operating results from those reported for the fiscal year ended February 3, 2001. Accordingly, the Company has commenced implementing the Business Restructuring Plan and the Business Segmentation Plan. The Company is also seeking alternative sources of financing to repay its outstanding obligations under the Credit Facility. These sources include the execution of long-term vendor supply agreements that would involve the receipt by the Company of monies due upon the execution of such agreements. During the first quarter of fiscal year 2002, the Company executed a long-term vendor supply agreement and received $8.7 million in cash in connection therewith. These proceeds were used to reduce outstanding borrowings under the Credit Facility. And, as further discussed in Item 1. Business--General, the Company is also seeking to consummate the merger that would result in the sale of the Company in its entirety and a refinancing of the Credit Facility. However, because the Merger Agreement is subject to certain conditions, including completion of necessary financing arrangements and stockholder approval, no assurances can be given that the merger will be consummated. If the merger is not completed and the Company is unable to successfully implement the Business Restructuring Plan, the Business Segmentation Plan and otherwise realize an improvement in operating results during fiscal year 2002, the Company may not be in compliance with certain amended financial ratio covenants as required by the Credit Facility. If the Company is not in compliance with these certain financial ratio covenant requirements in the future and the Credit Facility lenders do not waive these requirements or otherwise amend the Credit Facility, the Company would be in default and the Credit Facility lenders could cause repayment of the Credit Facility to be accelerated in which case amounts outstanding under the Credit Facility would become immediately due and payable. In addition, certain other indebtedness and obligations of the Company, including the senior subordinated notes, certain mortgage notes payable and certain operating leases, material to the Company's operations, would become immediately due and payable upon an acceleration of the Company's Credit Facility. The Company is not currently in default under any of these arrangements. Management anticipates that the cash flow from operations, the proceeds from the sale of certain assets and the execution of long-term vendor supply agreements will provide the Company with adequate liquidity to fund operations and meet its ongoing debt service requirements. Cash Provided By Operating Activities During fiscal year 2001, net cash provided by operating activities was $0.3 million compared to $6.8 million in fiscal year 2000. The decrease in net cash provided by operating activities for fiscal year 2001 compared to fiscal year 2000 was primarily the result of an increase in net loss and a decrease in accounts payable, partially offset by a decrease in accounts receivable and store inventory. The decrease in store inventory is the result of fewer stores in operation and the Company's effort to reduce cigarette inventory on hand and increase cigarette inventory turnover. Accounts receivable decreased primarily as a result of the receipt of insurance related proceeds and the partial write-off of insurance related accounts receivable in connection with a derivative litigation settlement, the timing of receipt of rebates due from trade vendors and a reduction in the number of franchise stores in operation and corresponding accounts receivable from franchisees. The decrease in accounts payable is a result of lower 16 17 trade vendor payables in connection with reduced levels of inventory and lower money order payables in connection with fewer stores in operation. Capital Expenditures The Company's capital expenditures, net of the proceeds from the sale of property, equipment and assets held for sale, were $7.6 million lower in fiscal year 2001 than in fiscal year 2000. In fiscal year 2001, the Company purchased $17.4 million of property and equipment, primarily for the construction of nine new stores that opened in fiscal year 2001. The Company has suspended its new store expansion program and the related capital expenditures pending its ability to consummate the merger. Management estimates that capital expenditures will be required in the range of $2.0 million to $3.0 million annually to replace existing property, plant and equipment that becomes obsolete and worn out in the ordinary course of business. Environmental Responsibility The Company's financial statements are prepared in conformity with the American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities," that provides guidance on specific accounting issues that are present in the recognition, measurement and disclosure of environmental remediation liabilities. The Company accrues its estimate of all costs to be incurred for assessment and remediation with respect to release of regulated substances from existing and previously operated retail gasoline facilities. 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 F1 through F28 of this Form 10-K. The required Supplementary Data appears on page F30 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Listed below are the names, positions and ages of the directors and executive officers of the Company as of April 27, 2001. Each executive officer will serve until a successor is selected by the Board of Directors or until the earlier of their resignation or removal.
NAME POSITION AGE ---- -------- --- Albert T. Adams..................... Director 50 Frank W. Barrett.................... Director 61 J. Kermit Birchfield, Jr............ Director 61 John W. Everets..................... Director 54 William A. Foley.................... Director 53 Robert B. Stein Jr.................. Chairman of the Board, President and Chief Executive Officer 43 Gregory G. Landry................... Vice Chairman and Chief Financial Officer 43 Alice R. Guiney..................... Vice President Human Resources 47 Susan D. Adams...................... Vice President Finance and Treasurer 43 Dale R. Valvo....................... Vice President Gasoline and Store Development 51
ALBERT T. ADAMS Mr. Adams, a director since 1998, has been a partner with the law firm of Baker & Hostetler LLP in Cleveland, Ohio, since 1984, and has been affiliated with the firm since 1977. Mr. Adams is a director of American Industrial Properties REIT, Associated Estates Realty Corporation, Boykin Lodging Company, Captec Net Lease Realty, Inc. and Developers Diversified Realty Corporation. FRANK W. BARRETT Mr. Barrett, a director since 1983, has been Executive Vice President of Family Bank, FSB, a subsidiary of Peoples Heritage Financial Group since 1994. Mr. Barrett is a director of the Providence and Worcester Railroad, which provides freight rail service in Connecticut, Massachusetts and Rhode Island. J. KERMIT BIRCHFIELD, JR. Mr. Birchfield, a director since 1996, has been the Chairman of the Board of Displaytech, Inc., a manufacturer of high resolution miniature ferro-electric liquid crystal displays since 1995. Mr. Birchfield is a director of HPSC, Inc., company that provides financing for the purchase of health care equipment, Intermountain Gas Company, Inc., an Idaho public utility company, and the Compass Group of Mutual Funds of MFS, Inc., a wholly owned subsidiary of Sun Life of Canada, a registered mutual funds company. JOHN W. EVERETS Mr. Everets, a director since 1994, has been Chairman of the Board and Chief Executive Officer of HPSC, Inc., a company that provides financing for health care equipment since July 1993 and has been a director of HPSC, Inc. since 1983. Mr. Everets is also a director of Eastern Company, a manufacturing company. WILLIAM A. FOLEY Mr. Foley, a director since 1999, has been the Chairman, President, Chief Executive Officer and a director of LESCO, Inc., a manufacturer and direct marketer of turf care products and equipment, since July 1993. Mr. Foley is also a director of Libbey, Inc., a producer of glass products. 18 19 ROBERT B. STEIN, JR. Mr. Stein, a director since 1992, was elected President of the Company in September 1994, Chief Executive Officer in June 1995 and Chairman of the Board of Directors in December 1995. He joined the Company in 1983 and served in various positions including Treasurer, General Manager of the Midwest Region, and Executive Vice President-Operations and Marketing. Mr. Stein is also a director of LESCO, Inc., a manufacturer and direct marketer of turf care products and equipment. GREGORY G. LANDRY Mr. Landry, a director since 1991, has served as Chief Financial Officer of the Company since August 1990, was named Executive Vice President of the Company in April 1992, and Vice Chairman in April 2000. Mr. Landry joined the Company in October 1985 and served in various financial positions, including Treasurer. ALICE R. GUINEY Ms. Guiney was named Vice President Human Resources in November 1996. From June 1992 through November 1996, Ms. Guiney directed corporate and field operational disciplines of human resources for Sunglass Hut International, a retailer of sunglasses. SUSAN D. ADAMS Ms. Adams was named Vice President Finance and Treasurer in November 1997. From May 1997 through November 1997, Ms. Adams served as Assistant Treasurer for DoubleTree Corporation, an owner and operator of hotels. From February 1986 through May 1997, she held various positions, including Assistant Treasurer, with The Circle K Corporation, a convenience store operator and franchisor. DALE R. VALVO Mr. Valvo was named Vice President Gasoline and Store Development in February 1999. He joined the Company in April 1998 as Vice President Gasoline Operations. From July 1990 through October 1998, Mr. Valvo was General Manager Marketing-Southeast Business Unit for Fina Oil and Chemical Company, a diversified oil company. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based on the Company's review of Forms 3, 4 and 5, all transactions occurring during fiscal year 2001 which required the reporting of changes in beneficial ownership of the Company's Common Stock were timely filed for all of the Company's executive officers and directors, except the Forms 5 that were inadvertently not filed by Messrs. Adams, Everets, and Foley in connection with their election to defer the payment of their directors' fees in an account that values that deferred compensation as if it were invested in the Common Stock of the Company. 19 20 ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS EXECUTIVE OFFICERS' COMPENSATION The following table summarizes the compensation earned by or paid to the Company's Chief Executive Officer and the Company's other five most highly compensated executive officers who served during the 2001 fiscal year. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS(A) ------------------------------------------ ------------ OTHER ANNUAL SECURITIES ALL OTHER FISCAL COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (c) OPTIONS (d) --------------------------- ------ -------- ------- ------------ ------------ ------------ Robert B. Stein, Jr............... 2001 $415,385 $68,750(b) $68,750 125,000 $7,298 Chairman of the Board, President 2000 391,346 50,000 1,611 -- 9,430 and Chief Executive Officer 1999 374,998 -- 45,983 183,750 10,270 Gregory G. Landry................. 2001 285,577 $52,000(b) 49,500 66,000 5,688 Vice Chairman and 2000 264,615 37,500 -- -- 9,220 Chief Financial Officer 1999 244,998 -- -- 105,000 10,009 J. Wayne Colley................... 2001 258,654 10,000 25,792 -- -- Executive Vice President and 2000 -- -- -- -- -- Chief Operating Officer 1999 -- -- -- -- -- Dale R. Valvo..................... 2001 153,173 -- 6,000 -- 4,336 Vice President 2000 133,750 10,000 6,000 7,500 550 Gasoline and Store Development 1999 89,216 -- 5,000 20,000 865 Alice R. Guiney................... 2001 143,135 -- 6,045 -- 4,051 Vice President 2000 129,904 10,000 2,265 7,500 550 Human Resources 1999 125,000 -- 1,508 -- 388 Susan D. Adams.................... 2001 142,789 -- 6,000 -- 3,799 Vice President 2000 129,904 10,000 6,000 7,500 550 Finance and Treasurer 1999 125,000 -- 45,193 -- 536
- --------------- (a) The Company did not grant any stock appreciation rights nor make any long-term incentive plan payments during fiscal years 2001, 2000 or 1999. (b) Includes 25,000 shares and 18,000 shares granted to Mr. Stein and Mr. Landry, respectively, on April 6, 2000, at fair market value of $2.75 per share on that date. (c) Other annual compensation for the following named executive officers includes the following amounts paid on behalf of, or received by, each officer: (i) In fiscal year 2001, Mr. Stein received $68,750 in tax reimbursement relating to the award of 25,000 shares of Common Stock granted to Mr. Stein. In fiscal year 2000, Mr. Stein received $894 for relocation expense and $717 in tax reimbursement. In fiscal year 1999, Mr. Stein received $27,731 for relocation expense and $18,252 in tax reimbursement; (ii) In fiscal year 2001, Mr. Landry received $49,500 in tax reimbursement relating to the award of 18,000 shares of Common Stock granted to Mr. Landry; (iii) In fiscal year 2001, Mr. Colley received $25,231 in tax reimbursement and $561 in automobile allowance. Mr. Colley's employment with the Company began January 18, 2000; (iv) For Mr. Valvo the amounts represent automobile allowances. Mr. Valvo has been employed by the Company since April 1, 1998; (v) For Ms. Guiney the amounts represent automobile allowances; (vi) In fiscal year 2001, Ms. Adams received $6,000 in automobile allowance. In fiscal year 2000, Ms. Adams received $6,000 in automobile allowance. In fiscal year 1999, Ms. Adams received $24,100 for relocation expense, $14,093 in tax reimbursement, and $7,000 in automobile allowance. (d) Includes amounts contributed for the benefit of the Company's executive officers to the Company's Non-Qualified deferred compensation plan, qualified profit sharing plan and premiums paid by the Company for split-dollar and life insurance for the benefit of certain executive officers during the applicable years. Company contributions to the Non-Qualified deferred compensation plan for fiscal year 2001 included $4,231 for Mr. Stein, $3,385 for Mr. Landry, $4,076 for Mr. Valvo and $3,808 for Ms. Guiney, and $3,799 20 21 for Ms. Adams. Company contributions to the qualified profit sharing plan for each of the 2001, 2000, and 1999 fiscal years, respectively, included $462, $550 and $388 for Mr. Stein, $0, $550 and $388, for Mr. Landry, $260, $550 and $865 for Mr. Valvo, $243, $550 and $338 for Ms. Guiney, and $0, $550 and $536 for Ms. Adams. Premiums paid on split-dollar and life insurance for each of the 2001, 2000, and 1999 fiscal years, respectively, included $2,606, $8,880 and $9,882 for Mr. Stein, and $2,303, $8,670 and $9,621 for Mr. Landry. LONG-TERM INCENTIVE AWARDS IN LAST FISCAL YEAR The Company did not grant long-term incentive awards during the 2001 fiscal year to any of the named executive officers listed in the Summary Compensation Table. OPTIONS GRANTED IN LAST FISCAL YEAR The table below provides certain information regarding stock options granted during the Company's last fiscal year to the named executive officers listed in the Summary Compensation Table above.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS EXERCISE OF FOR OPTION TERM OPTIONS GRANTED TO BASE PRICE (c) GRANTED EMPLOYEES IN PER SHARE EXPIRATION ---------------------- NAME (a) FISCAL YEAR (b) DATE 5% 10% ---- ---------- ------------ ----------- --------------- --------- --------- Robert B. Stein Jr................. 125,000 65.4 $2.75 4/5/10 $559,933 $891,599 Gregory G. Landry.... 66,000 34.6 $2.75 4/5/10 $295,644 $470,764 J. Wayne Colley...... -- -- -- -- -- -- Dale R. Valvo........ -- -- -- -- -- -- Alice R. Guiney...... -- -- -- -- -- -- Susan D. Adams....... -- -- -- -- -- --
- --------------- (a) The options become fully exercisable over four years, with 25% of the options vesting on each anniversary of the option grant date. All options expire ten years from the date of grant, unless sooner terminated by, for example, the failure to exercise an option, to the extent it is then exercisable, before three months after termination of the optionee's employment, except for termination in the case of death, in which case, the option is exercisable within one year from the date of death by the optionee's executor, administrator or personal representative, to the extent it is then exercisable. If the merger is completed, these options will become immediately exercisable. Messrs. Stein and Landry were also awarded 25,000 and 18,000 shares of stock, respectively, on the date the options were granted. (b) All options were granted at the exercise price per share equal to the fair market value of the Company's Common Stock on the date of grant, as quoted on the American Stock Exchange (AMEX). (c) These amounts are based on hypothetical appreciation rates of 5% and 10% and are not intended to forecast the actual future appreciation of the Company's common shares. No gain to optionees is possible without an actual increase in the price of the Company's common shares, which would benefit all of the Company's stockholders. All calculations are based on a ten-year option period compounding annually. 21 22 AGGREGATED OPTION EXERCISES DURING 2001 FISCAL YEAR AND FISCAL YEAR 2001 YEAR END OPTION VALUES The table below sets forth information regarding stock options that were exercised, if any, during the past fiscal year, and unexercised stock options held as of February 3, 2001, by the executive officers listed in the Summary Compensation Table above.
VALUE OF NUMBER OF UNEXERCISED SHARES UNDERLYING IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS AT SHARES OPTIONS AT FISCAL ACQUIRED FISCAL YEAR END YEAR END(1) ON EXERCISE OF VALUE EXERCISABLE(E)/ EXERCISABLE(E)/ NAME OPTIONS REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U) ---- ---------------- -------- ----------------------- ----------------------- Robert B. Stein, Jr.............. -- -- $249,375 (E) $12,431 (E) 216,875 (U) -- (U) Gregory G. Landry................ -- -- 159,000 (E) 10,959 (E) 118,500 (U) -- (U) J. Wayne Colley.................. -- -- 35,000 (E) -- (E) 85,000 (U) -- (U) Dale R. Valvo.................... -- -- 11,875 (E) -- (E) 15,625 (U) -- (U) Alice R. Guiney.................. -- -- 18,125 (E) -- (E) 9,375 (U) -- (U) Susan D. Adams................... -- -- 16,875 (E) -- (E) 10,625 (U) -- (U)
- --------------- (1) Values are calculated for options "in the money" by subtracting the exercise price per share from the closing price per share of the Company's Common Stock on February 3, 2001, which was $3.00. Certain of the executive officers have options to purchase shares of Common Stock at exercise prices greater than the fair market value of the applicable class of Common Stock as of February 3, 2001. Such options are not "in the money" and, therefore, their value is not disclosed above. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 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. Currently, only Messrs. Stein and Landry participate in the SERP. 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 on the lives of Messrs. Stein and Landry to fund its obligations under the Plan. Messrs. Stein and Landry have no claim or right to the proceeds of the cash surrender value of the insurance policies that are payable upon their death. To the extent they have an accrued vested benefit under the SERP, they will only have a claim against the general assets of the Company. Messrs. Stein and Landry are each 100% vested as of the end of fiscal year 2001. The benefits under the SERP are payable in a lump sum, which reflects the annual life benefit determined under the SERP, discounted to its present value. The lump sum benefit is based on providing the participant the present value of an annual annuity commencing at age 65 and payable through participant's death equal to (a) 50% of the average of participant's three greatest years of compensation during participant's last five years of service with the Company multiplied by a percentage equal to the actual years of service credited through retirement divided by the years of service the participant could have been credited with through the age of 65, less (b) the actuarial equivalent value, as determined under the SERP, of (i) half the participant's Social Security benefits and (ii) all Company contributions or allocations on the participant's behalf to or under any other deferred compensation or retirement-type plans, such as the Company 401(k) matching contribution, plus deemed interest equal to seven percent compounded annually, on such contributions or allocations. Stock option grants and incentive stock awards are not considered under the SERP as Company contributions or allocations under a retirement plan. The 22 23 portion of the benefit that is based on the percentage of years of service credited to the participant will accelerate to 100% upon (a) a change of control that is not approved by two-thirds of the Board of Directors or (b) the Company terminating the participant without "good cause." The compensation covered under the SERP is generally the same compensation that is covered in the Summary Compensation Table for Messrs. Stein and Landry, except that compensation under the SERP does not include the Company 401(k) match or compensation from any equity based compensation plan including stock options and incentive stock awards. If Messrs. Stein and Landry retired at age 65 and they both received annual increases in their compensation each year through age 65, they would be entitled to an accrued lump sum benefit of approximately $3,810,000 and $2,590,000 respectively, at age 65. If any excise taxes are due on such payments, the payments will be grossed up to cover such taxes. DIRECTORS' COMPENSATION Each non-employee director is compensated at the rate of $12,000 per year plus $1,000 for attendance at each meeting of the Board of Directors and for each meeting of any committee, including the special committee formed in connection with the merger, on which he serves, but non-employee directors are paid only $500 for attending telephonic meetings (except for meetings of the special committee, which remain at $1,000). Under the Directors' Deferred Compensation Plan that was adopted in fiscal year 1999, a director's compensation is credited to the director's account and, as elected by these directors, valued thereafter as if the director had invested the deferred amount in the Company's Common Stock. Messrs. Adams, Everets, and Foley deferred $17,000, $45,500 and $47,000, respectively, in directors' fees pursuant to the plan during fiscal year 2001. In February 2001, Messrs. Barrett, Everets, Birchfield, Foley and Adams each received an automatic grant of options to purchase 3,500 shares of the Company's Common Stock at $2.60 per share pursuant to the stock option plan for outside directors. The Company's employees and officers who are also directors are not paid any directors' fees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors during the last fiscal year were Messrs. Adams, Barrett, Everets and Foley. Mr. Adams is a partner of Baker & Hostetler LLP, which acts as the Company's general outside legal counsel on a variety of matters. No member of the Compensation Committee was at any time during fiscal year 2001, or at any other time, an officer or employee of the Company. Mr. Foley is the Chairman, President, Chief Executive Officer and Director of LESCO, Inc. Mr. Stein also serves as a director of LESCO, Inc. No other executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors or Compensation Committee. EMPLOYMENT AND SEVERANCE AGREEMENTS In January 2000, the Company entered into employment agreements with Messrs. Stein, Landry and Colley. The employment agreements for Messrs. Stein and Landry commenced on January 1, 2000, and are initially for three (3) year terms. The employment agreement for Mr. Colley commenced on January 18, 2000, and is initially for a term which shall terminate on December 31, 2002. Each of the employment agreements provide that commencing on January 1, 2001, and each January 1 thereafter, each term is automatically extended one additional year such that the remaining unexpired term shall be three (3) years unless the Company or the employee gives notice before December 31st of each year that it or he does not desire to have the term extended. Under the employment agreements, Messrs. Stein, Landry and Colley receive annual salaries that may be increased, but may not be decreased. In addition, the employment agreements provide that the Board of Directors, or a committee thereof, may award each employee annual bonuses if performance criteria to be determined by the Board are met. Under the employment agreements, if the employee's employment is terminated for any reason, other than by the Company without cause or by the employee for good reason, or as a result of death or disability, then the employee will receive his salary and bonus through the date of termination. If the employee dies or is disabled, he 23 24 will also receive any additional benefits that are provided under the Company's death and disability programs in effect at the time of death or disability. In addition, if an employee is disabled and there is no disability program in effect or if an employee dies, then the employee's beneficiary will receive 100% of the employee's annual salary plus an amount equal to the highest of the aggregate bonus payments earned by the employee for any of the last three 12-month periods prior to the date of termination. The employment agreements provide that if the employee's termination is by the Company without cause or by the employee for good reason, and not as a result of the employee's death or disability, the employee will receive his full salary and bonus through the date of termination. The amount of the employee's bonus will be the highest of the aggregate bonus payments earned by the employee for any of the last three 12-month periods prior to the date of termination. The agreement for Mr. Colley also provides that after such termination, Mr. Colley will receive a severance payment equal to 100% of the sum of his then current full base salary and annual bonus. The agreements for Messrs. Stein and Landry also provide that after such termination, each of Messrs. Stein and Landry will receive a severance payment equal to three times the sum of his then current full base salary and annual bonus. If any payment in connection with the termination of the employee's employment under the employment agreement would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the Company will pay the employee an additional payment equal to the amount of any excise tax the employee incurs as a result of the employee's receipt of the additional payment. Prior to the execution of the Merger Agreement, Mr. Landry indicated to Mr. Stein that he intended to terminate his employment with the Company after the merger. Based on these events and in connection with entering into the Merger Agreement, Mr. Landry and the Company entered into a severance agreement, dated March 15, 2001, to agree upon the obligations that will be due Mr. Landry pursuant to the terms of his employment agreement and benefit plans when he terminates his employment if the merger is consummated. Under the terms of the severance agreement, Mr. Landry will be entitled to receive his accrued and unpaid base salary through his termination date; an annual bonus of $136,500, prorated from February 4, 2001 through his termination date; a cash payment of $1,234,500 comprising three times the sum of his base salary of $275,000 plus his bonus of $136,500; a possible cash payment estimated to be approximately $998,000, representing a gross-up payment to cover excise taxes (and the income tax resulting from the gross-up on the excise taxes) due and payable by him as a result of the benefits being provided to him in connection with the severance agreement and the merger; a cash payment of $354,375 if the merger is not completed by July 13, 2001, and if he does not receive 78,750 shares of Dairy Mart common stock immediately prior to the merger; title to the automobile that he currently uses for commuting to and from work; health insurance benefits for himself and his dependents until he becomes eligible for substantially equivalent benefits from a subsequent employer for a period not to exceed three years; two life insurance policies with an aggregate face value of $500,000 and an aggregate accumulated cash surrender value of approximately $62,000; the personal computer of Dairy Mart that he currently uses at his home; vested retirement benefits of approximately $66,000 to which he is entitled under the supplemental employment retirement plan of Dairy Mart; and legal fees he incurred in connection with negotiating and preparing the severance agreement that are estimated to be approximately $40,000. Mr. Colley's employment was terminated effective March 30, 2001, in connection with the Business Restructuring Plan. In connection with this plan, Mr. Colley will receive severance payments totaling, in the aggregate, $250,000 to be paid in equal biweekly installments through July 2001, then he will receive the balance in a lump sum. In addition, options to purchase 100,000 shares of Common Stock have become immediately exercisable. 24 25 COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION OVERVIEW The Compensation Committee of the Board of Directors (the "Compensation Committee") is composed entirely of outside directors. The Compensation Committee, which consists of Messrs. Everets (Chairman), Adams, Barrett, and Foley, is responsible for establishing and administering the Company's executive compensation policies and the Company's stock option and other employee equity plans. This report addresses the Company's compensation policies for the fiscal year 2001 for executive officers and in particular for Mr. Stein in his capacity as Chairman of the Board, President and Chief Executive Officer. GENERAL COMPENSATION POLICY The objectives of the Company's executive compensation program are to: - Provide a competitive compensation package that will attract and retain superior talent and reward performance; - Support the achievement of desired Company performance; and - Align the interests of executives with the long-term interests of stockholders through award opportunities that can result in ownership of shares of the Company's Common Stock, thereby encouraging the achievement of superior results over an extended period. EXECUTIVE OFFICER COMPENSATION PROGRAM The Company's executive officer compensation program is composed primarily of: (i) base salary, which is set on an annual basis; (ii) annual incentive bonuses, which are based on the achievement of predetermined financial objectives of the Company and individual objectives; (iii) discretionary bonuses, which are granted under special circumstances; (iv) supplemental executive retirement plan benefits; and (v) long-term incentive compensation in the form of periodic stock option and restricted stock grants, with the objective of aligning the executive officers' long-term interests with those of the stockholders and encouraging the achievement of superior results over an extended period. The Compensation Committee performs annual reviews of executive compensation, during which the Compensation Committee reviews executive compensation packages of the Company compared with available information on other national and regional convenience store chains. In considering compensation of the Company's executives, one of the factors the Compensation Committee takes into account is the anticipated tax treatment to the Company of various components of compensation. The Company does not believe Section 162(m) of the Internal Revenue Code of 1986, as amended, which generally disallows a tax deduction for certain compensation in excess of $1 million to any of the executive officers appearing in the Summary Compensation Table above, will have an effect on the Company. The Compensation Committee has considered the requirements of Section 162(m) of the Code and its related regulations. It is the Company's present policy to take reasonable measures to preserve the full deductibility of substantially all executive compensation, to the extent consistent with its other compensation objectives. BASE SALARY The Compensation Committee reviews base salary levels for the Company's executive officers on an annual basis. In determining salaries, the Compensation Committee takes into consideration individual experience and performance and comparable compensation data available on other national and regional convenience store chains. The Company seeks to set base salaries to be competitive with compensation paid by comparable companies to persons with similar experience. 25 26 ANNUAL INCENTIVE BONUSES The Compensation Committee determines the amount of annual cash bonuses based on achievement of predetermined financial, operational and strategic objectives. Giving greatest weight to the attainment of financial targets, specifically pre-tax earnings and cash flow, the Company also awards bonuses based on various operational and strategic objectives geared to specific management groups (i.e., financial, management, information systems, construction and marketing), and for Mr. Stein individually. LONG-TERM INCENTIVE COMPENSATION Long-term incentive compensation, in the form of stock options and restricted stock grants, allows the executive officers to share in any appreciation in the value of the Company's Common Stock. The Compensation Committee believes that an enhanced market value for the Company's shares of Common Stock should be a primary objective of senior management, and that stock option and restricted stock grant participation align executive officers' interests with those of the stockholders. The amounts of the awards are designed to reward past performance and create incentives to meet long-term objectives. In determining the amount of each grant, the Compensation Committee takes into account the number of shares held by the executive prior to the grant. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") The Company adopted the SERP to provide additional retirement benefits to certain key executives. It is intended to attract and retain these executives. The benefits primarily accrue under the SERP based on compensation paid to the executive and the years of service the executive provides to the Company. Currently only Messrs. Stein and Landry participate in the SERP. The Company believes that these benefits are reasonable in relation to the executive compensation practices of other companies. NON-QUALIFIED COMPENSATION PLAN In fiscal year 2000, the Company adopted a non-qualified compensation plan for its "highly compensated employees," a group of which includes, but is not limited to, the executive officers set forth in the Executive Officer's Compensation table. Under the Company's 401(k) Savings and Profit Sharing Plan, "highly compensated employees" are not able to receive the same tax deferred savings and company match as the "non-highly compensated employees" are able to receive. A purpose of the non-qualified plan is to permit the "highly compensated employees" to receive the same level of Company match received by the non-highly compensated employees under the Company's 401(k) plan. Another purpose of the non-qualified plan is to permit the "highly compensated employees" to increase their tax deferred savings above what they would otherwise be permitted under the Company's 401(k) plan. There are certain risks inherent in the non-qualified plan which are not present in the 401(k) plan. Distributions under the plan, including deferral amounts, company match and earnings are paid from the general assets of the Company and are required to be distributed to the employee upon a termination of service prior to normal retirement. Thus, the non-qualified plan participant might be forced to receive deferred income earlier than anticipated, creating negative tax consequences. In addition, non-qualified plan participants are general creditors of the Company and are not secured in the same way as the 401(k) participant. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Stein, who holds the positions of Chairman of the Board, President and Chief Executive Officer, was paid a base salary of $415,385 during the 53-week fiscal year of 2001, which was based on the $400,000 base salary set by the Compensation Committee in fiscal year 2000. During fiscal year 2000, in consultation with outside consultants, the Compensation Committee re-evaluated Mr. Stein's total compensation package. In connection with this reevaluation, the Compensation Committee increased Mr. Stein's base salary to $400,000 per year to a level comparable with compensation paid to executives with similar responsibilities and by companies of similar size. Additionally, in connection with that revaluation, the Company awarded Mr. Stein a discretionary cash bonus of $50,000 that was paid to him in fiscal year 2000. Finally, in connection with that revaluation, the Compensation Committee also recommended that Mr. Stein should receive stock options to purchase 125,000 shares and receive a stock grant of 25,000 shares, together with a tax reimbursement payment to cover the federal 26 27 and local income taxes of the stock grant, but because of the significance of these awards, the Compensation Committee did not approve these awards. Instead, the Compensation Committee chose to submit a recommendation for the approval of these awards to the entire board of directors. These stock-based incentives were not approved by the entire board, however, until April 2000 (which is part of the Company's fiscal year 2001), but related to modifying Mr. Stein's entire compensation package during fiscal year 2000. In setting Mr. Stein's discretionary bonus and in making its recommendation with respect to the stock based compensation, the Compensation Committee considered the following factors, among others: comparable store sales increased, gallons of gasoline increased based on comparable stores, store expansion continued at appropriate levels, improved profitability for fiscal year 1999 and the Company was selected as the number one convenience store chain in the country by Convenience Store Decisions magazine. Other than the stock-based compensation that related to fiscal year 2000, the Compensation Committee did not award Mr. Stein any bonuses or long-term compensation in fiscal year 2001. THE COMPENSATION COMMITTEE: John W. Everets, Chairman Albert T. Adams Frank W. Barrett William A. Foley ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the amount of the Company's common shares beneficially owned as of April 27, 2001, by: (i) the Company's directors; (ii) each other person who is known by the Company to own beneficially more than 5% of the Company's outstanding common shares; (iii) the named executive officers listed in the Summary Compensation Table; and (iv) all directors and executive officers as a group. This information is furnished in accordance with the SEC regulations relating to any persons known by the Company to be the beneficial owners of 5% or more of Common Stock. In preparing the following table, the Company has relied on information filed by such persons with the SEC, and in some cases, other information provided to the Company by such persons.
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING SHARES ------------------- ----------------- ------------------ DM Associates Limited Partnership......................... 702,617(1) 14.1% 300 Executive Parkway West Hudson, Ohio 44236 New DM Management Associates I............................ 702,617(1) 14.1% 300 Executive Parkway West Hudson, Ohio 44236 Robert B. Stein, Jr....................................... 1,076,368(1)(6) 20.4% 300 Executive Parkway West Hudson, Ohio 44236 Gregory G. Landry......................................... 912,992(1)(7) 17.6% 300 Executive Parkway West Hudson, Ohio 44236 Triumph-Connecticut Limited Partnership................... 827,221(2) 14.2% 28 State Street, 37th Floor Boston, Massachusetts 02109
27 28
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING SHARES ------------------- ----------------- ------------------ The IDS Mutual Fund Group................................. 378,903(3) 7.0% 25614 AXP Financial Center Minneapolis, Minnesota 55474 American International Group, Inc......................... 388,811(4) 7.2% 70 Pine Street New York, New York 10005 William L. Musser, Jr..................................... 327,550(5) 6.5% and New Frontier Capital, L.P. 919 Third Avenue New York, New York 10022 Albert T. Adams........................................... 13,750(8) (*) 3200 National City Center 1900 E. 9th Street Cleveland, Ohio 44114 Frank W. Barrett.......................................... 27,500(9) (*) 1441 Main Street Springfield, Massachusetts 01101 J. Kermit Birchfield, Jr.................................. 30,325(10) (*) Cranberry Hill 33 Way Road Gloucester, Massachusetts 01930 John W. Everets........................................... 32,625(11) (*) 60 State Street Boston, Massachusetts 02109 William A. Foley.......................................... 2,750(12) (*) 20005 Lake Road Rocky River, Ohio 44116 J. Wayne Colley........................................... 105,000(13) 2.1% 4837 Arbour Green Bath, Ohio 44333 Dale R. Valvo............................................. 18,950(14) (*) 300 Executive Parkway West Hudson, Ohio 44236 Alice R. Guiney........................................... 20,549(15) (*) 300 Executive Parkway West Hudson, Ohio 44236 Susan D. Adams............................................ 21,750(16) (*) 300 Executive Parkway West Hudson, Ohio 44236 All directors and executive officers as a group (11 persons)................................................ 1,484,942(17) 26.5%
- --------------- (*) Owns less than 1% of the issued and outstanding shares of Common Stock. (1) DM Associates Limited Partnership ("DM Associates") is the owner of record of 702,617 shares of Common Stock of the Company, representing approximately 14.1% of the issued and outstanding shares of Common Stock. The general partner of DM Associates is New DM Management Associates I ("DM 28 29 Management I"), which is a general partnership. The general partners of DM Management I are Robert B. Stein, Jr. and Gregory G. Landry, each of whom owns 50% of the partnership interest of DM Management I. As the sole general partner of DM Associates, DM Management I has the power to vote and dispose of the 702,617 shares of Common Stock owned by DM Associates, subject to the required consent of a class of limited partners of DM Associates for sales of more than 396,000 shares. The partnership agreement of DM Management I provides that a majority of the partnership interests of DM Management I is required to vote the shares of Common Stock owned by DM Associates. As the managing general partner of DM Management I, Mr. Stein has sole dispositive power with respect to the 702,617 shares owned by DM Associates, subject to the limitation described above. As general partners of DM Management I, Messrs. Stein and Landry share voting power with respect to the 702,617 shares owned by DM Associates. (2) Triumph-Connecticut Limited Partnership ("Triumph"), Triumph's general partner, Triumph-Connecticut Capital Advisors, Limited Partnership ("TCCALP"), and TCCALP's general partners, Triumph-Capital Group, Inc., Fredrick W. McCarthy, Fredrick S. Moseley, IV, E. Mark Noonan, Thomas W. Janes, John M. Chapman and Richard J. Williams, reported on a Schedule 13D filed with the SEC their shared beneficial ownership of currently exercisable warrants to purchase an aggregate of 826,221 shares of Common Stock. (3) The IDS Mutual Fund Group, through nominees, holds currently exercisable warrants to purchase an aggregate of 378,903 shares of Common Stock. If the 378,903 shares underlying the warrants were issued, they would represent approximately 7.0% of the total number of issued and outstanding shares of the Company's Common Stock. (4) American International Group, Inc. and its affiliates hold currently exercisable warrants to purchase an aggregate of 388,811 shares of Common Stock. If the 388,811 shares underlying the warrants were issued, they would represent approximately 7.2% of the total number of issued and outstanding shares of the Company's Common Stock. (5) New Frontier Capital, L.P., and William L. Musser, Jr., in his capacity as General Partner, reported on a Form 13F filed with the SEC its beneficial ownership, as an investment advisor, of 327,550 shares of Common Stock. (6) Includes 280,625 shares of Common Stock issuable to Mr. Stein within 60 days of April 27, 2001, pursuant to employee stock options and grants. Mr. Stein also has the power to dispose of 4,001 shares held in his 401(k) account that are included above. (7) Includes 175,500 shares of Common Stock issuable to Mr. Landry within 60 days of April 27, 2001, pursuant to employee stock options and grants. (8) Includes 8,750 shares of Common Stock that Mr. Adams is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (9) Includes 23,125 shares of Common Stock that Mr. Barrett is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (10) Includes 17,125 shares of Common Stock that Mr. Birchfield is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (11) Includes 20,625 shares of Common Stock that Mr. Everets is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (12) Includes 1,750 shares of Common Stock that Mr. Foley is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (13) Includes 100,000 shares of Common Stock that Mr. Colley is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (14) Includes 18,750 shares of Common Stock that Mr. Valvo is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (15) Includes 20,000 shares of Common Stock that Ms. Guiney is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. 29 30 (16) Includes 18,750 shares of Common Stock that Ms. Adams is, or within 60 days of April 27, 2001, will be, entitled to purchase upon the exercise of stock options. (17) Includes exercisable, within 60 days of April 27, 2001, stock options granted to all directors and executive officers of the Company to purchase 610,000 shares of Common Stock. ARRANGEMENTS INVOLVING CHANGES IN CONTROL If the merger is consummated, Mr. Stein will control the Company. The Company's existing stockholders, except Mr. Stein and his affiliates, will receive $4.50 per share in cash. In connection with entering into the Merger Agreement, Mr. Stein, DM Associates, DM Management I and DM Acquisition Corp. entered into a voting agreement pursuant to which they agreed to vote any shares of Dairy Mart Common Stock that they beneficially owned in favor of the merger and the Merger Agreement and agreed to refrain from voting in favor of any other proposals to sell Dairy Mart. 30 31 PERFORMANCE GRAPH The Performance Graph set forth below compares the performance of the Common Stock over the past five years with (i) the cumulative total return on the American Stock Exchange Stock Market (the "AMEX") and (ii) a peer group index consisting of AMEX Stocks Standard Industry Codes 5410-5419 (grocery stores) ("Peer Group Index"). The figures presented assume the reinvestment of all dividends into shares of Common Stock on the dividend payment date and that $100 was invested in Common Stock and in the AMEX Stock Market Index (U.S. Companies) and Peer Group Index on February 2, 1996, and held through February 2, 2001 (the end of the Company's most recent fiscal year). COMPARISON OF FIVE--YEAR CUMULATIVE TOTAL RETURNS PERFORMANCE GRAPH FOR DAIRY MART CONVENIENCE STORES, INC. PRODUCED ON 04/05/2001 INCLUDING DATA TO 02/02/2001
AMEX STOCKS (SIC 5410- DAIRY MART CONVENIENCE AMEX STOCK MARKET (US 5419 US COMPANIES) STORES, INC. COMPANIES) GROCERY STORES ---------------------- --------------------- ---------------------- 01/27/1995 100 100 100 01/28/1995 100 103.158 105.173 03/29/1995 95.082 104.036 106.21 04/28/1995 111.475 107.132 118.197 05/26/1999 137.705 110.025 126.375 06/29/1995 131.148 111.889 126.219 07/28/1995 124.59 118.206 138.954 08/29/1995 160.656 119.474 134.115 09/29/1995 147.541 124.182 140.457 10/27/1995 157.377 118.095 142.623 11/29/1995 177.049 121.758 150.96 12/29/1995 147.541 125.203 142.232 02/02/1996 147.541 124.996 148.334 02/29/1996 157.377 127.376 149.494 03/29/1996 157.377 128.552 150.273 04/29/1996 144.262 133.56 144.986 05/29/1996 157.377 136.903 155.637 06/28/1996 154.098 129.779 163.77 07/29/1996 157.377 118.882 151.949 08/29/1996 157.377 123.469 155.522 09/27/1996 131.148 125.916 157.299 10/29/1996 131.148 123.198 153.112 11/29/1996 129.508 129.147 154.862 12/27/1996 114.754 127.204 159.402 01/31/1997 150.82 130.168 152.503 02/28/1997 137.705 132.558 150.742 03/27/1997 124.59 128.23 149.759 04/29/1997 121.312 121.444 150.892 05/29/1997 157.377 134.166 152.936 06/27/1997 152.459 138.78 157.629 07/29/1997 160.656 143.687 152.515 08/29/1997 147.541 146.882 151.975 09/29/1997 144.262 158.127 153.745 10/29/1997 127.869 152.997 142.832 11/28/1997 118.033 153.073 158.019 12/29/1997 129.508 154.957 156.797 01/30/1998 109.836 156.313 152.388 02/27/1998 114.754 165.951 171.051 03/27/1998 111.476 174.412 179.57 04/29/1998 98.361 176.772 172.334 05/29/1998 111.476 170.269 203.976 06/29/1998 101.639 174.213 203.011 07/29/1998 101.64 172.401 204.165 08/28/1998 93.443 148.085 201.449 09/29/1998 98.361 149.872 202.832 10/29/1998 91.803 153.745 203.569 11/27/1998 114.754 163.192 213.842 12/29/1998 100 166.243 199.447 01/29/1999 91.803 178.304 200.26 02/26/1999 88.525 174.388 186.476 03/29/1999 98.361 176.431 185.283 04/29/1999 95.082 189.567 162.945 05/28/1999 101.64 192.534 169.671 06/29/1999 98.361 191.56 164.811 07/29/1999 95.082 193.147 192.913 08/27/1999 140.984 190.013 197.934 09/29/1999 98.361 189.235 182.432 10/29/1999 85.246 191.509 158.438 11/29/1999 114.754 204.639 156.841 12/29/1999 88.525 212.388 145.462 01/28/2000 85.246 211.448 152.485
02/02/1996 01/31/1997 01/30/1998 01/29/1999 01/28/2000 02/02/2001 CRSP TOTAL RETURNS INDEX FOR: ---------- ---------- ---------- ---------- ---------- ---------- Dairy Mart Convenience Stores, Inc....... 100.0 98.3 72.4 59.6 55.3 51.1 AMEX Stock Market (US Companies)......... 100.0 104.2 125.3 142.8 173.8 175.8 AMEX Stocks (SIC 5410-5419 US Companies) Grocery Stores......................... 100.0 102.8 102.7 135.0 102.8 92.1
NOTES: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. D. The index level for all series was set to $100.0 on 02/02/1996. 31 32 1/2/98 84.473 126.997 107.04 1/5/98 84.473 126.754 108.298 1/6/98 83.048 126.182 105.838 1/7/98 81.27 126.284 106.456 1/8/98 84.121 125.269 107.279 1/9/98 83.399 121.827 102.324 1/12/98 82.696 121.578 104.962 1/13/98 80.205 123.599 105.347 1/14/98 81.27 124.095 105.588 1/15/98 80.214 123.559 105.029 1/16/98 80.918 124.865 107.088 1/20/98 80.918 126.753 107.255 1/21/98 82.344 125.876 106.598 1/22/98 80.566 125.304 106.577 1/23/98 80.918 124.435 105.817 1/26/98 80.918 124.171 107.066 1/27/98 78.076 124.848 105.873 1/28/98 77.715 124.973 104.961 1/29/98 73.104 125.611 105.643 1/30/98 72.391 125.253 102.733 2/2/98 73.808 125.727 105.824 2/3/98 73.808 125.743 104.911 2/4/98 72.391 126.394 104.206 2/5/98 74.53 126.928 104.223 2/6/98 74.53 127.597 105.974 2/9/98 75.233 127.736 105.592 2/10/98 76.659 128.846 108.274 2/11/98 78.789 128.559 110.479 2/12/98 78.437 128.913 108.93 2/13/98 73.808 129.383 110.401 2/17/98 74.53 129.214 110.042 2/18/98 75.956 129.363 113 2/19/98 75.956 129.336 112.667 2/20/98 73.104 129.564 112.775 2/23/98 66.697 129.764 113.705 2/24/98 65.994 129.384 113.098 2/25/98 68.123 130.33 115.225 2/26/98 73.104 131.938 114.18 2/27/98 74.53 132.978 115.315 3/2/98 75.956 133.803 116.469 3/3/98 73.826 133.655 119.455 3/4/98 73.826 133.807 118.165 3/5/98 73.826 132.661 116.195 3/6/98 73.826 134.481 118.531 3/9/98 72.4 133.635 118.086 3/10/98 74.178 134.642 120.078 3/11/98 76.307 134.926 121.456 3/12/98 77.02 134.998 122.778 3/13/98 75.956 135.461 123.37 3/16/98 75.243 136.276 123.331 3/17/98 73.474 136.483 121.918 3/18/98 73.826 137.437 123.011 3/19/98 74.548 138.278 121.22 3/20/98 73.122 138.423 120.25 3/23/98 71.697 139.344 121.695 3/24/98 70.271 140.193 122.576 3/25/98 73.122 139.635 120.778 3/26/98 73.113 139.914 122.246 3/27/98 72.049 139.66 121.058 3/30/98 73.104 139.49 121.209 3/31/98 74.53 140.754 123.147 4/1/98 75.233 141.331 124.816 4/2/98 74.521 142.242 126.121 4/3/98 73.808 142.151 126.801 4/6/98 72.382 141.249 124.561 4/7/98 72.4 139.864 122.191 4/8/98 72.4 140.243 122.706 4/9/98 71.688 141.089 122.805 4/13/98 68.845 140.666 123.701 4/14/98 68.845 140.973 123.41 4/15/98 68.845 141.54 124.561 4/16/98 69.549 140.711 123.18 4/17/98 69.549 141.804 125.34 4/20/98 67.419 142.655 123.235 4/21/98 66.716 143.065 120.058 4/22/98 65.29 143.666 118.765 4/23/98 65.994 142.205 117.051 4/24/98 65.994 141.107 114.813 4/27/98 63.864 138.524 113.186 4/28/98 65.994 139.62 113.151 4/29/98 65.994 141.679 116.179 4/30/98 65.994 142.589 119.022 5/1/98 65.308 143.293 119.248 5/4/98 65.66 142.974 119.064 5/5/98 65.308 142.381 119.611 5/6/98 65.308 141.911 119.837 5/7/98 65.308 141.769 119.952 5/8/98 63.883 142.048 121.664 5/11/98 64.957 141.849 121.857 5/12/98 65.308 141.663 122.46 5/13/98 68.845 141.875 122.412 5/14/98 70.993 141.553 122.975 5/15/98 70.271 140.89 121.044 5/18/98 73.474 139.938 121.229 5/19/98 72.4 140.129 136.422 5/20/98 73.465 140.201 136.49 5/21/98 74.53 140.235 136.97 5/22/98 74.53 139.39 137.367 5/26/98 76.307 137.418 137.159 5/27/98 74.53 135.247 136.895 5/28/98 71.678 136.183 136.912 5/29/98 73.104 136.494 137.511 6/1/98 71.672 135.448 137.491 6/2/98 70.59 135.182 137.392 6/3/98 68.827 134.95 137.536 6/4/98 68.111 135.938 137.324 6/5/98 68.46 136.751 137.767 6/8/98 68.827 136.882 137.837 6/9/98 69.543 137.131 137.313 6/10/98 68.129 136.195 137.434 6/11/98 70.276 134.847 137.601 6/12/98 70.276 134.307 137.434 6/15/98 69.561 132.075 137.443 6/16/98 68.147 133.162 137.265 6/17/98 68.147 134.175 137.301 6/18/98 68.147 133.57 137.664 6/19/98 68.496 134.239 137.542 6/22/98 66.715 134.136 137.75 6/23/98 66.366 134.918 137.574 6/24/98 69.579 137.078 137.889 6/25/98 70.974 138.08 137.13 6/26/98 68.129 139.021 137.29 6/29/98 67.413 139.668 136.861 6/30/98 68.827 140.101 136.874 7/1/98 68.845 140.353 136.876 7/2/98 68.845 140.08 137.196 7/6/98 68.845 140.685 137.371 7/7/98 69.525 141.126 137.126 7/8/98 68.809 141.484 137.389 7/9/98 69.543 141.485 137.516 7/10/98 68.827 142.264 137.447 7/13/98 67.413 142.379 137.337 7/14/98 68.845 142.571 137.295 7/15/98 65.999 142.2 136.806 7/16/98 66.733 142.369 136.606 7/17/98 67.082 143.071 137.552 7/20/98 67.082 143.957 137.119 7/21/98 68.147 142.904 137.045 7/22/98 68.147 143.035 137.026 7/23/98 70.276 140.315 136.994 7/24/98 67.413 140.012 136.927 7/27/98 66.715 139.249 136.941 7/28/98 66.715 137.775 136.819 7/29/98 66.715 138.219 137.639 7/30/98 66.715 139.611 137.595 7/31/98 64.55 138.11 137.005 8/3/98 65.284 136.458 137.416 8/4/98 62.456 132.495 136.927 8/5/98 62.456 131.192 137.224 8/6/98 59.593 132.877 137.25 8/7/98 62.456 134.048 137.17 8/10/98 62.456 133.358 136.99 8/11/98 59.593 129.461 137.245 8/12/98 65.319 131.209 137.138 8/13/98 65.319 131.123 137.425 8/14/98 66.751 130.003 137.749 8/17/98 66.733 130.246 137.749 8/18/98 66.751 131.602 137.261 8/19/98 66.035 130.512 136.723 8/20/98 66.035 130.071 136.653 8/21/98 66.035 127.765 136.055 8/24/98 63.888 127.323 136.43 8/25/98 63.888 126.765 136.369 8/26/98 64.621 124.396 136.313 8/27/98 60.327 120.086 135.598 8/28/98 61.042 118.761 135.807 8/31/98 56.801 110.833 135.124 9/1/98 56.801 116.786 135.836 9/2/98 55.369 117.707 135.478 9/3/98 53.24 116.134 134.697 9/4/98 52.506 115.909 134.87 9/8/98 56.801 120.651 136.214 9/9/98 56.085 118.439 135.595 9/10/98 54.671 116.791 135.794 9/11/98 53.973 118.27 135.726 9/14/98 56.103 119.44 135.473 9/15/98 63.19 120.482 135.935 9/16/98 64.621 121.734 136.06 9/17/98 62.492 120.286 136.44 9/18/98 60.344 121.72 135.849 9/21/98 60.344 121.907 135.988 9/22/98 61.776 122.741 136.237 9/23/98 61.06 124.904 136.604 9/24/98 61.776 123.493 136.696 9/25/98 62.125 123.101 136.89 9/28/98 62.841 123.112 136.689 9/29/98 63.19 120.16 136.74 9/30/98 63.19 119.156 136.562 10/1/98 59.279 116.729 136.841 10/2/98 59.627 116.623 136.655 10/5/98 60.364 113.347 136.232 10/6/98 57.497 113.47 136.338 10/7/98 53.975 111.429 136.107 10/8/98 52.542 107.217 136.038 10/9/98 53.975 109.695 136.22 10/12/98 53.975 110.994 136.412 10/13/98 48.283 110.361 136.387 10/14/98 52.542 111.754 136.45 10/15/98 53.975 114.911 136.273 10/16/98 53.975 116.061 136.527 10/19/98 53.975 116.673 136.829 10/20/98 55.408 118.781 137.013 10/21/98 56.125 119.569 136.985 10/22/98 53.975 121.446 137.307 10/23/98 54.692 121.347 137.296 10/26/98 54.672 122.678 137.549 10/27/98 54.672 121.931 137.153 10/28/98 56.105 122.312 137.198 10/29/98 57.538 123.251 137.237 10/30/98 60.364 124.777 137.275 11/2/98 58.951 126.977 136.237 11/3/98 58.234 128.33 136.93 11/4/98 59.668 128.393 136.852 11/5/98 61.06 128.632 137.503 11/6/98 59.627 129.369 137.77 11/9/98 62.493 128.297 138.501 11/10/98 62.493 127.997 139.516 11/11/98 61.06 127.751 139.973 11/12/98 61.06 128.241 142.479 11/13/98 66.016 128.731 142.799 11/16/98 63.19 128.931 139.762 11/17/98 65.36 129.086 141.182 11/18/98 64.623 129.305 142.567 11/19/98 64.971 130.446 139.274 11/20/98 67.101 130.902 140.95 11/23/98 64.623 130.575 140.192 11/24/98 66.056 129.603 140.942 11/25/98 69.619 130.465 141.54 11/27/98 73.141 130.835 144.162 11/30/98 73.837 129.275 143.415 12/1/98 74.186 129.148 140.122 12/2/98 72.056 128.998 139.126 12/3/98 67.449 127.543 133.97 12/4/98 66.384 128.749 137.406 12/7/98 67.449 130.063 135.927 12/8/98 67.449 130.573 136.107 12/9/98 66.752 130.795 132.36 12/10/98 65.319 130.33 141.221 12/11/98 67.449 129.27 135.194 12/14/98 66.016 126.946 133.034 12/15/98 63.538 126.685 133.108 12/16/98 63.19 127.331 131.343 12/17/98 61.06 127.674 131.975 12/18/98 58.931 128.044 134.79 12/21/98 66.036 128.822 135.5 12/22/98 65.319 129.509 136.89 12/23/98 58.931 131.69 137.159 12/24/98 58.931 132.105 134.47 12/28/98 62.493 131.847 134.077 12/29/98 63.906 133.288 134.458 12/30/98 58.89 133.657 132.506 12/31/98 60.364 136.813 134.007 1/4/99 60.364 135.83 134.342 1/5/99 59.674 137.477 139.347 1/6/99 58.985 139.025 141.025 1/7/99 60.364 139.313 138.101 1/8/99 58.924 139.729 138.87 1/11/99 60.364 139.396 138.476 1/12/99 63.933 137.924 135.783 1/13/99 62.493 138.403 136.682 1/14/99 61.053 138.349 136.146 1/15/99 58.985 140.46 133.303 1/19/99 60.334 140.572 135.848 1/20/99 61.053 141.941 135.811 1/21/99 57.485 139.974 133.405 1/22/99 56.045 140.262 134.211 1/25/99 59.614 140.649 136.583 1/26/99 59.614 140.676 136.73 1/27/99 58.924 140.736 132.926 1/28/99 59.614 142.461 134.216 1/29/99 59.614 142.844 135.006 2/1/99 58.174 142.115 132.885 2/2/99 59.269 141.883 134.732 2/3/99 57.485 142.69 132.199 2/4/99 57.485 141.037 130.434 2/5/99 58.924 140.679 130.825 2/8/99 60.334 140.157 129.346 2/9/99 66.751 138.13 131.929 2/10/99 65.342 137.208 132.84 2/11/99 64.967 139.361 131.293 2/12/99 60.303 138.514 128.774 2/16/99 60.303 138.551 129.211 2/17/99 60.303 137.17 130.098 2/18/99 60.303 137.387 130.925 2/19/99 60.303 138.303 132.232 2/22/99 60.648 140.141 130.931 2/23/99 60.303 140.392 130.278 2/24/99 60.303 139.243 129.494 2/25/99 58.864 139.023 128.821 2/26/99 58.864 139.742 125.713 3/1/99 57.424 139.652 125.599 3/2/99 58.144 139.635 126.431 3/3/99 58.113 138.735 126.888 3/4/99 59.898 139.518 127.561 3/5/99 58.113 140.689 124.373 3/8/99 53.916 141.654 125.421 3/9/99 53.571 141.575 125.827 3/10/99 52.476 142.061 126.187 3/11/99 51.787 143.398 125.682 3/12/99 51.787 142.965 124.054 3/15/99 51.097 143.051 125.392 3/16/99 51.097 142.138 124.986 3/17/99 51.097 141.504 126.003 3/18/99 51.097 141.504 125.77 3/19/99 50.753 140.285 125.677 3/22/99 55.416 140.952 125.692 3/23/99 56.106 137.943 125.733 3/24/99 56.106 138.259 127.825 3/25/99 60.364 140.084 129.342 3/26/99 62.179 141.378 124.546 3/29/99 61.803 141.74 124.909 3/30/99 61.084 140.731 123.964 3/31/99 48.968 140.034 118.268 4/1/99 54.666 140.362 115.963 4/5/99 49.719 142.4 114.581 4/6/99 52.537 141.641 114.132 4/7/99 49.313 142.368 113.249 4/8/99 49.313 143.372 111.863 4/9/99 51.097 144.199 108.816 4/12/99 46.839 145.676 107.55 4/13/99 50.408 145.769 109.079 4/14/99 49.719 145.271 109.53 4/15/99 49.719 145.38 111.202 4/16/99 49.688 145.955 110.721 4/19/99 51.848 143.567 110.928 4/20/99 50.408 144.333 106.439 4/21/99 51.128 147.241 112.472 4/22/99 49.343 148.91 107.909 4/23/99 49.688 150.998 111.005 4/26/99 50.408 151.878 110.124 4/27/99 58.864 152.076 108.567 4/28/99 59.614 151.79 110.441 4/29/99 60.364 151.572 109.85 4/30/99 61.773 151.683 109.567 5/3/99 60.303 153.304 109.015 5/4/99 61.398 153.006 108.81 5/5/99 61.743 153.064 110.235 5/6/99 59.958 152.951 110.086 5/7/99 59.614 153.28 107.39 5/10/99 59.614 153.404 110.266 5/11/99 58.174 154.428 113.502 5/12/99 57.485 156.596 114.058 5/13/99 65.251 156.955 115.739 5/14/99 63.466 154.672 112.921 5/17/99 60.993 153.977 111.937 5/18/99 62.493 153.819 110.952 5/19/99 63.182 154.647 112.762 5/20/99 64.592 155.352 113.417 5/21/99 62.432 155.832 112.277 5/24/99 60.648 154.119 115.406 5/25/99 63.872 152.665 116.045 5/26/99 63.152 153.469 117.663 5/27/99 63.182 152.077 115.061 5/28/99 64.622 153.467 114.384 6/1/99 66.079 152.835 113.29 6/2/99 64.622 151.789 112.336 6/3/99 62.437 152.536 111.698 6/4/99 63.836 153.765 110.73 6/7/99 65.293 153.561 112.484 6/8/99 63.836 152.677 110.885 6/9/99 61.651 152.985 110.339 6/10/99 63.165 151.83 112.688 6/11/99 64.508 150.749 113.326 6/14/99 65.293 149.855 112.609 6/15/99 65.964 150.122 110.977 6/16/99 64.172 150.664 113.035 6/17/99 64.508 151.585 113.399 6/18/99 63.779 151.679 113.053 6/21/99 61.594 151.495 112.221 6/22/99 60.923 151.222 112.547 6/23/99 60.587 152.279 108.064 6/24/99 60.309 151.569 105.856 6/25/99 62.494 151.539 111.034 6/28/99 61.709 152.456 109.783 6/29/99 63.165 153.571 111.108 6/30/99 63.165 157.754 111.992 7/1/99 62.031 157.126 110.578 7/2/99 64.962 158.408 111.14 7/6/99 63.024 158.724 108.566 7/7/99 64.49 158.114 110.355 7/8/99 67.42 159.342 113.369 7/9/99 65.955 160.294 115.047 7/12/99 66.688 160.8 112.936 7/13/99 67.089 161.248 112.811 7/14/99 66.357 161.04 113.393 7/15/99 65.624 162.554 111.757 7/16/99 66.758 161.828 112.818 7/19/99 66.758 161.641 109.425 7/20/99 60.235 158.949 118.945 7/21/99 63.165 159.759 122.74 7/22/99 63.165 158.049 126.897 7/23/99 63.165 157.459 128.402 7/26/99 61.7 155.804 130.548 7/27/99 62.397 156.475 129.956 7/28/99 61.7 156.013 129.509 7/29/99 62.693 154.764 130.053 7/30/99 62.764 155.11 130.454 8/2/99 60.305 154.457 124.369 8/3/99 62.433 153.39 129.2 8/4/99 62.101 152.132 133.501 8/5/99 62.834 152.289 136.021 8/6/99 62.362 152.273 134.376 8/9/99 63.828 152.095 138.93 8/10/99 63.828 150.472 142.603 8/11/99 68.083 151.6 142.828 8/12/99 66.286 152.128 138.12 8/13/99 65.955 153.206 140.625 8/16/99 72.338 152.702 144.913 8/17/99 74.465 153.082 143.67 8/18/99 76.593 152.908 144.049 8/19/99 78.39 152.998 141.845 8/20/99 84.11 153.299 138.459 8/23/99 91.486 154.691 137.666 8/24/99 83.307 154.329 136.279 8/25/99 88.696 154.058 134.953 8/26/99 90.683 153.357 132.242 8/27/99 90.824 152.844 133.438 8/30/99 90.824 151.4 132.867 8/31/99 89.027 151.408 133.184 9/1/99 87.562 152.761 133.561 9/2/99 85.766 152.097 134.388 9/3/99 86.097 154.441 134.329 9/7/99 86.428 155.555 133.995 9/8/99 86.498 155.247 134.288 9/9/99 85.836 157.393 134.803 9/10/99 84.3 157.965 134.073 9/13/99 83.638 157.346 137.141 9/14/99 82.976 156.669 137.24 9/15/99 82.976 155.64 133.367 9/16/99 83.307 154.569 133.789 9/17/99 81.51 155.645 131.594 9/20/99 79.383 155.537 131.485 9/21/99 79.383 153.877 130.828 9/22/99 77.255 153.929 131.342 9/23/99 72.197 152.128 130.324 9/24/99 68.745 151.418 126.581 9/27/99 70.21 152.157 127.213 9/28/99 68.745 151.149 128.687 9/29/99 64.49 152.077 122.987 9/30/99 57.445 153.601 105.876 10/1/99 59.572 153.354 114.535 10/4/99 64.975 154.202 118.473 10/5/99 65.796 153.254 117.302 10/6/99 64.891 154.317 119.448 10/7/99 66.039 153.605 116.697 10/8/99 65.955 153.362 115.79 10/11/99 65.302 155.331 117.193 10/12/99 64.565 154.825 115.719 10/13/99 63.828 153.422 116.866 10/14/99 62.027 152.727 116.187 10/15/99 62.353 150.475 117.987 10/18/99 64.565 148.815 118.081 10/19/99 64.238 149.562 118.456 10/20/99 63.911 151.652 115.956 10/21/99 63.174 151.62 113.25 10/22/99 61.373 153.026 111.825 10/25/99 60.553 152.806 109.582 10/26/99 58.425 151.969 109.004 10/27/99 58.752 151.836 106.361 10/28/99 59.489 153.835 105.768 10/29/99 56.624 154.98 106.811 11/1/99 59.899 155.114 103.663 11/2/99 63.174 154.803 109.513 11/3/99 61.863 155.273 110.237 11/4/99 67.429 156.491 105.566 11/5/99 67.429 156.862 105.142 11/8/99 70.21 158.122 107.702 11/9/99 67.429 158.299 105.207 11/10/99 67.429 159.862 105.042 11/11/99 66.692 160.529 101.154 11/12/99 68.736 161.911 103.101 11/15/99 68.82 164.009 100.883 11/16/99 68.531 164.218 101.462 11/17/99 67.999 163.957 100.018 11/18/99 68.409 165.014 99.569 11/19/99 70.864 165.848 101.862 11/22/99 74.465 165.98 103.133 11/23/99 74.465 163.863 104.692 11/24/99 73.812 165.238 101.126 11/26/99 74.139 166.216 108.552 11/29/99 73.812 166.576 105.735 11/30/99 71.684 165.858 104.528 12/1/99 73.645 166.76 106.595 12/2/99 69.39 167.291 103.087 12/3/99 67.915 168.271 102.739 12/6/99 65.871 168.013 102.528 12/7/99 59.238 167.472 101.857 12/8/99 60.385 167.258 100.64 12/9/99 62.186 166.13 100.765 12/10/99 63.007 166.311 101.299 12/13/99 62.027 166.921 99.407 12/14/99 62.68 166.305 99.266 12/15/99 63.417 168.086 100.547 12/16/99 60.226 168.105 98.749 12/17/99 58.752 167.755 99.407 12/20/99 54.329 168.761 99.871 12/21/99 58.425 170.633 101.138 12/22/99 59.899 170.651 101.543 12/23/99 63.501 171.592 101.93 12/27/99 61.373 171.333 102.313 12/28/99 58.919 171.783 100.24 12/29/99 57.445 175.645 98.064 12/30/99 57.118 176.954 97.234 12/31/99 57.771 179.86 97.278
33 1/3/00 61.059 177.604 97.767 1/4/00 57.771 170.953 97.804 1/5/00 58.19 171.074 97.483 1/6/00 60.413 169.57 99.948 1/7/00 61.19 173.61 99.705 1/10/00 62.027 177.491 100.312 1/11/00 60.222 173.992 99.085 1/12/00 60.545 171.762 99.718 1/13/00 59.576 175.009 101.026 1/14/00 60.64 176.085 99.706 1/18/00 58.835 179.217 98.473 1/19/00 58.094 180.687 98.777 1/20/00 56.612 181.644 100.08 1/21/00 59.576 184.085 99.649 1/24/00 58.835 182.037 103.518 1/25/00 56.612 182.866 102.571 1/26/00 55.966 182.057 103.389 1/27/00 55.321 176.716 102.609 1/28/00 55.321 173.792 102.798 1/31/00 54.676 174.586 99.607 2/1/00 55.966 176.244 103.212 2/2/00 56.707 177.09 100.395 2/3/00 56.612 179.462 102.284 2/4/00 55.5 179.659 102.133 2/7/00 58.094 180.882 104.878 2/8/00 57.449 183.372 105.067 2/9/00 57.449 181.065 105.777 2/10/00 57.449 183.896 105.433 2/11/00 57.449 182.328 104.742 2/14/00 55.321 183.161 104.176 2/15/00 55.321 183.764 104.866 2/16/00 55.321 185.288 105.152 2/17/00 51.065 188.338 104.328 2/18/00 54.257 185.317 103.877 2/22/00 53.193 185.648 103.679 2/23/00 52.129 188.186 100.635 2/24/00 52.129 189.176 104.69 2/25/00 52.129 188.413 104.863 2/28/00 51.065 188.978 105.125 2/29/00 48.938 192.324 102.926 3/1/00 53.193 196.334 105.526 3/2/00 53.193 197.737 102.74 3/3/00 51.065 200.456 107.672 3/6/00 51.065 201.246 102.429 3/7/00 48.938 200.425 103.15 3/8/00 44.682 200.609 102.169 3/9/00 42.555 203.003 100.336 3/10/00 45.746 203.571 102.143 3/13/00 45.746 200.98 97.789 3/14/00 44.682 197.196 97.979 3/15/00 44.682 194.743 97.481 3/16/00 42.555 199.646 97.24 3/17/00 42.555 200.804 100.549 3/20/00 41.491 198.048 104.937 3/21/00 42.555 198.733 110.662 3/22/00 47.874 200.933 108.031 3/23/00 46.81 202.924 111.382 3/24/00 48.938 203.029 115.223 3/27/00 51.065 201.419 115.397 3/28/00 50.002 199.913 113.772 3/29/00 50.002 197.694 107.23 3/30/00 48.938 195.377 110.023 3/31/00 48.938 198.554 109.64 4/3/00 46.81 195.046 107.21 4/4/00 46.81 189.589 108.605 4/5/00 46.81 190.018 108.102 4/6/00 44.682 193.43 106.12 4/7/00 46.81 195.688 111.545 4/10/00 45.746 191.175 112.889 4/11/00 46.81 189.09 113.589 4/12/00 46.81 184.049 116.316 4/13/00 47.874 181.745 118.433 4/14/00 36.171 171.016 106.745 4/17/00 31.916 171.409 105.974 4/18/00 34.044 177.525 107.587 4/19/00 34.044 178.333 106.44 4/20/00 44.682 178.346 111.35 4/24/00 38.299 175.11 103.98 4/25/00 40.427 180.009 109.67 4/26/00 41.491 179.523 110.186 4/27/00 53.193 180.543 115.666 4/28/00 48.938 182.932 114.949 5/1/00 42.555 185.923 113.631 5/2/00 46.81 182.972 114.679 5/3/00 46.81 179.885 115.13 5/4/00 44.682 182.025 114.546 5/5/00 40.427 184.471 113.76 5/8/00 38.299 182.347 112.858 5/9/00 38.299 181.641 111.392 5/10/00 38.299 176.692 115.586 5/11/00 42.555 180.07 113.904 5/12/00 63.832 181.473 124.673 5/15/00 72.343 183.833 127.404 5/16/00 70.215 185.024 127.901 5/17/00 71.279 184.685 128.101 5/18/00 65.96 183.076 131.113 5/19/00 65.96 179.438 131.679 5/22/00 78.726 176.521 134.876 5/23/00 72.343 174.099 126.819 5/24/00 69.151 175.442 124.388 5/25/00 73.407 173.574 127.151 5/26/00 75.534 173.505 128.434 5/30/00 74.47 178.571 127.219 5/31/00 72.343 179.731 123.063 6/1/00 81.918 182.087 128.316 6/2/00 82.981 185.321 131.595 6/5/00 85.109 184.68 132.913 6/6/00 81.918 185.024 131.033 6/7/00 85.109 185.592 133.173 6/8/00 85.109 186.395 130.26 6/9/00 82.981 187.355 127.97 6/12/00 80.854 185.734 127.879 6/13/00 78.726 187.432 126.039 6/14/00 77.662 186.772 124.766 6/15/00 79.79 186.902 125.424 6/16/00 84.045 186.692 127.938 6/19/00 80.854 188.297 126.821 6/20/00 80.854 187.886 129.118 6/21/00 74.47 187.896 127.051 6/22/00 68.087 185.769 125.942 6/23/00 74.47 184.78 128.979 6/26/00 76.598 185.904 128.585 6/27/00 74.47 185.63 127.781 6/28/00 76.598 186.371 127.119 6/29/00 78.726 186.974 129.31 6/30/00 72.343 186.386 127.55 7/3/00 70.215 188.467 127.181 7/5/00 76.598 184.861 127.181 7/6/00 76.598 186.625 126.497 7/7/00 76.598 188.725 127.646 7/10/00 76.598 188.4 126.583 7/11/00 78.726 191.108 133.827 7/12/00 79.79 192.458 133.868 7/13/00 85.109 192.013 131.3 7/14/00 82.981 193.449 132.809 7/17/00 85.109 193.035 134.452 7/18/00 85.109 192.144 131.955 7/19/00 87.237 190.321 133.89 7/20/00 89.365 192.495 134.078 7/21/00 86.173 189.964 135.264 7/24/00 85.109 187.176 135.177 7/25/00 87.237 186.279 136.927 7/26/00 86.173 187.499 135.035 7/27/00 86.173 185.813 135.143 7/28/00 86.173 182.599 134.415 7/31/00 87.237 184.656 133.396 8/1/00 93.62 185.839 136.293 8/2/00 93.62 186.179 134.973 8/3/00 98.939 186.314 134.988 8/4/00 97.875 186.23 128.325 8/7/00 95.748 187.112 125.613 8/8/00 95.748 187.658 125.571 8/9/00 95.748 186.115 125.142 8/10/00 92.556 185.908 124.583 8/11/00 89.365 187.836 126.333 8/14/00 90.428 189.769 125.935 8/15/00 97.875 186.542 126.086 8/16/00 93.62 185.689 127.558 8/17/00 92.556 187.646 124.968 8/18/00 90.428 187.558 124.823 8/21/00 89.365 188.064 122.19 8/22/00 87.237 188.293 123.501 8/23/00 89.365 188.511 121.349 8/24/00 89.365 189.903 121.705 8/25/00 92.556 190.448 120.977 8/28/00 88.301 190.72 119.618 8/29/00 87.237 191.036 124.608 8/30/00 89.365 191.467 125.362 8/31/00 91.492 194.092 124.841 9/1/00 91.492 195.403 126.631 9/5/00 89.365 193.945 123.851 9/6/00 86.173 194.762 120.247 9/7/00 91.492 195.954 122.364 9/8/00 89.365 194.651 121.149 9/11/00 85.109 194.291 119.274 9/12/00 87.237 193.946 120.995 9/13/00 89.365 193.767 121.91 9/14/00 86.173 194.601 119.603 9/15/00 86.173 194.294 117.342 9/18/00 86.173 190.752 117.772 9/19/00 85.109 190.564 116.586 9/20/00 88.301 188.258 118.643 9/21/00 89.365 186.255 118.908 9/22/00 89.365 187.318 122.018 9/25/00 91.492 187.608 119.022 9/26/00 86.173 186.579 117.547 9/27/00 88.301 187.257 117.441 9/28/00 86.173 190.692 116.933 9/29/00 85.109 190.227 114.778 10/2/00 87.237 187.916 112.244 10/3/00 89.365 185.474 116.781 10/4/00 91.492 186.163 117.559 10/5/00 90.428 186.162 115.911 10/6/00 89.365 183.39 116.901 10/9/00 92.556 183.061 117.417 10/10/00 89.365 181.252 114.522 10/11/00 86.173 179.09 113.535 10/12/00 89.365 176.124 115.036 10/13/00 87.237 179.611 115.362 10/16/00 85.109 179.375 114.703 10/17/00 65.96 175.913 107.932 10/18/00 74.47 175.988 110.905 10/19/00 78.726 180.493 114.149 10/20/00 76.598 182.12 111.307 10/23/00 74.47 182.313 109.33 10/24/00 72.343 179.987 108.266 10/25/00 70.215 175.621 109.44 10/26/00 63.832 176.834 106.952 10/27/00 68.087 177.131 108.313 10/30/00 76.598 177.406 108.489 10/31/00 72.343 180.873 105.424 11/1/00 70.215 180.796 107.586 11/2/00 71.279 181.891 102.973 11/3/00 76.598 182.564 101.487 11/6/00 84.045 182.111 103.32 11/7/00 85.109 183.199 105.952 11/8/00 85.109 180.929 106.766 11/9/00 85.109 179.412 106.338 11/10/00 80.854 175.655 105.021 11/13/00 80.854 172.304 104.775 11/14/00 76.598 176.347 101.821 11/15/00 76.598 177.743 103.106 11/16/00 80.854 174.611 103.489 11/17/00 80.854 173.007 103.574 11/20/00 72.343 169.482 99.573 11/21/00 74.47 170.026 102.242 11/22/00 72.343 166.194 100.428 11/24/00 74.47 169.993 102.2 11/27/00 74.47 170.561 103.484 11/28/00 67.023 168.13 100.709 11/29/00 62.768 166.107 99.092 11/30/00 67.023 163.18 95.251 12/1/00 69.151 164.4 96.586 12/4/00 64.896 164.015 93.856 12/5/00 61.704 168.894 92.645 12/6/00 57.449 167.267 91.456 12/7/00 67.023 165.923 92.242 12/8/00 68.087 169.53 94.232 12/11/00 65.96 174.482 94.045 12/12/00 64.896 172.417 95.507 12/13/00 57.449 171.003 90.934 12/14/00 61.704 167.703 97.158 12/15/00 60.64 165.373 95.156 12/18/00 57.449 167.57 94.127 12/19/00 53.193 165.522 89.23 12/20/00 48.938 159.577 84.803 12/21/00 35.108 159.548 77.156 12/22/00 34.044 163.468 77.497 12/26/00 34.044 165.387 81.591 12/27/00 34.044 166.277 82.575 12/28/00 36.171 168.718 82.72 12/29/00 59.576 168.629 88.59 1/2/01 55.321 164.247 85.994 1/3/01 59.576 168.941 88.908 1/4/01 57.449 167.581 87.266 1/5/01 59.576 164.273 89.289 1/8/01 59.576 164.51 88.565 1/9/01 57.449 165.237 88.579 1/10/01 59.576 168.99 88.309 1/11/01 57.449 171.169 87.171 1/12/01 56.385 172.085 90.497 1/16/01 59.576 174.329 91.33 1/17/01 55.321 174.076 88.713 1/18/01 51.065 173.992 86.649 1/19/01 52.129 172.86 87.304 1/22/01 51.065 173.304 87.119 1/23/01 51.065 175.724 87.48 1/24/01 51.065 176.963 88.484 1/25/01 46.81 177.053 90.347 1/26/01 48.938 177.812 91.869 1/29/01 46.81 179.545 92.963 1/30/01 37.448 180.442 87.694 1/31/01 44.257 178.746 90.114 2/1/01 45.959 178.635 89.854 2/2/01 51.065 175.811 92.121
34 ITEM 13. CERTAIN TRANSACTIONS Stock Owned by DM Associates DM Associates Limited Partnership ("DM Associates") is the owner of record of 702,617 shares of Common Stock of the Company, representing approximately 14.4% of the issued and outstanding shares of Common Stock. The general partner of DM Associates is New DM Management Associates I, which is a general partnership. The general partners of New DM Management Associates I are Robert B. Stein, Jr., a Director and the Chairman of the Board, Chief Executive Officer and President of the Company, and Gregory G. Landry, a Director and the Vice Chairman and Chief Financial Officer of the Company. As the sole general partner of DM Associates, DM Management I has the power to vote and dispose of the 702,617 shares of Common Stock owned by DM Associates, subject to the required consent of a class of limited partners of DM Associates for sales of more than 396,000 shares. The partnership agreement of DM Management I provides that a majority of the partnership interests of DM Management I is required to vote the shares of Common Stock owned by DM Associates. As the managing general partner of DM Management I, Mr. Stein has sole dispositive power with respect to the 702,617 shares owned by DM Associates, subject to the limitation described above. As general partners of DM Management I, Messrs. Stein and Landry share voting power with respect to the 702,617 shares owned by DM Associates. OUTSIDE COUNSEL Albert T. Adams, one of the Company's directors, is a partner of Baker & Hostetler LLP, which acts as the Company's general outside legal counsel on a variety of matters. The Company expects that Baker & Hostetler will continue to provide legal services in that capacity in fiscal year 2002. IT SERVICES AGREEMENT On May 1, 2001, the Company renewed an IT Services Agreement with EmpowerWare, Inc. EmpowerWare, Inc. is a Connecticut-based company specializing in financial and retail accounting software. It is owned by Scott Stein, the former Vice President Management Information Systems of the Company and the brother of Mr. Stein. For a monthly fee of approximately $49,875 (plus expenses) EmpowerWare, Inc. provides relationship management, project management and administration, software upgrades, production support and other services. The term of the Agreement is from May 1, 2001 to April 30, 2004, unless otherwise terminated or extended in accordance with its terms. The Company believes that the fees payable to EmpowerWare, Inc. are on terms no less favorable than would be available in an arm's-length transaction with any other vendor. MERGER AGREEMENT If the merger, contemplated by the Merger Agreement, is consummated, Mr. Stein and his affiliates will control the Company. The Company's existing stockholders, except Mr. Stein and his affiliates, including DM Associates, will receive $4.50 per share in cash. In connection with entering into the Merger Agreement, Mr. Stein, DM Associates, DM Management I and DM Acquisition Corp. entered into a voting agreement pursuant to which they agreed to vote any shares of the Company's Common Stock that they beneficially owned in favor of the merger and the Merger Agreement and agreed to refrain from voting in favor of any other proposals to sell the Company. SEVERANCE AGREEMENTS AND OTHER PAYMENTS Ms. Adams and Mr. Valvo's employment with the Company will be terminated effective May 11, 2001 and May 25, 2001, respectively, in connection with the Business Restructuring Plan. In connection with the Business Restructuring Plan, Ms. Adams, Vice President Finance of the Company, and Mr. Valvo, Vice President Gasoline and Store Development of the Company, will receive severance payments of $140,000 and $150,000, respectively, which will be payable as a salary continuation. In addition, Ms. Adams and Mr. Valvo will be entitled to exercise their options until August 31, 2001. 32 35 NEGOTIATIONS TO PURCHASE CERTAIN STORES Pursuant to the Business Segmentation Plan, Mr. Stein and Ms. Adams have had preliminary discussions concerning the possibility of Ms. Adams purchasing stores from the Company that have been identified as stores to be sold pursuant to the Business Segmentation Plan. If an agreement were reached, the terms would be negotiated by the Company's financial advisor retained to sell stores that do not fit within Dairy Mart's existing portfolio structure. Furthermore, the stores would only be sold to Ms. Adams if the Company believed it was receiving the same amount of consideration for those stores that it could receive in an arm's-length transaction. 33 36 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 [46]. (2) Financial Statement Schedules: Report of Independent Public Accountants Consolidated Statements of Operations for the three years ended February 3, 2001, January 29, 2000 and January 30, 1999. Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000. Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999. Consolidated Statements of Cash Flows for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999. Notes to Consolidated Financial Statements for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999. Schedule II--Valuation Accounts All other schedules are omitted because they are not applicable, not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (3) Exhibits:
EXHIBIT NUMBER: (2.1) Agreement and Plan of Merger, dated as of March 15, 2001, between DM Acquisition Corp. and Dairy Mart Convenience Stores, Inc. is filed herewith. (3.1) The Company's Restated Certificate of Incorporation, as amended, was filed as Exhibit 3.1 to the Company's 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference. (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 are incorporated herein by reference. (4.1) The Company's Restated Certificate of Incorporation, as amended, and Certificate of Designation is filed as Exhibit 3.1 hereto. (4.2) Amended and Restated Bylaws are filed as Exhibit 3.2 hereto. (4.3(a)) Amended and Restated Rights Agreement, as amended, dated as of February 8, 2000, between the Company and the American Stock Transfer and Trust Company, as Rights Agent, including form of Rights Certificate, is filed as Exhibit 10.22(a) hereto. (4.3(b)) First Amendment to the Amended and Restated Rights Agreement, dated as of February 8, 2000, by and between Dairy Mart Convenience Stores, Inc. and American Stock Transfer & Trust Company, as Rights Agent, is filed as Exhibit 10.22(b) hereto. (4.4) 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.
34 37
EXHIBIT NUMBER: (4.5) 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 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995, and is incorporated herein by reference. (4.6) The instruments defining the rights of the holders of the Company's Warrants include the Form of Stock Purchase Warrants are filed as Exhibits 10.12 and 10.13 hereto. (4.7) 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, is filed as Exhibit 10.11 hereto. (4.8) 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 is filed as Exhibit 10.14 hereto. (10.1(a)) Credit Agreement, dated as of December 28, 1999, among the Company, the Banks from time to time parties thereto and Citizens Bank of Connecticut, as agent, and related schedules was filed as Exhibit 10.1 to the Company's Form 10-K for the fiscal quarter ended January 29, 2000, and is incorporated herein by reference. (10.1(b)) First Amendment to the Credit Agreement, dated January 28, 2000, between the Company and Citizens Bank of Connecticut, as agent for the Banks from time to time parties to the Company's Amended and Restated Credit Agreement, was filed as Exhibit 10.1 to the Company's Form 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference. (10.1(c)) Second Amendment to the Credit Agreement, dated July 28, 2000, between the Company and Citizens Bank of Connecticut, as agent for the Banks from time to time parties to the Company's Amended and Restated Credit Agreement, was filed as Exhibit 10.1.1 to the Company's Form 10-Q for the fiscal quarter ended July 29, 2000, and is incorporated herein by reference. (10.1(d)) Third Amendment to the Credit Agreement, dated October 27, 2000, between the Company and Citizens Bank of Connecticut, as agent for the Banks from time to time parties to the Company's Amended and Restated Credit Agreement, was filed as Exhibit 10.1.1 to the Company's Form 10-Q for the fiscal quarter ended October 28, 2000, and is incorporated herein by reference. (10.1(e)) Fourth Amendment to the Credit Agreement, dated March 14, 2001, between the Company and Citizens Bank of Connecticut, as agent for the Banks from time to time parties to the Company's Amended and Restated Credit Agreement, was filed as Exhibit 10(a) to the Company's Form 8-K for the March 14, 2001 event and is incorporated herein by reference. (10.1(f)) Fifth Amendment to the Credit Agreement, dated May 7, 2001, between the Company and Citizens Bank of Connecticut, as agent for the Banks from time to time parties to the Company's Amended and Restated Credit Agreement 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 to 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 to the Company's Form 8-K for the June 21, 1997 event and is incorporated herein by reference.
35 38
EXHIBIT NUMBER: (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 to the Company's Form 10-K for the fiscal year ended January 28, 1995, and is incorporated herein by reference. (10.7) Employment Agreement between the Company and Robert B. Stein, Jr., dated January 1, 2000, was filed as Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference. (10.8) Employment Agreement between the Company and Gregory G. Landry, dated January 1, 2000, was filed as Exhibit 10.8 to the Company's Form 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference. (10.9) Severance Agreement, dated March 15, 2001, between the Company and Gregory G. Landry, is filed herewith. (10.10) Settlement Agreement, dated January 27, 1995, between the Company and Frank Colaccino was filed as Exhibit 10.10 to the Company's January 28, 1995 Form 10-K and is incorporated herein by reference. (10.11) 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 to 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 1,215,000 Shares of Common Stock) was filed as Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995, and is incorporated herein by reference. (10.13) Form of Stock Purchase Warrant to Subscribe for and Purchase Shares of Common Stock of the Company (Initially Exercisable for an Aggregate of 500,000 Shares of Common Stock) was filed as Exhibit 10.3 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995, and is incorporated herein by reference. (10.14) 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 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995, and is incorporated herein by reference. (10.15) 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 to the Company's Form 8-K/A Amendment No. 1 for the October 30, 1995, event and is incorporated herein by reference. (10.16) 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 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference.
36 39
EXHIBIT NUMBER: (10.17) 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 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995 and is incorporated herein by reference. (10.18) DM Associates Limited Partnership Agreement, dated March 12, 1992 is filed herewith. (10.19) First Amendment to Partnership Agreement of DM Associates Limited Partnership, dated as of September 8, 1994, was filed as Exhibit F to the Company's Schedule 13D, Amendment No. 4, dated January 27, 1995, 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 and is incorporated herein by reference. (10.20) Partnership Agreement of New DM Management Associates I, dated as of September 8, 1994, was filed as Exhibit G to the Company's Schedule 13D, Amendment No. 4, dated January 27, 1995, 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 and is incorporated herein by reference. (10.21) 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 to the Company's Form 10-Q for the fiscal quarter ended October 28, 1995, and is incorporated herein by reference. (10.22(a)) Amended and Restated Rights Agreement, as amended, dated as of February 8, 2000, between the Company and the American Stock Transfer and Trust Company, as Rights Agent, including form of Rights Certificate, was filed as Exhibit 5 to the Company's Form 8-A/A Amendment No. 2 to Form 8-A for the February 9, 2000 event and is incorporated herein by reference. (10.22(b)) First Amendment to the Amended and Restated Rights Agreement, dated as of February 8, 2000, by and between Dairy Mart Convenience Stores, Inc. and American Stock Transfer & Trust Company, as Rights Agent, is filed herewith. (10.23) Third Amendment to Partnership Agreement of New DM Management Associate I, dated as of December 12, 1997, was filed as Exhibit 1 to the Company's Form 8-K for the December 12, 1997 event and is incorporated herein by reference. (10.24) 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. (10.25) Director's 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. (10.26) Employment Agreement between the Company and J. Wayne Colley, dated January 18, 2000, was filed as Exhibit 10.25 to the Company's Form 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference. (10.27) Supplement to Employment Agreement, dated April 20, 2001, between the Company and J. Wayne Colley is filed herewith. (10.28) Nonqualified Deferred Compensation Plan, dated January 1, 2000, was filed as Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended January 29, 2000, and is incorporated herein by reference.
37 40
EXHIBIT NUMBER: (10.29) Change of Control Agreement, dated June 20, 2000, between the Company and Certain Employees of the Company identified therein, is filed herewith. (10.30) Agreement, dated May 21, 2000, between the Committee of Concerned Dairy Mart Shareholders and Frank Colaccino and the Company was filed as Exhibit 10(a) to the Company's Form 8-K for the May 21, 2000 event and is incorporated herein by reference. (10.31) Exchange and Voting Agreement by and among the Company and the Noteholders listed therein, dated March 15, 2001, 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 is filed herewith. (23) Consent of Arthur Andersen LLP to the incorporation of their reports included in this Form 10-K, for the fiscal year ended February 3, 2001, into the Company's previously filed Registration Statements on Forms S-8 is filed herewith. (99) NONE
(b) Reports on Form 8-K: NONE. No Financial Statements were filed with any of the Current Reports. (c) See (a)(3) above. (d) See (a)(2) above. 38 41 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Dated: May 7, 2001 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.
NAME TITLE DATE ---- ----- ---- /s/ ROBERT B. STEIN, JR. President, Chief Executive Officer, - ------------------------------------------------ Chairman of the Board (Principal Executive Dated: May 7, Robert B. Stein, Jr. Officer) and Director 2001 /s/ GREGORY G. LANDRY Vice Chairman, Chief Financial Officer, - ------------------------------------------------ (Principal Financial and Accounting Dated: May 7, Gregory G. Landry Officer) and Director 2001 /s/ ALBERT T. ADAMS Director - ------------------------------------------------ Dated: May 7, Albert T. Adams 2001 /s/ FRANK W. BARRETT Director - ------------------------------------------------ Dated: May 7, Frank W. Barrett 2001 /s/ J. KERMIT BIRCHFIELD, JR. Director - ------------------------------------------------ Dated: May 7, J. Kermit Birchfield, Jr. 2001 /s/ JOHN W. EVERETS Director - ------------------------------------------------ Dated: May 7, John W. Everets 2001 /s/ WILLIAM A. FOLEY Director - ------------------------------------------------ Dated: May 7, William A. Foley 2001
39 42 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...................................... F-2 Consolidated Statements of Operations for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30,1999................................................... F-3 Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000.......................................... F-4 Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999.......................................... F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999...................................................... F-6 Notes to Consolidated Financial Statements for the Fiscal Years Ended February 3, 2001, January 29, 2000 and January 30, 1999.................................................. F-7 Report of Independent Public Accountants on Schedule II..... F-29 Schedule II................................................. F-30
F-1 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Dairy Mart Convenience Stores, Inc.: We have audited the accompanying consolidated balance sheets of Dairy Mart Convenience Stores, Inc. (a Delaware corporation) and Subsidiaries as of February 3, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended February 3, 2001. 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 February 3, 2001, and January 29, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP -------------------------------------- ARTHUR ANDERSEN LLP Cleveland, Ohio, May 7, 2001 F-2 44 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 -------- -------- -------- Revenues (including excise taxes of $42,054, $34,865 and $31,265, respectively).................................... $723,671 $588,551 $481,598 Cost of goods sold and expenses: Cost of goods sold........................................ 576,042 443,559 344,079 Operating and administrative expenses..................... 157,519 137,069 126,538 Interest expense, net..................................... 14,183 11,583 10,806 -------- -------- -------- 747,744 592,211 481,423 -------- -------- -------- Income (loss) before income taxes......................... (24,073) (3,660) 175 Benefit (provision) from income taxes..................... (5,378) 1,164 (150) -------- -------- -------- Net income (loss)......................................... $(29,451) $ (2,496) $ 25 ======== ======== ======== Earnings (loss) per share, basic and diluted................ $ (5.96) $ (.51) $ .01
The accompanying notes are an integral part of these consolidated financial statements. F-3 45 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FEBRUARY 3, 2001 AND JANUARY 29, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 -------- -------- ASSETS Current assets: Cash...................................................... $ 5,667 $ 7,702 Short-term investments.................................... 3,000 155 Accounts and notes receivable, net........................ 13,462 20,499 Inventory................................................. 24,424 34,804 Prepaid expenses and other current assets................. 3,612 1,704 Deferred income taxes..................................... -- 2,393 -------- -------- Total current assets.............................. 50,165 67,257 Property and equipment, net................................. 111,448 113,338 Intangible assets, net...................................... 13,731 14,582 Other assets, net........................................... 15,373 14,622 -------- -------- Total assets........................................... $190,717 $209,799 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations............... $ 6,043 $ 3,091 Accounts payable.......................................... 44,361 50,916 Accrued expenses.......................................... 15,835 11,651 Accrued interest.......................................... 3,638 3,490 -------- -------- Total current liabilities.............................. 69,877 69,148 -------- -------- Long-term obligations, less current portion above........... 129,557 120,044 Other liabilities........................................... 13,555 13,738 Commitments and contingencies (Notes 6, 7, 12) Stockholders' equity: Preferred stock (serial), par value $.01, 1,000 shares authorized, no shares issued........................... -- -- Common stock, par value $.01, 30,000 shares authorized, 7,059 and 6,949 issued................................. 70 69 Paid-in capital........................................... 32,416 32,107 Retained deficit.......................................... (39,753) (10,302) Treasury stock, at cost................................... (15,005) (15,005) -------- -------- Total stockholders' (deficit) equity................... (22,272) 6,869 -------- -------- Total liabilities and stockholders' deficit............... $190,717 $209,799 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-4 46 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS)
COMMON STOCK TREASURY STOCK ------------------------------------- ----------------- RETAINED COMMON PAID-IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT ------ ------ ------- --------- ------ -------- 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) Issuance of Common Stock........... 110 1 309 -- -- -- Net loss........................... -- -- -- (29,451) -- -- ----- --- ------- -------- ----- -------- Balance February 3, 2001............. 7,059 $70 $32,416 $(39,753) 2,058 $(15,005) ===== === ======= ======== ===== ========
The accompanying notes are an integral part of these consolidate financial statements. F-5 47 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS)
2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $(29,451) $ (2,496) $ 25 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 15,142 13,576 10,252 Deferred income taxes..................................... 4,760 (1,420) 127 (Gain) loss on dispositions of properties, net............ 550 (577) 710 Net changes in assets and liabilities: Accounts and notes receivable............................. 3,982 (4,679) 1,506 Inventory................................................. 10,380 (10,511) (3,205) Accounts payable.......................................... (6,555) 15,231 4,388 Accrued interest.......................................... 148 (223) 146 Other assets and liabilities, net......................... 1,357 (2,086) (2,048) -------- -------- -------- Net cash provided by operating activities................. 313 6,815 11,901 -------- -------- -------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Purchase of short-term investments........................ (2,845) -- -- Proceeds from sale of short-term investments.............. -- 2,569 905 Purchase of property & equipment.......................... (17,398) (41,878) (52,398) Proceeds from sale of property and equipment.............. 5,350 22,254 30,760 -------- -------- -------- Net cash (used for) investing activities.................. (14,893) (17,055) (20,733) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on revolving loan, net......................... 10,030 4,096 10,200 Borrowings of long-term obligations....................... 5,607 14,882 -- Repayment of long-term obligations........................ (3,402) (4,511) (2,051) Issuance of Common Stock.................................. 310 108 244 -------- -------- -------- Net cash provided by financing activities................... 12,545 14,575 8,393 -------- -------- -------- Increase (decrease) in cash................................. (2,035) 4,335 (439) Cash at beginning of year................................... 7,702 3,367 3,806 -------- -------- -------- Cash at end of year......................................... $ 5,667 $ 7,702 $ 3,367 ======== ======== ======== SUPPLEMENTAL DISCLOSURES: Cash (paid) refunded during the year -- Interest............................................... $(14,035) $(11,806) $(10,661) Income taxes refunded, net............................. 139 119 381
The accompanying notes are an integral part of these consolidated financial statements. F-6 48 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30,1999 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 gasoline, 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 53 weeks included in the fiscal year ended February 3, 2001 and 52 weeks in the fiscal years ended January 29, 2000 and January 30,1999. 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 February 3, 2001, the Company's short-term investments consisted of U.S. Treasury Bills having original maturities of less than one year. As of January 29, 2000, the Company's short-term investments consisted of over-night investment securities. As of February 3, 2001 and January 29, 2000, 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. 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 Leasehold improvements...................................... 31 years.
Repair and maintenance costs are expensed as incurred. 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 February 3, 2001. 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 February 3, 2001 and January 29, 2000, the Company had established reserves for these risks of $1,604,000 and $1,843,000, 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 February 3, 2001 and January 29, 2000, the risk-free rates of return were 5.19% and 6.65%, respectively. F-7 49 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 $9,085,000, $9,678,000 and $10,255,000 for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, 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. The weighted-average number of shares used in the calculation of basic earnings (loss) per share is 4,945,207, 4,868,664 and 4,823,154 for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. Dilutive earnings per share has not been presented as the Company's basic and dilutive earnings per share are equal for fiscal years 2001, 2000 and 1999. 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" as amended by SFAS 138. 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 as either other comprehensive income or in current period income depending on the use of the derivative and whether it qualifies for hedge accounting. The Company adopted this Statement on February 4, 2001 and it did not have any effect on the Company's 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. 2. ACCOUNTS AND NOTES RECEIVABLE: A summary of accounts and notes receivable as of February 3, 2001 and January 29, 2000 is as follows:
2001 2000 ------- ------- (IN THOUSANDS) Franchise accounts receivable............................... $ 3,386 $ 3,338 Franchise notes receivable.................................. 1,140 1,729 Marketing allowances........................................ 5,358 8,374 Other receivables........................................... 15,492 15,679 ------- ------- 25,376 29,120 Less allowance for doubtful accounts and notes receivable... (2,301) (2,063) ------- ------- Net accounts and notes receivable........................... 23,075 27,057 Less noncurrent notes receivable (included in other assets)................................................... (9,613) (6,558) ------- ------- Current accounts and notes receivable....................... $13,462 $20,499 ======= =======
F-8 50 The carrying amount of current accounts and notes receivable approximates fair value because of the short maturity of those receivables. The fair value of the Company's noncurrent notes receivable is estimated by discounting the future cash flows using the rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of February 3, 2001 and January 29, 2000, management has determined the fair values of the noncurrent notes receivable approximate their carrying values. 3. PROPERTY AND EQUIPMENT: A summary of property and equipment as of February 3, 2001 and January 29, 2000 is as follows:
2001 2000 -------- -------- (IN THOUSANDS) Land and improvements....................................... $ 5,171 $ 5,543 Building and leasehold improvements......................... 47,556 44,581 Equipment................................................... 120,943 118,889 Assets under capital leases................................. 4,558 5,331 -------- -------- 178,228 174,344 Less accumulated depreciation and amortization.............. (66,780) (61,006) -------- -------- Property and equipment, net................................. $111,448 $113,388 ======== ========
4. INTANGIBLE ASSETS: A summary of intangibles as of February 3, 2001 and January 29, 2000 is as follows:
2001 2000 -------- ------- (IN THOUSANDS) Goodwill.................................................... $ 13,907 $13,907 Franchise and operating rights.............................. 10,104 10,104 -------- ------- 24,011 24,011 Less accumulated amortization............................... (10,280) (9,429) -------- ------- Intangible assets, net...................................... $ 13,731 $14,582 ======== =======
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 cash flows on an undiscounted basis. Management has determined that there has been no material impairment to goodwill or franchise and operating rights as of February 3, 2001. 5. ACCRUED EXPENSES: A summary of accrued expenses as of February 3, 2001 and January 29, 2000 is as follows:
2001 2000 ------- ------- (IN THOUSANDS) Accrued salaries and wages.................................. $ 3,804 $ 4,274 Accrued environmental assessment and remediation............ 4,434 2,390 Other accrued expenses...................................... 7,597 4,987 ------- ------- Total accrued expenses...................................... $15,835 $11,651 ======= =======
F-9 51 6. LONG-TERM OBLIGATIONS: The Company had the following long-term obligations as of February 3, 2001 and January 29, 2000:
JAN. 29 FEBRUARY 3, 2001 2000 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 $772................................ 10.25% 2005 -- 12,728 12,728 12,498 Senior revolving credit facility......... Various 2003 -- 24,326 24,326 14,296 Real estate mortgage notes payable....... 9.84%-10.95% 2007-2021 171 7,163 7,334 5,241 Small Business Administration debentures............................. 6.875%-8.33% 2002-2006 2,420 710 3,130 3,130 Equipment financing...................... 8.5%-11.81% 2003-2009 3,452 9,630 13,082 12,970 ------ -------- -------- -------- $6,043 $129,557 $135,600 $123,135 ====== ======== ======== ========
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. 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 1,852,249 and the exercise price of the warrants was adjusted to $5.05 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 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 $230,080, $160,980 and $153,904 is included in interest expense for the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. The Company is party to a $30,000,000 secured revolving credit facility (the "Credit Facility"), of which up to $15,000,000 may be available for the issuance of letters of credit. The outstanding balance is due and payable on September 15, 2002. 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 also provides for a commitment fee of 1/2% on any unused portion of the 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 F-10 52 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. The Credit Facility was further amended on May 7, 2001 amended to (1) waive any default or event of default under the Credit Facility arising from any failure to comply with financial covenants as of February 3, 2001 and (2) amend the financial covenants for the four quarters of fiscal year 2002. The ability of the Company to be in compliance with certain financial covenants in the future is dependent upon the Company realizing improved operating results from those reported for the fiscal year ended February 3, 2001. In connection with the Credit Facility, 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 Credit Facility and Notes. As of February 3, 2001, taking into account such limitations, the Company would not have been able to pay cash dividends. In fiscal year 2001, the Company entered into capital lease agreements of $3.7 million for equipment and $2.2 million in real estate mortgages that were used to support new store development. 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 that were used to support new store development. As of February 3, 2001 and January 29, 2000, respectively, management has determined that 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 February 3, 2001 and January 29, 2000 the fair value of the Series A and Series B Notes, approximated 47% and 80%, respectively, of their carrying amount. The fair value of the Notes was based on quoted market prices as of February 3, 2001 and January 29, 2000, respectively. The revolving Credit Facility is a variable rate loan, and thus, the fair value approximates the carrying amount as of February 3, 2001. As of February 3, 2001, maturities on long-term obligations, shown gross of original issue discount of $772 for the next five years and thereafter, are as follows:
FISCAL YEAR ----------- (IN THOUSANDS) 2002........................................................ $ 6,043 2003........................................................ 4,487 2004........................................................ 28,843 2005........................................................ 89,195 2006........................................................ 477 Thereafter.................................................. 7,327 -------- $136,372 ========
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. F-11 53 A summary of future minimum lease payments net of subleases as of February 3, 2001 is as follows:
NET OPERATING FISCAL YEAR LEASES ----------- -------------- (IN THOUSANDS) 2002........................................................ $ 15,567 2003........................................................ 13,158 2004........................................................ 10,565 2005........................................................ 9,499 2006........................................................ 8,215 Thereafter.................................................. 57,795 -------- $114,799 ========
Rental expense for all operating leases was as follows:
2001 2000 1999 ------- ------- ------- (IN THOUSANDS) Leases...................................................... $20,268 $16,691 $13,746 Less subleases.............................................. 1,293 1,592 1,999 ------- ------- ------- Net......................................................... $18,975 $15,099 $11,747 ======= ======= =======
8. FEDERAL AND STATE INCOME TAXES: The (provision) benefit from income taxes for the fiscal years ended February 3, 2001, January 29, 2000 and January 30,1999 was as follows:
2001 2000 1999 ------- ------ ----- (IN THOUSANDS) Current provision Federal................................................... $ -- $ (102) $ (23) State and Local........................................... (618) (249) -- ------- ------ ----- Total current provision........................... (618) (351) (23) ------- ------ ----- Deferred (provision) benefit Federal................................................... (4,760) 1,299 (103) State and Local........................................... -- 216 (24) ------- ------ ----- Total deferred (provision) benefit................ (4,760) 1,515 (127) ------- ------ ----- Total (provision) benefit......................... $(5,378) $1,164 $(150) ======= ====== =====
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) -------------------- 2001 2000 1999 ---- ---- ---- Statutory federal income tax rate........................... (34%) (34%) 34% Increase (decrease) from: State income tax net of federal tax effect................ 3 (1) 14 Nondeductible expenses and amortization of acquired assets................................................. -- 3 38 Change in valuation allowance............................. 53 -- -- --- --- -- Effective income tax rate................................. 22% (32%) 86%
F-12 54 The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred taxes for which it does not consider realization of such assets to be more likely than not. Significant deferred tax assets (liabilities) as of February 3, 2001 and January 29, 2000 were as follows:
2001 2000 -------- -------- (IN THOUSANDS) Capitalized leases.......................................... $ 350 $ 442 Depreciation and amortization............................... (16,833) (14,814) Vacation accrual............................................ 297 296 Reserve for asset valuations................................ 905 838 Insurance reserves not deductible for tax purposes.......... 273 740 Income deferred for financial statement purposes............ 3,557 3,828 Reserve for closed stores and renovations................... 297 221 Environmental reserves...................................... (805) (503) Tax credits and net operating loss carryforwards............ 26,760 13,921 Other....................................................... (49) -- Valuation allowance......................................... (14,752) (209) -------- -------- Net deferred tax asset...................................... $ 0 $ 4,760 ======== ========
At February 3, 2001, the Company's net deferred tax assets are fully offset by a valuation allowance. For financial reporting purposes in fiscal year 2001, the Company recorded a valuation allowance because of the uncertainty of realizing certain tax credits and loss carryforwards in the future. Realization of the net operating loss carryforwards and tax credits as of January 29, 2000 were dependent on the successful implementation of tax-planning strategies prior to the expiration of the operating loss carryforwards. Although realization was not assured, management believed it was more likely than not that the deferred tax asset would be realized at January 29, 2000. As of February 3, 2001, 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 2002 to 2006. The Company and its subsidiaries file a consolidated federal income tax return but generally file separate state income tax returns. As of February 3, 2001, the Company had a capital loss carryforward of $1,610,000 that will expire in fiscal year 2003. As of February 3, 2001, the Company had regular federal income tax net operating loss carryforwards of $57,007,000 which expire, if unused, during fiscal years 2011 to 2020 and net operating loss carryforwards for state income tax purposes of $68,897,000 which expire, if unused, during fiscal years 2002 to 2015. 9. 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, 963,005 shares remained available for issuance as of February 3, 2001. As of February 3, 2001, January 29, 2000 and January 30,1999, the Company held 2,058,000 shares of Common Stock as treasury stock. F-13 55 10. STOCK OPTION PLANS AND GRANTS 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. 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 2001, 2000 and 1999, the Company granted incentive stock options of 191,000, 246,000, and 271,844, respectively. As of February 3, 2001, the Company had available for grant under the Award Plan options to purchase 185,531 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 21,000 and 24,500 non-qualified stock options in fiscal years 2001 and 2000, respectively. As of February 3, 2001 the Company had available for grant under the Outside Directors Plan options to purchase 24,000 shares of Common Stock, after considering lapses. During fiscal year 2001 the Company awarded, pursuant to the Award Plan, stock grants consisting of an aggregate of 43,000 shares of the Company's Common Stock. Compensation expense in the amount of $236,500 was recorded with respect to the shares awarded in fiscal year 2001. No shares were awarded in fiscal year 2000 or 1999. 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 2001 or 2000. As of February 3, 2001 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 non-qualified stock options in fiscal year 1999, 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 years 2001 and 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 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999 ----- ----- ----- Risk-free interest rates.................................... 6.38% 6.94% 5.73% Expected dividend yield..................................... --% --% --% Expected volatility......................................... 43.06% 38.09% 40.12% 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:
2001 2000 1999 -------- ------- ------ Net income (loss): As reported............................................... $(29,451) $(2,496) $ 25 Pro forma................................................. $(30,934) $(2,545) $ (243) Net income (loss) per share: As reported............................................... $ (5.96) $ (0.51) $ 0.01 Pro forma................................................. $ (6.26) $ (0.52) $(0.05)
F-14 56 The pro forma effect on net loss for fiscal years 2001, 2000 and 1999 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 February 3, 2001, January 29, 2000 and January 30, 1999, is as follows:
WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE -------------- ---------------- (IN THOUSANDS) 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 Granted..................................................... 229 2.78 Exercised................................................... (49) 2.86 Forfeited................................................... (109) 3.71 ----- Outstanding as of February 3, 2001.......................... 1,189 3.55 =====
The weighted-average fair values of stock options granted during fiscal years 2001, 2000 and 1999 were $1.76, $1.93 and $4.20, respectively The following table summarizes information about the Company's stock options outstanding as of February 3, 2001:
WEIGHTED WEIGHTED-AVERAGE AVERAGE REMAINING GRANT OPTIONS OPTIONS EXERCISE CONTRACTUAL PRICE RANGE OUTSTANDING EXERCISABLE PRICE LIFE (YEARS) ----------- ----------- ----------- -------- ---------------- $2.75 to $3.28............................... 452,613 221,863 $2.85 7.1 $3.44 to $4.60............................... 658,137 394,262 3.85 6.7 $5.13 to $5.88............................... 78,000 71,750 5.68 5.4 --------- ------- Total.............................. 1,188,750 687,875 ========= =======
11. 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 2001, 2000 and 1999. 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 2001 and 2000 and 25% during fiscal year 1999, up to 6% of the employees' annual compensation. Matching contributions from the Company for fiscal years 2001, 2000 and 1999 were $311,000, $320,000 and $252,000, 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 February 3, 2001 and January 29, 2000, cash surrender F-15 57 values of $431,203 and $284,847, respectively, were recorded as assets on the accompanying Consolidated Balance Sheets. As of February 3, 2001 and January 29, 2000 plan obligations of $232,882 and $182,590, respectively, were recorded as liabilities on the accompanying Consolidated Balance Sheets. 12. COMMITMENTS AND CONTINGENCIES: As of February 3, 2001, the Company was contingently liable for outstanding letters of credit amounting to $5,227,650. The Company has certain environmental contingencies related to the ongoing costs to comply with federal, state and local environmental laws and regulations, including costs for assessment, compliance, remediation and certain capital expenditures related to its gasoline operations. In the ordinary course of business, the Company is involved in environmental assessment and remediation activities with respect to releases of regulated substances from existing and previously operated retail gasoline facilities. The Company accrues its estimate of all costs to be incurred for assessment and remediation for known releases. 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 February 3, 2001 and January 29, 2000, the Company had recorded an accrual of $8,707,000 and $6,045,000, respectively, for such costs. The Company is entitled to reimbursement of a portion of the above costs from various state environmental trust funds based upon compliance with the terms and conditions of such funds. As of February 3, 2001 and January 29, 2000, the Company had recorded a reimbursement receivable of $10,575,000 and $7,286,000, respectively. For the fiscal years ended February 3, 2001, January 29, 2000 and January 30, 1999, the Company recorded a provision for environmental expenses of $656,000, $474,000, and $98,000, respectively. At 14 locations, the Company either sold the location or removed 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 February 3, 2001. 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 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 requires 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. The agreement requires the purchase of a minimum quantity of coffee. Management expects to meet the required level of purchases. The Company is a defendant in an action brought by a former supplier of certain dairy products to convenience stores formerly owned by the Company in Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores"). The action is entitled New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. and Dairy Mart, Inc., Civil Action No. 397CU00894 (U.S. District Court for the State of Connecticut). This action was commenced on April 17, 1997, by New England Dairies, Inc. ("NED") alleging that the Company committed an anticipatory breach of a supply agreement entered into between NED and the Company on April 25, 1995 ("the Agreement"), when the Company entered into a contract with a third party to sell all company-owned and franchised convenience stores in New England, without requiring the third party purchaser F-16 58 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 of this case was completed on December 7, 2000, and it is not known when the judge will issue his ruling. The Company has recognized no provision for any possible loss in the accompanying financial statements. The Company was the plaintiff in an action commenced on April 20, 2000 entitled Dairy Mart Convenience Stores, Inc. v. RLI Insurance Group and RLI Insurance Company and RLI Corporation, Civil Action Number 5:00 CV 1043 (U.S. District Court for the Northern District of Ohio, Eastern Division), brought against RLI Insurance Group to recover $3.0 million under the Company's directors and officers excess liability insurance policy for legal fees incurred in the course of defending certain directors and officers of the Company in derivative litigation of Dairy Mart Convenience Stores, Inc.. The Company previously recorded the $3.0 million as a receivable. On November 28, 2000, the Company reached an agreement in principle with RLI Insurance Group to settle the litigation for $1.8 million. Accordingly, a reduction in accounts receivable and other costs related to this settlement was recognized in the amount of $1.3 million during fiscal year 2001 and was included in general and administrative expenses. 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. 13. 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. F-17 59 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 3, 2001 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ----- ------------ ------------ Revenues (including excise taxes of $42,054).......................... $ 220 $723,229 $222 $ -- $723,671 Cost of goods sold and expenses: Cost of goods sold................ -- 576,042 -- -- 576,042 Operating and administrative expenses....................... 352 157,146 21 -- 157,519 Interest expense.................. 13,408 533 242 -- 14,183 -------- -------- ---- ------- -------- 13,760 733,721 263 -- 747,744 -------- -------- ---- ------- -------- Income (loss) before income taxes and equity in income of consolidated subsidiaries...... (13,540) (10,492) (41) -- (24,073) Benefit (provision) from income taxes............................. 6,228 (11,625) 19 -- (5,378) -------- -------- ---- ------- -------- Income (loss) before equity in income of consolidated subsidiaries................... (7,312) (22,117) (22) -- (29,451) Equity in income of consolidated subsidiaries...................... (22,139) (22) -- 22,161 -- -------- -------- ---- ------- -------- Net income (loss)................. $(29,451) $(22,139) $(22) $22,161 $(29,451) ======== ======== ==== ======= ========
F-18 60 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET AS OF FEBRUARY 3, 2001 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------ ------------ ------------ ASSETS Current assets: Cash............................. $ 3,721 $ 1,519 $ 427 $ -- $ 5,667 Short-term investments........... -- -- 3,000 -- 3,000 Accounts and notes receivable, net........................... 60 12,546 856 -- 13,462 Inventory........................ -- 24,424 -- -- 24,424 Prepaid expenses and other current assets................ 66 3,546 -- -- 3,612 Deferred income taxes............ -- -- -- -- -------- -------- ------ --------- -------- Total current assets........ 3,847 42,035 4,283 -- 50,165 -------- -------- ------ --------- -------- Property and equipment, net........ -- 111,448 -- -- 111,448 Intangible assets, net............. -- 13,731 -- -- 13,731 Other assets, net.................. 1,809 12,921 643 -- 15,373 Investment in and advances to subsidiaries..................... 118,966 1,699 244 (120,909) -- -------- -------- ------ --------- -------- Total assets................ $124,622 $181,834 $5,170 $(120,909) $190,717 ======== ======== ====== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term obligations................... $ 5,230 $ 813 $ -- $ -- $ 6,043 Accounts payable................. 25,544 18,817 -- -- 44,361 Accrued expenses................. 599 15,213 23 -- 15,835 Accrued interest................. 3,564 -- 74 -- 3,638 -------- -------- ------ --------- -------- Total current liabilities... 34,937 34,843 97 -- 69,877 -------- -------- ------ --------- -------- Long-term obligations, less current portion above.................... 111,957 14,470 3,130 -- 129,557 Other liabilities.................. -- 13,555 -- -- 13,555 Stockholders' equity............... (22,272) 118,966 1,943 (120,909) (22,272) -------- -------- ------ --------- -------- Total liabilities and stockholders' equity..... $124,622 $181,834 $5,170 $(120,909) $190,717 ======== ======== ====== ========= ========
F-19 61 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 3, 2001 (IN THOUSANDS)
PARENT GUARANTOR COMPANY SUBSIDIARIES FINOP ELIMINATIONS CONSOLIDATED -------- ------------ ------- ------------ ------------ Net cash provided by (used in) operating activities................ $(13,310) $13,291 $ 332 $-- $ 313 Cash flows from investing activities: Purchase of and change in short-term investments...................... -- 155 (3,000) -- (2,845) Purchase of property and equipment........................ -- (17,398) -- -- (17,398) Proceeds from sale of property, equipment and assets held for sale............................. -- 5,350 -- -- 5,350 Investment in and advances to subsidiaries..................... 8,515 (8,572) 57 -- -- Increase in long-term notes receivable....................... -- -- -- -- -- Proceeds from collection of long-term notes receivable....... -- -- -- -- -- Decrease in intangibles and other assets........................... -- -- -- -- -- -------- ------- ------- --- -------- Net cash used in investing activities.......................... 8,515 (20,465) (2,943) -- (14,893) -------- ------- ------- --- -------- Borrowings of long term obligations...................... -- 5,607 -- -- 5,607 Increase in revolving loan, net..... 10,030 -- -- -- 10,030 Repayment of long-term obligations...................... (2,030) (1,372) -- -- (3,402) Issuance of Common Stock............ 310 -- -- 310 -------- ------- ------- --- -------- Net cash used in financing activities.......................... 8,310 4,235 -- -- 12,545 -------- ------- ------- --- -------- Decrease in cash...................... 3,515 (2,939) (2,611) -- (2,035) Cash at beginning of year............. 206 4,458 3,038 -- 7,702 -------- ------- ------- --- -------- Cash at end of year................... $ 3,721 $ 1,519 $ 427 $-- $ 5,667 ======== ======= ======= === ======== Supplemental disclosures: Cash (paid) refunded during the year -- Interest............................ $(13,264) $ (529) $ (242) -- $(14,035) Income taxes refunded............... 139 -- -- -- 139
F-20 62 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 (including excise taxes of $34,865)..................... $ 444 $ 587,766 $341 $ -- $588,551 Cost of goods sold and expenses: Cost of goods sold.............. -- 443,559 -- -- 443,559 Operating and administrative expenses..................... 297 136,750 22 -- 137,069 Interest expense................ 9,848 1,492 243 -- 11,583 -------- ------------ ---- ------- -------- 10,145 581,801 265 -- 592,211 -------- ------------ ---- ------- -------- 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) ======== ============ ==== ======= ========
F-21 63 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 -------- -------- ------ --------- -------- Property and equipment, net........ -- 113,338 -- -- 113,338 Intangible assets, net............. -- 14,582 -- -- 14,582 Other assets, net.................. 1,820 11,735 1,067 -- 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 ======== ======== ====== ========= ========
F-22 64 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................ $ (3,746) $10,141 $ 420 $ -- $ 6,815 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 -- -- -------- ------- ------ ------- -------- Net cash (used in) provided by investing activities................ 716 (20,389) 2,618 -- (17,055) -------- ------- ------ ------- -------- 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
F-23 65 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 $481,021 $422 $ -- $ 481,598 Cost of goods sold and expenses: Cost of goods sold.................... -- 344,079 -- -- 344,079 Operating and administrative expenses........................... 276 126,240 22 -- 126,538 Interest expense...................... 9,749 752 305 -- 10,806 -------- -------- ----- ------- --------- 10,025 471,071 327 -- 481,423 -------- -------- ----- ------- --------- 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 ======== ======== ===== ======= =========
F-24 66 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 -------- -------- ------ --------- -------- Property and equipment, net............ -- 105,156 -- -- 105,156 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 ======== ======== ====== ========= ========
F-25 67 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................ $ 6,773 $ 5,055 $ 73 $-- $ 11,901 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 -- -- -- -------- -------- ------- --- -------- Net cash (used in) provided by investing activities................ (16,047) (5,729) 1,043 -- (20,733) -------- -------- ------- --- -------- 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
F-26 68 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES 14. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): Quarterly financial information is as follows:
FISCAL QUARTER ENDED ----------------------- APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3, FISCAL YEAR ENDED FEBRUARY 3, 2001 2000 2000 2000 2001 ---------------------------------- --------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues...................................... $172,934 $195,810 $180,723 $174,204 Gross profit.................................. 35,523 41,867 36,447 33,792 Net income (loss)............................. (2,881) 94 (4,148) (22,516) Basic earnings (loss) per share............... (.60) (.02) (.83) (4.51) Diluted earnings (loss) per share............. (.60) (.02) (.83) (4.51)
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...................................... $126,262 $155,550 $156,424 $150,285 Gross profit.................................. 33,339 38,471 38,286 34,896 Net income (loss)............................. 95 1,158 511 (4,260) Basic earnings (loss) per share(1)............ 0.02 0.24 0.11 (0.88) Diluted earnings (loss) per share(1).......... 0.02 0.23 0.10 (0.88)
- --------------- (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 2001 and 2000. 15. OPERATING SEGMENT The Company operates in one segment based on the criteria established by SFAS 131. 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, ATMs and money orders. Food service sales are comprised of fountain, coffee, fresh made sandwiches, deli products and branded quick serve 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. 16. SUBSEQUENT EVENTS On March 15, 2001, the Company executed a merger agreement (the "Merger Agreement") pursuant to which DM Acquisition Corp. agreed to acquire the Company in a cash merger for $4.50 per share. DM Acquisition Corp. is controlled by Robert B. Stein, Jr., the Chairman, President and Chief Executive Officer of the Company. The Merger Agreement provides that DM Acquisition Corp. will be merged with and into the Company and that each share of the Company's Common Stock outstanding immediately prior to the merger, other than those owned by Mr. Stein and his affiliates, will be converted into the right to receive $4.50 per share in cash. The Company's board of directors, based on the unanimous recommendation of a special committee of independent directors, has approved the transaction and recommended that the Company's stockholders approve the transaction. In connection with the merger, the Company will solicit its senior subordinated noteholders to F-27 69 exchange their subordinated notes of the Company and receive, for each $10,000 in principal amount of the old notes, $3,870 in principal amount of new notes of the Company, $6,191.30 in cash and a warrant to purchase Common Stock of the Company, which will not be exercisable until after the completion of the merger. The Company has entered into an exchange and voting agreement pursuant to which holders of approximately 70% of the senior subordinated notes have agreed to participate in the exchange. The Merger Agreement is subject to customary conditions, including completion of necessary financing arrangements and approval of holders of a majority (excluding those shares held by persons who will have an interest in the buyout entity) of the shares of the Company's Common Stock voting at a special meeting. If the merger is completed, the Company will no longer be a public company. There can be no assurance, however, that the Company or DM Acquisition Corp. will be able to complete the merger. F-28 70 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 May 3, 2001. 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. /s/ ARTHUR ANDERSEN LLP ------------------------------------------- ARTHUR ANDERSEN LLP Cleveland, Ohio May 7, 2001 F-29 71 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 BALANCE AT BEGINNING OF COSTS AND OTHER AND ACCOUNTS END OF DESCRIPTION PERIOD EXPENSES RECOVERIES WRITTEN-OFF PERIOD ----------- ------------ ---------- ---------- ----------- ---------- Reserve for Doubtful Accounts: 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 Fiscal Year Ended February 3, 2001... 2,063,339 832,284 -- (594,289) 2,301,334
F-30 EX-2.1 2 l88054aex2-1.txt EX-2.1 1 Exhibit 2.1 EXECUTION COPY AGREEMENT AND PLAN OF MERGER dated as of March 15, 2001 between DM ACQUISITION CORP. and DAIRY MART CONVENIENCE STORES, INC. 2 TABLE OF CONTENTS ----------------- This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience only.
Page No. ---- ARTICLE I THE MERGER......................................................................................1 1.01 THE MERGER......................................................................................1 1.02 CLOSING.........................................................................................1 1.03 EFFECTIVE TIME..................................................................................2 1.04 RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BYLAWS OF THE SURVIVING CORPORATION....................................................................2 1.05 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.............................................2 1.06 EFFECTS OF THE MERGER...........................................................................2 1.07 FURTHER ASSURANCES..............................................................................2 1.08 AUTHORIZATION AND VOTING........................................................................3 1.09 ALTERNATIVE MERGER STRUCTURE....................................................................3 ARTICLE II CONVERSION OF SHARES............................................................................3 2.01 CONVERSION OF CAPITAL STOCK.....................................................................3 2.02 EXCHANGE OF CERTIFICATES........................................................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................8 3.01 ORGANIZATION AND QUALIFICATION..................................................................8 3.02 CAPITAL STOCK...................................................................................8 3.03 AUTHORITY RELATIVE TO THIS AGREEMENT...........................................................10 3.04 NON-CONTRAVENTION; APPROVALS AND CONSENTS......................................................10 3.05 SEC REPORTS AND FINANCIAL STATEMENTS...........................................................11 3.06 ABSENCE OF CERTAIN CHANGES OR EVENTS...........................................................12 3.07 ABSENCE OF UNDISCLOSED LIABILITIES.............................................................12 3.08 LEGAL PROCEEDINGS..............................................................................12 3.09 INFORMATION SUPPLIED...........................................................................13 3.10 COMPLIANCE WITH LAWS AND ORDERS................................................................13 3.11 COMPLIANCE WITH AGREEMENTS; CERTAIN AGREEMENTS.................................................14 3.12 TAXES..........................................................................................15 3.13 EMPLOYEE BENEFIT PLANS; ERISA..................................................................15 3.14 LABOR MATTERS..................................................................................16 3.15 ENVIRONMENTAL MATTERS..........................................................................17 3.16 INTELLECTUAL PROPERTY RIGHTS...................................................................18 3.17 VOTE REQUIRED..................................................................................18 3.18 OPINION OF FINANCIAL ADVISOR...................................................................18 3.19 COMPANY RIGHTS AGREEMENT.......................................................................18 3.20 SECTIONS 11.2 AND 11.3 OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND SECTION 203 OF THE DGCL NOT APPLICABLE.......................................19 3.21 NO PAYMENTS TO EMPLOYEES, OFFICERS OR DIRECTORS................................................19
3 3.22 COMPANY FINANCING..............................................................................19 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER........................................................20 4.01 ORGANIZATION AND QUALIFICATION.................................................................20 4.02 AUTHORITY RELATIVE TO THIS AGREEMENT...........................................................20 4.03 NON-CONTRAVENTION; APPROVALS AND CONSENTS......................................................20 4.04 LEGAL PROCEEDINGS..............................................................................21 4.05 INFORMATION SUPPLIED...........................................................................21 4.06 OWNERSHIP OF COMPANY COMMON STOCK..............................................................22 4.07 BUYER FINANCING................................................................................22 4.08 FRAUDULENT TRANSFER............................................................................23 4.09 OWNERSHIP OF BUYER STOCK.......................................................................23 ARTICLE V COVENANTS OF THE COMPANY.......................................................................23 5.01 COVENANTS OF THE COMPANY.......................................................................23 5.02 NO SOLICITATIONS...............................................................................25 5.03 COMPANY RIGHTS AGREEMENT.......................................................................27 5.04 STOCKHOLDER CLAIMS.............................................................................27 5.05 BUSINESS PLAN..................................................................................27 ARTICLE VI ADDITIONAL AGREEMENTS..........................................................................27 6.01 ACCESS TO INFORMATION; CONFIDENTIALITY.........................................................27 6.02 PREPARATION OF PROXY STATEMENT, SCHEDULE 13E-3 AND OFFERING MATERIALS..........................28 6.03 APPROVAL OF STOCKHOLDERS.......................................................................28 6.04 REGULATORY AND OTHER APPROVALS.................................................................29 6.05 Severance Policy and Other Agreements..........................................................29 6.06 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.........................................29 6.07 EXPENSES.......................................................................................31 6.08 BROKERS OR FINDERS.............................................................................31 6.09 TAKEOVER STATUTES..............................................................................32 6.10 CONVEYANCE TAXES...............................................................................32 6.11 NEW YORK STATE STOCK TRANSFER TAX..............................................................32 6.12 CONDUCT OF BUSINESS OF BUYER...................................................................32 6.13 FINANCING......................................................................................32 6.14 NOTICE AND CURE................................................................................34 6.15 FULFILLMENT OF CONDITIONS......................................................................34 6.16 OTHER ARRANGEMENTS.............................................................................34 ARTICLE VII CONDITIONS.....................................................................................35 7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.....................................35 7.02 CONDITIONS TO OBLIGATION OF BUYER TO EFFECT THE MERGER.........................................35 7.03 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER...................................36 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER..............................................................37 8.01 TERMINATION....................................................................................37 8.02 EFFECT OF TERMINATION..........................................................................39 8.03 AMENDMENT......................................................................................39
ii 4 8.04 WAIVER.........................................................................................39 ARTICLE IX GENERAL PROVISIONS.............................................................................40 9.01 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS..........................40 9.02 NOTICES........................................................................................40 9.03 ENTIRE AGREEMENT; INCORPORATION OF EXHIBITS....................................................41 9.04 PUBLIC ANNOUNCEMENTS...........................................................................41 9.05 NO THIRD PARTY BENEFICIARY.....................................................................41 9.06 NO ASSIGNMENT; BINDING EFFECT..................................................................42 9.07 HEADINGS.......................................................................................42 9.08 INVALID PROVISIONS.............................................................................42 9.09 GOVERNING LAW..................................................................................42 9.10 ENFORCEMENT OF AGREEMENT.......................................................................42 9.11 CERTAIN DEFINITIONS............................................................................42 9.12 COUNTERPARTS...................................................................................44
iii 5 GLOSSARY OF DEFINED TERMS The following terms, when used in this Agreement, have the meanings ascribed to them in the corresponding Sections of this Agreement listed below: "affiliate" -- Section 9.11(a) "Agreement" -- Preamble "Alternative Merger" -- Section 1.09 "Alternative Proposal" -- Section 5.02 "Antitrust Division" -- Section 6.04 "beneficially" -- Section 9.11(b) "business day" -- Section 9.11(c) "Buyer" -- Preamble "Buyer Commitment Letters" -- Section 4.07(a) "Buyer Common Stock" -- Section 2.01(a) "Buyer Disclosure Letter" -- Section 4.01 "Buyer Financing" -- Section 4.07(a) "Buyer Investors -- Section 4.07(a) "Buyer Preferred Stock" -- Section 2.01(a) "Buyer Subscription Agreements" -- Section 4.07(a) "CERCLA" -- Section 3.15(b) "Certificate of Merger" -- Section 1.03 "Certificates" -- Section 2.02(b) "Closing" -- Section 1.02 "Closing Date" -- Section 1.02 "Code" -- Section 2.02(e) "Commitment Letters" -- Section 4.07(a) "Company" -- Preamble "Company Commitment Letters" -- Section 3.22 "Company Common Stock" -- Section 2.01(b) "Company Disclosure Letter" -- Section 3.01 "Company Financial Statements" -- Section 3.05 "Company Financing" -- Section 3.22 "Company Option Plans" -- Section 2.01(e) "Company Permits" -- Section 3.10 "Company Plans" -- Section 3.13(a) "Company Preferred Stock" -- Section 3.02(a) "Company Rights" -- Section 3.02(a) "Company Rights Agreement" -- Section 3.02(a) "Company SEC Reports" -- Section 3.05 "Company Series A Preferred Stock" -- Section 3.02(a) "Company Stockholders' Approval" -- Section 6.03 "Company Stockholders' Meeting" -- Section 6.03 "Company Warrants" -- Section 2.01(f) iv 6 "Confidentiality Agreement" -- Section 6.01 "Constituent Corporations" -- Section 1.01 "Contracts" -- Section 3.04(a) "control," "controlling," "controlled by" and "under common control with" -- Section 9.11(a) "Debt Financing" -- Section 4.07(a) "Definitive Preferred Stock Agreements" -- Section 4.02 "DGCL" -- Section 1.01 "Dissenting Share" -- Section 2.01(d)(i) "Effective Time" -- Section 1.03 "Election" -- Section 1.09 "Environmental Law" -- Section 3.15(d)(i) "Environmental Permits" -- Section 3.15(a) "Equity Financing" -- Section 4.07(a) "Equity Investors" -- Section 4.07(a) "ERISA" -- Section 3.13(a) "Exchange Act" -- Section 3.04(b) "Exchange Agent" -- Section 2.02(a) "Exchange Offer" -- Section 3.22 "Expenses" -- Section 8.02(b) "Financing" -- Section 4.07(a) "Financing Parties" -- Section 6.13(c) "FTC" -- Section 6.04 "Governmental or Regulatory Authority" -- Section 3.04(a) "group" -- Section 9.11(f) "Hazardous Material" -- Section 3.15(d)(ii) "Indemnified Liabilities" -- Section 6.06(a) "Indemnified Parties" -- Section 6.06(a) "Indemnifying Party" -- Section 6.06(a) "Intellectual Property" -- Section 3.16 "Junior Subordinated Debt Commitment Letter" -- Section 4.07(a) "Junior Subordinated Debt Financing" -- Section 4.07(a) "Junior Subordinated Lenders" -- Section 4.07(a) "knowledge" -- Section 9.11(d) "laws" -- Section 3.04(a) "Lien" -- Section 3.02(b) "Marketing Commitment Letters" -- Section 3.22 "Marketing Partner Financing" -- Section 3.22 "Marketing Partners" -- Section 3.22 "material", "material adverse effect" and "materially adverse" -- Section 9.11(e) "Merger" -- Preamble "Merger Price" -- Section 2.01(c) "Merger Sub" -- Section 1.09 "Morgan Keegan" -- Section 3.18 "New Notes" -- Section 3.22 v 7 "Offering Materials" -- Section 6.02(b) "Option Amount" -- Section 2.01(e) "Options" -- Section 3.02(a) "orders" -- Section 3.04(a) "Partnership Investors" -- Section 4.07(a) "Partnership Subscription Agreements" -- Section 4.07(a) "Payment Agent" -- Section 2.02(a) "Payment Fund" -- Section 2.02(a) "person" -- Section 9.11(f) "Preferred Stock Commitment Letters" -- Section 4.07(a) "Preferred Stock Investors" -- Section 4.07(a) "Proxy Statement" -- Section 3.09 "Representatives" -- Section 9.11(g) "Required Approvals" -- Section 7.01(c) "Required Payments" -- Section 7.02(c) "Schedule 13E-3" -- Section 3.04(b) "SEC" -- Section 3.04(b) "Secretary of State" -- Section 1.03 "Securities Act" -- Section 3.05 "Senior Debt Commitment Letter" -- Section 4.07(a) "Senior Debt Financing" -- Section 4.07(a) "Senior Lender" -- Section 4.07(a) "Significant Subsidiaries" -- Section 9.11(h) "Special Committee" -- Section 1.08 "Stock Grant Amount" -- Section 2.01(e) "Stockholders" -- Preamble "Subordinated Debt Commitment Letter" -- Section 3.22 "Subordinated Debt Financing" -- Section 3.22 "Subordinated Lenders" -- Section 3.22 "Subsidiary" -- Section 9.11(i) "Superior Transaction" -- Section 5.02 "Surviving Corporation" -- Section 1.01 "Surviving Corporation Common Stock" -- Section 2.01(a) "Surviving Corporation Preferred Stock" -- Section 2.01(a) "taxes" -- Section 3.12(b) "Voting Agreement" -- Preamble "Warrant Amount" -- Section 2.01(f) vi 8 This AGREEMENT AND PLAN OF MERGER dated as of March 15, 2001 (this "AGREEMENT") is made and entered into between DM Acquisition Corp., a Delaware corporation ("BUYER") and Dairy Mart Convenience Stores, Inc., a Delaware corporation (the "COMPANY"). WHEREAS, as of the date hereof, all of the outstanding capital stock of Buyer is owned by Robert B. Stein, Jr.; WHEREAS, contemporaneously with the execution and delivery of this Agreement, Robert B. Stein, Jr. and DM Associates Limited Partnership (the "STOCKHOLDERS") entered into a Voting Agreement (the "VOTING AGREEMENT"); WHEREAS, the Boards of Directors of Buyer and the Company have each determined that it is advisable and in the best interests of their respective stockholders to consummate, and have approved, the business combination transaction provided for herein in which Buyer would merge with and into the Company (the "MERGER"); and WHEREAS, Buyer and the Company desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I THE MERGER 1.01 THE MERGER. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in SECTION 1.03), Buyer shall be merged with and into the Company in accordance with the General Corporation Law of the State of Delaware (the "DGCL"). At the Effective Time, the separate existence of Buyer shall cease and the Company shall continue as the surviving corporation in the Merger (the "SURVIVING CORPORATION"). Buyer and the Company are sometimes referred to herein as the "CONSTITUENT CORPORATIONS". As a result of the Merger, the outstanding shares of capital stock of the Constituent Corporations shall be converted or cancelled in the manner provided in ARTICLE II. 1.02 CLOSING. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to SECTION 8.01, and subject to the satisfaction or waiver (where applicable) of the conditions set forth in ARTICLE VII, the closing of the Merger (the "CLOSING") will take place at the offices of Baker & Hostetler LLP, 3200 National City Center, Cleveland, Ohio, at 10:00 a.m., local time, on the first business day following satisfaction of the condition set forth in SECTION 7.01(a), unless another date, time or place is agreed to in writing by the parties hereto (the 9 "CLOSING Date"). At the Closing there shall be delivered to Buyer and the Company the certificates and other documents and instruments required to be delivered under ARTICLE VII. 1.03 EFFECTIVE TIME. At the Closing, a certificate of merger (the "CERTIFICATE OF MERGER") shall be duly prepared and executed by the Surviving Corporation and thereafter delivered to the Secretary of State of the State of Delaware (the "SECRETARY OF STATE") for filing, as provided in Section 251 of the DGCL, as soon as practicable on the Closing Date. The Merger shall become effective at the time of the filing of the Certificate of Merger with the Secretary of State (the date and time being referred to herein as the "EFFECTIVE TIME"). 1.04 RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BYLAWS OF THE SURVIVING CORPORATION. At the Effective Time, (i) the Certificate of Incorporation of Buyer as in effect immediately prior to the Effective Time shall be amended so as to include the indemnification provisions in the Company's Restated Certificate of Incorporation as of the date hereof and to change the name of the corporation set forth in Buyer's Certificate of Incorporation to "Dairy Mart Convenience Stores, Inc.", and, as so amended, such Certificate of Incorporation shall be the Restated Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Restated Certificate of Incorporation, and (ii) the Bylaws of Buyer as in effect immediately prior to the Effective Time shall be amended so as to include the indemnification provisions in the Company's Bylaws as of the date hereof, and, as so amended, shall be the Amended and Restated Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Restated Certificate of Incorporation of the Surviving Corporation and such Amended and Restated Bylaws. 1.05 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors of Buyer and the officers of the Company immediately prior to the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Restated Certificate of Incorporation and Amended and Restated Bylaws. At or prior to the Closing, the Company will deliver to Buyer evidence that is reasonably satisfactory to Buyer that all of the directors of the Company (other than Robert B. Stein, Jr.) have resigned. All such resignations will be effective at the Effective Time. 1.06 EFFECTS OF THE MERGER. Subject to the foregoing, the effects of the Merger shall be as provided in the applicable provisions of the DGCL. 1.07 FURTHER ASSURANCES. Each party hereto will, either prior to or after the Effective Time, execute such further documents, instruments, deeds, bills of sale, assignments and assurances and take such further actions as may reasonably be requested by one or more of the others to consummate the Merger, to vest the Surviving Corporation with full title to all assets, properties, privileges, rights, approvals, 10 immunities and franchises of either of the Constituent Corporations or to effect the other purposes of this Agreement. 1.08 AUTHORIZATION AND VOTING. The Company hereby represents that its Board of Directors, at a meeting duly called and held and acting on the unanimous recommendation of a special committee of the Board of Directors of the Company comprising all of the members of the Board of Directors other than Messrs. Adams, Landry and Stein (the "SPECIAL COMMITTEE"), has (i) unanimously determined, with Messrs. Adams and Stein abstaining, that this Agreement and the transactions contemplated hereby, including the Merger, are fair to and in the best interest of the Company's stockholders, (ii) unanimously, with Messrs. Adams and Stein abstaining, approved this Agreement and the transactions contemplated hereby, including the Merger and the Voting Agreement, and (iii) unanimously, with Messrs. Adams and Stein abstaining, resolved to recommend approval and adoption of this Agreement and the Merger to its stockholders. The Company has been advised that all of its directors intend to vote all of their shares of Company Common Stock in favor of approval and adoption of this Agreement and the Merger. 1.09 ALTERNATIVE MERGER STRUCTURE. While it is currently contemplated that the Merger shall be effected through the merger of Buyer with and into the Company, Buyer shall have the option, in its sole discretion and without requiring the further consent of the Company or the Company's Board of Directors or stockholders, to cause the Merger to be effected through an alternative transaction structure pursuant to which a wholly owned Subsidiary of Buyer ("MERGER SUB") will merge with and into the Company, with the Company being the Surviving Company (the "ALTERNATIVE MERGER"); PROVIDED, HOWEVER, that the Alternative Merger shall require the consent of the Company and the Company's Board of Directors if the Alternative Merger would delay the Closing or require any additional consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority. In case of an Alternative Merger, the effects set forth in SECTION 2.01(a) shall be deemed amended to provided that each share of common stock of Merger Sub would be converted into a share of Surviving Corporation Common Stock. Buyer shall make such election by delivering to the Company a notice (the "ELECTION") electing to effect the Alternative Merger. The Election Notice shall be available for the inspection of any stockholder of the Company upon request during normal business hours. For purposes of this Agreement, all references to the term "Merger" shall be deemed to include the Alternative Merger, except for such references contained in this SECTION 1.09. As part of the Proxy Statement and in the manner required by applicable law, the Company shall describe the provisions of this SECTION 1.09. ARTICLE II CONVERSION OF SHARES 2.01 CONVERSION OF CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof: (a) CAPITAL STOCK OF BUYER. Each issued and outstanding share of the common stock, par value $0.01 per share, of Buyer ("BUYER COMMON STOCK") shall be 11 converted into and become one fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation ("SURVIVING CORPORATION COMMON STOCK"). Each certificate representing outstanding shares of Buyer Common Stock shall at the Effective Time represent an equal number of shares of Surviving Corporation Common Stock. Each issued and outstanding share of preferred stock, par value $0.01 per share, of Buyer ("BUYER PREFERRED STOCK") shall be converted into and become one fully paid and nonassessable share of preferred stock, par value $0.01 per share, of the Surviving Corporation ("SURVIVING CORPORATION PREFERRED STOCK"). Each certificate representing outstanding shares of Buyer Preferred Stock shall at the Effective Time represent an equal number of shares of Surviving Corporation Preferred Stock. (b) CANCELLATION OF TREASURY STOCK AND STOCK OWNED BY BUYER. All shares of common stock, par value $0.01 per share, of the Company ("COMPANY COMMON STOCK") that are owned by the Company as treasury stock and any shares of Company Common Stock owned by Buyer shall be cancelled and retired and shall cease to exist and no stock of Buyer or other consideration shall be delivered in exchange therefor. (c) EXCHANGE RATIO FOR COMPANY COMMON STOCK. (i) Each issued and outstanding share of Company Common Stock (other than shares to be cancelled in accordance with SECTION 2.01(b) and other than Dissenting Shares (as defined in SECTION 2.01(d)) shall be converted into the right to receive $4.50 in cash, without interest (the "MERGER PRICE"). (ii) All shares of Company Common Stock converted in accordance with paragraph (i) of this SECTION 2.01(c) shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the Merger Price per share, upon the surrender of such certificate in accordance with SECTION 2.02, without interest. (d) DISSENTING SHARES. (i) Notwithstanding any provision of this Agreement to the contrary, each outstanding share of Company Common Stock the holder of which has not voted in favor of the Merger, has perfected such holder's right to an appraisal of such holder's shares in accordance with the applicable provisions of the DGCL and has not effectively withdrawn or lost such right to appraisal (a "DISSENTING SHARE"), shall not be converted into or represent a right to receive the Merger Price pursuant to SECTION 2.01(c), but the holder thereof shall be entitled only to such rights as are granted by the applicable provisions of the DGCL; PROVIDED, HOWEVER, that any Dissenting Share held by a person at the Effective Time who shall, after the Effective Time, withdraw the demand for appraisal or lose the right of appraisal, in either case pursuant to the DGCL, shall be deemed to be converted into, as of the Effective Time, the right to receive, without interest, the Merger Price pursuant to SECTION 2.01(c). (ii) The Company shall give Buyer (x) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other instruments 12 served pursuant to the applicable provisions of the DGCL relating to the appraisal process received by the Company and (y) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the DGCL. The Company will not voluntarily make any payment with respect to any demands for appraisal and will not, except with the prior written consent of Buyer, settle or offer to settle any such demands. (e) STOCK OPTION PLANS. The Board of Directors of the Company will take all action that is necessary, including providing any notice, so that at the Effective Time, each option to acquire a share of Company Common Stock (other than those held by Robert B. Stein, Jr. or Buyer pursuant to clause (iii) below) outstanding under the Company's 1985 Stock Option Plan, the 1990 Stock Option Plan, 1995 Stock Option and Incentive Award Plan, 1995 Stock Option Plan for Outside Directors, 1998 Stock Option Plan for Outside Directors and options to purchase shares of Company Common Stock that were issued outside of any plan (collectively, the "COMPANY OPTION PLANS") shall be cancelled and each holder of an option will be entitled to receive an amount in cash, without interest, in respect of each share of Company Common Stock subject to such option (the "OPTION AMOUNT") equal to the excess of the Merger Price over the purchase price therefor pursuant to the Company Option Plans and the related stock option agreements executed pursuant thereto. All the options to purchase shares of Company Common Stock that are held by Robert B. Stein, Jr. will, at his option, (i) be amended and restated immediately prior to the Effective Time and become options to purchase shares of the Surviving Corporation Common Stock with such adjustments to the number of shares purchasable upon the exercise of those options and the exercise price as the Buyer and Robert B. Stein, Jr. may agree, (ii) be exercised immediately prior to the Effective Time, but only to the extent that any shares of Company Common Stock received are contributed to Buyer under the Buyer Subscription Agreements, or (iii) contributed or assigned to Buyer in exchange for shares of Buyer Common Stock. If Robert B. Stein, Jr. requests, the Board of Directors of the Company will take such action that is necessary to permit him to exercise his options by delivering to Robert B. Stein, Jr. the number of shares of Company Common Stock equal to (y) the amount of the excess of (A) the Merger Price multiplied by the aggregate number of shares purchasable upon the exercise of all his options over (B) the aggregate purchase price of those shares multiplied by the number of shares purchasable at the purchase price divided by (z) the Merger Price. Upon the delivery of those shares of Company Common Stock to Robert B. Stein, Jr., his options shall be deemed exercised under clause (ii) above and canceled. Each grant of a right to receive a share of Company Common Stock outstanding under the Company Option Plans (other than those held by Robert B. Stein, Jr.) shall be cancelled and each holder of such a right shall receive an amount in cash, without interest, in respect of each share of Company Common Stock subject to such right (the "STOCK GRANT AMOUNT") equal to the Merger Price. Robert B. Stein, Jr. will receive shares of Company Common Stock in respect of any such right immediately prior to the Effective Time for contribution thereof to Buyer as contemplated pursuant to the Buyer Subscription Agreements (as defined in SECTION 4.07). On the Closing Date, the Buyer, and to the extent funds are not available from the Buyer, the Company, shall deposit in a bank account not within the Company's control an amount of cash equal to the sum of the Option Amount for each option, plus the Stock Grant Amount for each right, then 13 outstanding under the Company Option Plans (subject to any applicable withholding tax), together with instructions that such cash be promptly distributed following the Effective Time to the holders of such options or Company Common Stock in accordance with this Section. (f) WARRANTS. Each warrant to subscribe for and purchase shares of Company Common Stock pursuant to the Note and Warrant Purchase Agreement dated as of December 1, 1995 and to the Stock Purchase Warrant to Subscribe for and Purchase Shares of Common Stock of the Company, dated as of December 1, 1995 (collectively, the "COMPANY WARRANTS") shall be changed into an amount in cash in respect of each share of Company Common Stock subject to such warrant (the "WARRANT AMOUNT") equal to the Merger Price less the exercise price therefor pursuant to the Company Warrants and the related warrant agreements. If on the Closing Date, the Warrant Amount is a positive number, then the Company shall deposit in a bank account not within the Company's control an amount of cash equal to the Warrant Amount for each warrant then outstanding under the Company Warrants (subject to any applicable withholding tax), together with instructions that such cash be promptly distributed following the Effective Time to the holders of such warrants in accordance with this Section. 2.02 EXCHANGE OF CERTIFICATES. (a) PAYMENT AGENT. Prior to the mailing of the Proxy Statement (as defined in SECTION 3.09), Buyer shall appoint an agent (the "PAYMENT AGENT") for the purpose of exchanging certificates representing Company Common Stock for the Merger Price. Immediately prior to the Effective Time, the Buyer, and to the extent funds are not available from the Buyer, the Company shall deposit with the Payment Agent, a cash amount equal to the aggregate Merger Price to which holders of shares of Company Common Stock shall be entitled upon consummation of the Merger, to be held for the benefit of and distributed to such holders in accordance with this Section. The Payment Agent shall agree to hold such funds (such funds, together with earnings thereon, being referred to herein as the "PAYMENT FUND") for delivery as contemplated by this Section and upon such additional terms as may be agreed upon by the Payment Agent, the Company and Buyer. If for any reason (including losses) the Payment Fund is inadequate to pay the cash amounts to which holders of shares of Company Common Stock shall be entitled, the Surviving Corporation shall in any event remain liable for the payment thereof. For purposes of determining the aggregate Merger Price to be made available, the Company and Buyer shall assume that there are no Dissenting Shares. The Payment Fund shall not be used for any purpose except as expressly provided in this Agreement. (b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Payment Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "CERTIFICATES") whose shares are converted pursuant to SECTION 2.01(c) into the right to receive the Merger Price (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Payment Agent and shall be in such form and have such other 14 provisions as the Surviving Corporation may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Price. Upon surrender of a Certificate for cancellation to the Payment Agent, together with such letter of transmittal duly executed and completed in accordance with its terms, the holder of such Certificate shall be entitled to receive in exchange therefor a check representing the Merger Price per share of Company Common Stock represented thereby, which such holder has the right to receive pursuant to the provisions of this ARTICLE II, and the Certificate so surrendered shall forthwith be cancelled. In no event shall the holder of any Certificate be entitled to receive interest on any funds to be received in the Merger, including any interest accrued in respect of the Payment Fund. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, the Merger Price may be issued to a transferee if the Certificate representing such Company Common Stock is presented to the Payment Agent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this SECTION 2.02(b), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Price per share of Company Common Stock represented thereby as contemplated by this ARTICLE II. (c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All cash paid upon the surrender for exchange of Certificates in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock represented thereby. From and after the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Section. (d) TERMINATION OF PAYMENT FUND. Any portion of the Payment Fund which remains undistributed to the stockholders of the Company for six (6) months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any stockholders of the Company who have not theretofore complied with this ARTICLE II shall thereafter look only to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) as general creditors for payment of their claim for the Merger Price per share. Neither Buyer nor the Surviving Corporation shall be liable to any holder of shares of Company Common Stock for cash representing the Merger Price delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (e) WITHHOLDING RIGHTS. Buyer shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Buyer is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 15 1986, as amended (the "CODE"), or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Buyer, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Buyer. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Buyer as follows: 3.01 ORGANIZATION AND QUALIFICATION. Each of the Company and its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties, except, in the case of the Company's Subsidiaries, for such failures to be so incorporated, existing and in good standing or to have such power and authority which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect (as defined in SECTION 9.11) on the Company and its Subsidiaries taken as a whole. Each of the Company and its Subsidiaries is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for such failures to be so qualified, licensed or admitted and in good standing which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. SECTION 3.01 of the letter dated the date hereof and delivered to Buyer by the Company concurrently with the execution and delivery of this Agreement (the "COMPANY DISCLOSURE LETTER") sets forth (i) the name and jurisdiction of incorporation of each Significant Subsidiary (as defined in Section 9.11) of the Company, (ii) its authorized capital stock, (iii) the number of issued and outstanding shares of capital stock and (iv) the record owners of such shares. Except for interests in the Subsidiaries of the Company and as disclosed in SECTION 3.01 of the Company Disclosure Letter, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity (other than (i) non-controlling investments in the ordinary course of business and corporate partnering, development, cooperative marketing and similar undertakings and arrangements entered into in the ordinary course of business and (ii) other investments of less than $100,000). The Company has previously delivered to Buyer correct and complete copies of the certificate or articles of incorporation and bylaws (or other comparable charter documents) of the Company and its Significant Subsidiaries. 3.02 CAPITAL STOCK. (a) The authorized capital stock of the Company consists solely of 30,000,000 shares of Company Common Stock and 1,000,000 shares of preferred stock, par value $0.1 per share ("COMPANY PREFERRED STOCK"). As of March 5, 2001, 5,002,026 shares of Company Common Stock were issued and outstanding, 16 2,057,178 shares were held in the treasury of the Company and were reserved for issuance under the Company's Option Plans and the Company Warrants. Since such date, except as set forth in SECTION 3.02 of the Company Disclosure Letter, there has been no change in the number of issued and outstanding shares of Company Common Stock or shares of Company Common Stock held in treasury or reserved for issuance. As of the date hereof, no shares of Company Preferred Stock are issued and outstanding and 89,400 shares are designated Series A Junior Preferred Stock ("COMPANY SERIES A PREFERRED STOCK") and are reserved for issuance in accordance with the Amended and Restated Rights Agreement dated as of February 8, 2000, as amended, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "COMPANY RIGHTS AGREEMENT"), pursuant to which the Company has issued rights (the "COMPANY RIGHTS") to purchase shares of Company Series A Preferred Stock. All of the issued and outstanding shares of Company Common Stock are, and all shares reserved for issuance will be, upon issuance in accordance with the terms specified in the instruments or agreements pursuant to which they are issuable, duly authorized, validly issued, fully paid and nonassessable. Except pursuant to this Agreement and the Company Rights Agreement and except as set forth in SECTION 3.02 of the Company Disclosure Letter, there are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security, instrument or agreement (together, "OPTIONS"), obligating the Company or any of its Subsidiaries to issue or sell any shares of capital stock of the Company or to grant, extend or enter into any Option with respect thereto. (b) Except as disclosed in SECTION 3.02 of the Company Disclosure Letter, all of the outstanding shares of capital stock of each Significant Subsidiary of the Company are duly authorized, validly issued, fully paid and nonassessable and are owned, beneficially and of record, by the Company or a Subsidiary wholly owned, directly or indirectly, by the Company, free and clear of any liens, claims, mortgages, encumbrances, pledges, security interests, equities and charges of any kind (each a "LIEN"). Except as disclosed in SECTION 3.02 of the Company Disclosure Letter, there are no (i) outstanding Options obligating the Company or any of its Significant Subsidiaries to issue or sell any shares of capital stock of any Significant Subsidiary of the Company or to grant, extend or enter into any such Option or (ii) voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than the Company or a Subsidiary wholly owned, directly or indirectly, by the Company with respect to the voting of or the right to participate in dividends or other earnings on any capital stock of any Significant Subsidiary of the Company. (c) Except as disclosed in SECTION 3.02 of the Company Disclosure Letter, there are no outstanding contractual obligations of the Company or any Significant Subsidiary of the Company to repurchase, redeem or otherwise acquire any shares of Company Common Stock or any capital stock of any Significant Subsidiary of the Company or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Subsidiary of the Company or any other person. 17 3.03 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has full corporate power and authority to enter into this Agreement and, subject to obtaining the Company Stockholders' Approval (as defined in SECTION 6.03), to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the Company, the Board of Directors of the Company has recommended adoption of this Agreement by the stockholders of the Company and directed that this Agreement be submitted to the stockholders of the Company for their consideration, and no other corporate proceedings on the part of the Company or its stockholders are necessary to authorize the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, other than obtaining the Company Stockholders' Approval. This Agreement has been duly and validly executed and delivered by the Company and subject to the obtaining of the Company Stockholders' Approval, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.04 NON-CONTRAVENTION; APPROVALS AND CONSENTS. (a) Except as set forth in Section 3.04(a) of the Company Disclosure Letter, the execution and delivery of this Agreement by the Company do not, and the performance by the Company of its obligations hereunder and the consummation of the transactions contemplated hereby will not, conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any Lien upon any of the assets or properties of the Company or any of its Significant Subsidiaries under, any of the terms, conditions or provisions of (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of the Company or any of its Significant Subsidiaries, or (ii) subject to the obtaining of the Company Stockholders' Approval and the taking of the actions described in paragraph (b) of this Section, (x) any statute, law, rule, regulation or ordinance (together, "LAWS"), or any judgment, decree, order, writ, permit or license (together, "ORDERS"), of any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision (a "GOVERNMENTAL OR REGULATORY AUTHORITY") applicable to the Company or any of its Subsidiaries or any of their respective assets or properties, or (y) any note, bond, mortgage, security agreement, indenture, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind (together, "CONTRACTS") to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations and creations and impositions of Liens which, individually or in the aggregate, could not 18 be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole or on the ability of the Company to consummate the transactions contemplated by this Agreement. (b) Except (i) for the filing of the Proxy Statement (as defined in SECTION 3.09) with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "EXCHANGE ACT"), (ii) the filing of a Schedule 13E-3 with the SEC pursuant to the Exchange Act (the "SCHEDULE 13E-3"), (iii) for the filing of the Certificate of Merger and other appropriate merger documents required by the DGCL with the Secretary of State, (iv) for obtaining Company Stockholders' Approval, (v) for obtaining the Company Debt Financing and (vi) as disclosed in SECTION 3.04 of the Company Disclosure Letter, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party is necessary or required under any of the terms, conditions or provisions of any law or order of any Governmental or Regulatory Authority or any Contract to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound for the execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder or the consummation of the transactions contemplated hereby, other than such consents, approvals, actions, filings and notices which the failure to make or obtain, as the case may be, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole or on the ability of the Company to consummate the transactions contemplated by this Agreement. 3.05 SEC REPORTS AND FINANCIAL STATEMENTS. Each form, report, schedule, registration statement, definitive proxy statement and other document (together with all amendments thereof and supplements thereto) filed by the Company or any of its Subsidiaries with the SEC since December 31, 1997 (as such documents have since the time of their filing been amended or supplemented, the "COMPANY SEC REPORTS"), are all the documents (other than preliminary material) that the Company and its Subsidiaries were required to file with the SEC since such date. As of their respective dates, the Company SEC Reports (i) complied as to form in all material respects with the requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements (including, in each case, the notes, if any, thereto) included in the Company SEC Reports (the "COMPANY FINANCIAL STATEMENTS") complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited interim financial statements, to 19 normal, recurring year-end audit adjustments (which are not expected to be, individually or in the aggregate, materially adverse to the Company and its Subsidiaries taken as a whole)) the consolidated financial position of the Company and its consolidated subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. Except as set forth in SECTION 3.05 of the Company Disclosure Letter, each Significant Subsidiary of the Company is treated as a consolidated subsidiary of the Company in the Company Financial Statements for all periods covered thereby. 3.06 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Company SEC Reports filed prior to the date of this Agreement, (a) since October 28, 2000 there has not been any change, event or development having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on the Company and its Subsidiaries taken as a whole, other than events, changes or effects that (i) are caused by general economic conditions in any region in which the Company and its Subsidiaries conduct business or conditions affecting the types of businesses operated by the Company and its Subsidiaries, which conditions do not affect the Company and its Subsidiaries in a disproportionate manner, or (ii) are related to or result from the execution and delivery of this Agreement or from any action or inaction on the part of Buyer or any of its affiliates, and (b) except as disclosed in SECTION 3.06 of the Company Disclosure Letter, between such date and the date hereof (i) the Company and its Subsidiaries have conducted their respective businesses only in the ordinary course consistent with past practice and (ii) neither the Company nor any of its Subsidiaries has taken any action which, if taken after the date hereof, would constitute a breach of any provision of clause (ii) of SECTION 5.01(b). 3.07 ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters reflected or reserved against in the balance sheet for the period ended October 28, 2000 included in the Company Financial Statements or as disclosed in the Company SEC Reports or in SECTION 3.07 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries had at such date, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due) of any nature that would be required by generally accepted accounting principles to be reflected on a consolidated balance sheet of the Company or the notes to the Financial Statements and its consolidated subsidiaries (including the notes thereto), except liabilities or obligations (i) which were incurred in the ordinary course of business consistent with past practice or (ii) which have not been, and could not be reasonably expected to be, individually or in the aggregate, materially adverse to the Company and its Subsidiaries taken as a whole. 3.08 LEGAL PROCEEDINGS. Except as disclosed in the Company SEC Reports filed prior to the date of this Agreement or in SECTION 3.08 of the Company Disclosure Letter, (i) there are no actions, suits, arbitrations or proceedings pending or, to the knowledge of the Company, threatened against or relating to, nor to the knowledge of the Company are there any Governmental or Regulatory Authority investigations or audits pending or threatened against or relating to, the Company or any of its Subsidiaries or 20 any of their respective assets and properties which, individually or in the aggregate, could be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole or on the ability of the Company to consummate the transactions contemplated by this Agreement, and (ii) neither the Company nor any of its Subsidiaries is subject to any order of any Governmental or Regulatory Authority which, individually or in the aggregate, is having or could be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole or on the ability of the Company to consummate the transactions contemplated by this Agreement. 3.09 INFORMATION SUPPLIED. (a) The proxy statement relating to the Company Stockholders' Meeting (as defined in SECTION 6.03), as amended or supplemented from time to time (as so amended and supplemented, the "PROXY STATEMENT"), the Schedule 13E-3 and any other documents to be filed by the Company with the SEC or any other Governmental or Regulatory Authority in connection with the Merger and the other transactions contemplated hereby will not, on the date of its filing or at the time of any distribution thereof or, in the case of the Proxy Statement, on the date it is mailed to stockholders of the Company and on the date of the Company Stockholders' Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Company with respect to information supplied in writing by or on behalf of Buyer expressly for inclusion therein and information incorporated by reference therein from documents filed by Buyer or any of its Subsidiaries with the SEC. The Proxy Statement, the Schedule 13E-3 and any such other documents filed by the Company with the SEC under the Exchange Act will comply as to form in all material respects with the requirements of the Exchange Act. (b) Neither the information supplied or to be supplied in writing by or on behalf of the Company for inclusion, nor the information incorporated by reference from documents filed by the Company or any of its Subsidiaries with the SEC, in the Proxy Statement, the Schedule 13E-3 or any other documents to be filed by Buyer or the Company with the SEC or any other Governmental or Regulatory Authority in connection with the Merger and the other transactions contemplated hereby will on the date of its filing contain or its distribution, or in the case of the Proxy Statement, on the date it is mailed to stockholders of the Company and on the date of the Company's Stockholder Meeting, any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 3.10 COMPLIANCE WITH LAWS AND ORDERS. The Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental and Regulatory Authorities necessary for the lawful conduct of their respective businesses (the "COMPANY PERMITS"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. The Company and 21 its Subsidiaries are in compliance with the terms of the Company Permits, except failures so to comply which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. Except as disclosed in the Company SEC Reports filed prior to the date of this Agreement, the Company and its Subsidiaries are not in violation of or default under any law or order of any Governmental or Regulatory Authority, except for such violations or defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. 3.11 COMPLIANCE WITH AGREEMENTS; CERTAIN AGREEMENTS. (a) Except as disclosed in the Company SEC Reports filed prior to the date of this Agreement, neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any other party thereto is in breach or violation of, or in default in the performance or observance of any term or provision of, and no event has occurred which, with notice or lapse of time or both, could be reasonably expected to result in a default under, (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of the Company or any of its Significant Subsidiaries or (ii) any Contract to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound, except in the case of clause (ii) for breaches, violations and defaults which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. (b) Except as disclosed in SECTION 3.11 of the Company Disclosure Letter or in the Company SEC Reports filed prior to the date of this Agreement or as provided for in this Agreement, as of the date hereof, neither the Company nor any of its Subsidiaries is a party to any oral or written (i) consulting agreement not terminable on thirty (30) days' or less notice involving the payment of more than $50,000 per annum or $200,000 per annum in the aggregate for all such agreements; (ii) contracts with any person containing any provision or covenant prohibiting or limiting the ability of the Company or any Subsidiary of the Company to engage in any business activity, change its operations or compete with any person or prohibiting or limiting the ability of any person to compete with the Company or any Subsidiary of the Company; (iii) partnership, joint venture, shareholders' or other similar Contracts with any person; (iv) contracts relating to indebtedness of the Company or any Subsidiary of the Company in excess of $200,000; (v) union or collective bargaining agreement which covers any employees; (vi) agreement with any executive officer or other key employee of the Company or any of its Subsidiaries the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or any of its Subsidiaries of the nature contemplated by this Agreement; (vii) agreement with respect to any executive officer or other key employee of the Company or any of its Subsidiaries providing any term of employment or compensation guarantee; or (viii) agreement or plan, including any stock option, stock appreciation right, restricted stock or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions 22 contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. 3.12 TAXES. (a) Except as disclosed in SECTION 3.12 of the Company Disclosure Letter, (i) each of the Company and its Subsidiaries has filed all material tax returns and reports required to be filed by it, or requests for extensions to file such returns or reports have been timely filed or granted and have not expired, and all tax returns and reports are complete and accurate in all respects, except to the extent that such failures to file, have extensions granted that remain in effect or be complete and accurate in all respects, as applicable, individually or in the aggregate, would not have a material adverse effect on the Company and its Subsidiaries taken as a whole, (ii) the Company and each of its Subsidiaries has paid (or the Company has paid on its behalf) all taxes shown as due on such tax returns and reports. The most recent financial statements contained in the Company SEC Reports reflect an adequate reserve in accordance with generally accepted accounting principles for all taxes payable by the Company and its Subsidiaries for all taxable periods and portions thereof accrued through the date of such financial statements, and no deficiencies for any taxes have been proposed, asserted or assessed against the Company or any of its Subsidiaries that are not adequately reserved for in accordance with generally accepted accounting principles, except for inadequately reserved taxes and inadequately reserved deficiencies that would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries taken as a whole and (iii) no requests for waivers of the time to assess any taxes against the Company or any of its Subsidiaries have been granted or are pending, except for requests with respect to such taxes that have been adequately reserved for in accordance with generally accepted accounting principles in the most recent financial statements contained in the Company SEC Reports, or, to the extent not adequately reserved, the assessment of which would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries taken as a whole. (b) As used in this SECTION 3.12, "TAXES" shall include all federal, state, local and foreign income, franchise, property, sales, use, excise and other taxes (including all taxes imposed on gasoline products), including obligations for withholding taxes from payments due or made to any other person and any interest, penalties or additions to tax. 3.13 EMPLOYEE BENEFIT PLANS; ERISA. (a) Except as set forth in Company SEC Reports filed prior to the date of this Agreement or as disclosed in SECTION 3.13 of the Disclosure Letter, the Company has no material "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), severance, change-in-control or employment plan, program or agreement, stock option, bonus plan, or incentive plan or program ("COMPANY PLANS"). Copies or descriptions of the Company Plans have been or will be made available to Buyer. (b) Except as would not have a material adverse effect on the Company and its Subsidiaries taken as a whole, each Company Plan has been administered and is in compliance with the terms of such Plan and all applicable laws, rules and regulations. 23 (c) Except as disclosed on SECTION 3.13(c) of the Disclosure Letter: (i) each Company Plan intended to be qualified has received a favorable determination from the Internal Revenue Service and (ii) except as would not have a material adverse effect on the Company and its Subsidiaries taken as a whole, to the Company's knowledge, nothing has occurred since that would adversely affect such qualification. (d) Except as would not have a material adverse effect on the Company and its Subsidiaries taken as a whole: (i) no "reportable event" (as such term is used in section 4043 of ERISA) (other than those events for which the 30 day notice has been waived pursuant to the regulations) is pending with respect to any Company Plan, and (ii) no "accumulated funding deficiency" (as such term is used in section 412 or 4971 of the Code) has occurred during the last 5 years with respect to any Company Plan. (e) No litigation or administrative or other proceeding involving any Company Plans has occurred or, to the Company's knowledge, are threatened, where, in either case, an adverse determination would result in liability that would have a material adverse effect on the Company and its Subsidiaries taken as a whole. (f) Except as disclosed on SECTION 3.13(f) of the Disclosure Letter, the Company has not contributed to any "multiemployer plan" (within the meaning of section 3(37) of ERISA) and neither the Company nor any member of its Controlled Group (defined as any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o)) has incurred any withdrawal liability which remains unsatisfied in an amount which would result in liability that would have a material adverse effect on the Company and its Subsidiaries taken as a whole. (g) No Company Plan or plan sponsored by any member of the Company's Controlled Group has been terminated, where such termination has resulted in liability under Title IV of ERISA that would have a material adverse effect on the Company and its Subsidiaries taken as a whole. 3.14 LABOR MATTERS. Except as disclosed in the Company SEC Reports filed prior to the date of this Agreement or in SECTION 3.14 of the Company Disclosure Letter, there are no material controversies pending or, to the knowledge of the Company, threatened between the Company or any of its Subsidiaries and any representatives of its employees, except as would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries taken as a whole, and, to the knowledge of the Company, there are no material organizational efforts presently being made involving any of the now unorganized employees of the Company or any of its Subsidiaries. Since December 31, 1997, there has been no work stoppage, strike or other concerted action by employees of the Company or any of its Subsidiaries except as would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries taken as a whole. 24 3.15 ENVIRONMENTAL MATTERS. (a) Each of the Company and its Subsidiaries has obtained all licenses, permits, authorizations, approvals and consents from Governmental or Regulatory Authorities which are required under any applicable Environmental Law (as defined below) in respect of its business or operations ("ENVIRONMENTAL PERMITS"), except for such failures to have Environmental Permits which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. Each of such Environmental Permits is in full force and effect and each of the Company and its Subsidiaries is in compliance with the terms and conditions of all such Environmental Permits and with any applicable Environmental Law, except for such failures to be in compliance which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. (b) To the knowledge of the Company, no site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries is listed or proposed for listing on the National Priorities List promulgated pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the rules and regulations thereunder ("CERCLA"), or on any similar state or local list of sites requiring investigation or clean-up. Except for such releases of Hazardous Materials as would not reasonably be expected to result in a material adverse effect on the Company and its Subsidiaries taken as a whole, to the knowledge of the Company, there have been no releases of Hazardous Materials from facilities owned, operated or leased by the Company or its Subsidiaries. (c) To the knowledge of the Company there have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or which are in the possession of, the Company or any of its Subsidiaries in relation to any site or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries which have not been made available to Buyer prior to the execution of this Agreement. (d) As used herein: (i) "ENVIRONMENTAL LAW" means any law or order of any Governmental or Regulatory Authority relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes; and (ii) "HAZARDOUS MATERIAL" means (A) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and 25 transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (B) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of "hazardous substances," "hazardous wastes," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants" or words of similar import under any Environmental Law; and (C) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated by any Governmental or Regulatory Authority under any Environmental Law. 3.16 INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries have all right, title and interest in, or a valid and binding license to use, all Intellectual Property (as defined below) individually or in the aggregate material to the conduct of the businesses of the Company and its Subsidiaries taken as a whole. Neither the Company nor any Subsidiary of the Company is in default (or with the giving of notice or lapse of time or both, would be in default) under any license to use such Intellectual Property, to the knowledge of the Company such Intellectual Property is not being infringed by any third party, and, to the knowledge of the Company, neither the Company nor any Subsidiary of the Company is infringing any Intellectual Property of any third party, except for such defaults and infringements which, individually or in the aggregate, are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiaries taken as a whole. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, copyrights and copyright rights and other proprietary intellectual property rights and all pending applications for and registrations of any of the foregoing. 3.17 VOTE REQUIRED. Assuming the accuracy of the representation and warranty contained in SECTION 4.06 and except to the extent otherwise provided in the condition set forth in SECTION 7.03(d), the affirmative vote of the holders of record of at least a majority of the outstanding shares of Company Common Stock with respect to the adoption of this Agreement is the only vote of the holders of any class or series of the capital stock of the Company required to adopt this Agreement and approve the Merger and the other transactions contemplated hereby under the DGCL. 3.18 OPINION OF FINANCIAL ADVISOR. The Special Committee has received the opinion of Morgan Keegan & Company, Inc. ("MORGAN KEEGAN"), dated the date hereof, a signed copy of which will be delivered to Buyer promptly following the receipt thereof by the Special Committee, opining to the effect that, as of the date hereof, the consideration to be received in the Merger by the stockholders of the Company (other than Robert B. Stein, Jr. and his affiliates) is fair from a financial point of view to the stockholders of the Company. 3.19 COMPANY RIGHTS AGREEMENT. The Company and the Board of Directors of the Company have taken all action necessary to (i) render the Company Rights inapplicable to this Agreement and the Merger and (ii) ensure that (A) neither Buyer nor 26 any of its affiliates or associates is or will become an "Acquiring Person" (as defined in the Company Rights Agreement) by reason of this Agreement or the Merger and (B) a "Distribution Date" (as defined in the Company Rights Agreement) shall not occur by reason of this Agreement or the Merger. 3.20 SECTIONS 11.2 AND 11.3 OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND SECTION 203 OF THE DGCL NOT APPLICABLE. Assuming the accuracy of the representation and warranty contained in SECTION 4.06, the Company has taken all necessary actions so that neither the provisions of Sections 11.2 and 11.3 of the Restated Articles of Incorporation nor the provisions of Section 203 of the DGCL will, before the termination of this Agreement, apply to this Agreement, the Merger or the other transactions contemplated hereby. 3.21 NO PAYMENTS TO EMPLOYEES, OFFICERS OR DIRECTORS. SECTION 3.21 of the Company Disclosure Letter contains a true and complete list of any Company Plan which could provide cash and non-cash payments, rights to property or other contract rights that will become payable, accelerated or vested to or in any employee, officer or director of the Company or any Subsidiary of the Company as a result of the Merger. 3.22 COMPANY FINANCING. The Company has, on or prior to the date hereof, received commitment letters or other written assurances (the "MARKETING COMMITMENT LETTERS") with or from various third parties (the "MARKETING PARTNERS") pursuant to which the Marketing Partners have committed, subject to the conditions contained in the Marketing Commitment Letters, to provide an aggregate of up to $50 million to the Company as payment for marketing arrangements with the Company (the "MARKETING PARTNER FINANCING"). The Company has, on or prior to the date hereof, entered into an Exchange and Voting Agreement (the "SUBORDINATED DEBT COMMITMENT LETTER" and, together with the Marketing Commitment Letters, the "COMPANY COMMITMENT LETTERS"), with certain noteholders listed therein (the "SUBORDINATED LENDERS"), pursuant to which the Subordinated Lenders have committed, subject to the conditions contained in the Subordinated Debt Commitment Letter, to exchange their subordinated notes of the Company (the "OLD NOTES") and receive, for each $10,000 in principal amount of the Old Notes exchanged therefor, $3,870 in principal amount of a new note of the Company (the "NEW NOTES"), $6,191.30 in cash and a warrant, which after the Merger will be a warrant to purchase an agreed-upon percentage of the common stock of the Surviving Corporation (the "EXCHANGE OFFER"). The Exchange Offer will also contain terms substantially the same as those set forth in the Subordinated Debt Commitment Letter (as such terms may be amended in accordance with the terms thereof and SECTION 6.13 hereof prior to the Effective Time) (the "SUBORDINATED DEBT FINANCING" and, together with the Marketing Partner Financing, the "COMPANY FINANCING"). As of the date hereof, to the knowledge of the Company, none of the Company Commitment Letters has been withdrawn or modified in any way and the Company does not know of any facts or circumstances that may reasonably be expected to result in any of the conditions set forth in the letters relating to the Company Financing not being satisfied. 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Company as follows: 4.01 ORGANIZATION AND QUALIFICATION. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. Buyer was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities and has conducted its operations only as contemplated hereby. Buyer has previously delivered to the Company correct and complete copies of the certificate of incorporation and bylaws of Buyer. Buyer has no Subsidiaries. 4.02 AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has full corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Buyer and its consummation of the transactions contemplated hereby have been duly and validly approved by its Board of Directors and by its stockholders, and no other corporate proceedings on the part of Buyer or its stockholders are necessary to authorize the execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby. Notwithstanding the foregoing, further action may be necessary to authorize the issuance of shares of Buyer Preferred Stock pursuant to the Preferred Stock Commitment Letters (as defined in SECTION 4.07(a)) and to authorize the definitive agreements and documents relating to the Buyer Preferred Stock and the definitive agreements relating to the Buyer Debt Financing Agreements and the transactions contemplated thereby and any such necessary action shall be taken prior to the Closing. This Agreement has been duly and validly executed and delivered by Buyer and constitutes a legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.03 NON-CONTRAVENTION; APPROVALS AND CONSENTS. (a) The execution and delivery of this Agreement by Buyer does not, and the performance by Buyer of its obligations hereunder and the consummation of the transactions contemplated hereby will not, conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any Lien (other than Liens contemplated by the Commitment Letters) upon any of the assets or properties of Buyer under, any of the terms, conditions or provisions of (i) the certificates or articles of incorporation or bylaws (or other comparable charter documents) of Buyer, or (ii) subject to the taking of the actions described in paragraph (b) of this Section, (x) any laws or orders of any 28 Governmental or Regulatory Authority applicable to Buyer or any of their respective assets or properties, or (y) any Contracts to which Buyer is a party or by which Buyer or any of its assets or properties is bound, excluding from the foregoing clauses (x) and (y) conflicts, violations, breaches, defaults, terminations, modifications, accelerations and creations and impositions of Liens which, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. (b) Except (i) for the filing of the Schedule 13E-3 with the SEC, (ii) for the filing of the Certificate of Merger and other appropriate merger documents required by the DGCL with the Secretary of State and appropriate documents with the relevant authorities of other states in which the Constituent Corporations are qualified to do business, (iii) for obtaining stockholder approval of Buyer, which has been obtained on the date hereof, (iv) for obtaining the Buyer Financing and (v) as disclosed in SECTION 4.03 of the Buyer Disclosure Letter, no consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party is necessary or required under any of the terms, conditions or provisions of any law or order of any Governmental or Regulatory Authority or any Contract to which Buyer is a party or by which Buyer or any of its assets or properties is bound for the execution and delivery of this Agreement by Buyer, the performance by Buyer of its obligations hereunder or the consummation of the transactions contemplated hereby, other than such consents, approvals, actions, filings and notices which the failure to make or obtain, as the case may be, individually or in the aggregate, could not be reasonably expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 4.04 LEGAL PROCEEDINGS. There are no actions, suits, arbitrations or proceedings pending or, to the knowledge of Buyer, threatened against or relating to, nor to the knowledge of Buyer are there any Governmental or Regulatory Authority investigations or audits pending or threatened against or relating to, Buyer or any of its assets and properties which, individually or in the aggregate, could be reasonably expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement, and Buyer is not subject to any order of any Governmental or Regulatory Authority which, individually or in the aggregate, could be reasonably expected to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement. 4.05 INFORMATION SUPPLIED. Neither the information supplied or to be supplied in writing by or on behalf of Buyer for inclusion, nor the information incorporated by reference from documents filed by Buyer with the SEC, in the Proxy Statement, the Schedule 13E-3 or any other documents to be filed by Buyer or the Company with the SEC or any other Governmental or Regulatory Authority in connection with the Merger and the other transactions contemplated hereby will on the date of its filing or its distribution or, in the case of the Proxy Statement, on the date it is mailed to stockholders of the Company and on the date of the Company Stockholders' Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated 29 therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. All such documents filed by Buyer or the Company with the SEC under the Exchange Act will comply as to form in all material respects with the requirements of the Exchange Act. 4.06 OWNERSHIP OF COMPANY COMMON STOCK. Neither Buyer nor any of its affiliates beneficially owns any shares of Company Common Stock except as set forth in the Voting Agreement. 4.07 BUYER FINANCING. (a) Buyer has, on or prior to the date hereof, entered into subscription agreements (the "BUYER SUBSCRIPTION AGREEMENTS"), pursuant to which the subscribers thereunder (the "BUYER INVESTORS") have agreed, subject to the terms and conditions contained in the Buyer Subscription Agreements, to contribute all shares of Company Common Stock that they singularly or together have the sole power to dispose of, for shares of common stock of Buyer. Buyer has, on or prior to the date hereof, entered into one or more commitment letters (the "PREFERRED STOCK COMMITMENT LETTERS"), pursuant to which the proposed purchasers thereunder (the "PREFERRED STOCK INVESTORS" and, together with the Buyer Investors, the "EQUITY INVESTORS") have agreed, subject to the terms and conditions contained in the Preferred Stock Commitment Letters, to provide an aggregate of up to $24.25 million of funds to Buyer in cash for shares of preferred and common stock of Buyer, which shares of preferred stock will contain terms substantially the same as those set forth in the Preferred Stock Commitment Letters (as such terms may be amended in accordance with the terms of the Preferred Stock Commitment Letters and SECTION 6.13 hereof prior to the Effective Time). The financing to be provided to Buyer pursuant to the Buyer Subscription Agreements and the Preferred Stock Commitment Letters is sometimes referred to herein as the "EQUITY FINANCING." Buyer has, on or prior to the date hereof, entered into a commitment letter (the "SENIOR DEBT COMMITMENT LETTER" and, together with the Buyer Subscription Agreements, the Preferred Stock Commitment Letters, the "BUYER COMMITMENT LETTERS" and, together with the Company Commitment Letters, the "COMMITMENT LETTERS"), with Provident Bank (the "SENIOR LENDER") pursuant to which the Senior Lender has committed, subject to the conditions contained in the Senior Debt Commitment Letter, to provide an aggregate of up to $50 million to Buyer in a senior secured credit financing to Buyer, which senior secured credit financing will contain terms substantially the same as those set forth in the Senior Debt Commitment Letter (as such terms may be amended in accordance with the terms thereof and SECTION 6.13 hereof prior to the Effective Time) (the "SENIOR DEBT FINANCING" and together with the Company Financing, the "DEBT FINANCING" and, together with the Equity Financing, the "FINANCING"). The Senior Debt Financing and the Equity Financing are sometimes referred to herein as the "BUYER FINANCING." As of the date hereof, to the Buyer's knowledge none of the letters relating to the Financing referred to above has been withdrawn and Buyer does not know of any facts or circumstances that may reasonably be expected to result in any of the conditions set forth in the letters relating to the Financing not being satisfied. (b) Buyer has previously provided the Company with true and complete copies of (i) each Buyer Commitment Letter entered into on or prior to the date hereof, 30 and (ii) the form of each other agreement, if any, to which Buyer, on the one hand, and any party to a Buyer Commitment Letter, an affiliate of party to a Buyer Commitment Letter or any other person, on the other hand, to be entered into on the date hereof and relating to any equity interest of Buyer. 4.08 FRAUDULENT TRANSFER. Buyer believes that the Financing will not create any liability to the directors and stockholders of the Company under any federal or state fraudulent conveyance or transfer law. Buyer further believes that, upon the consummation of the transactions contemplated hereby, including, without limitation, the Financing, (i) the Surviving Corporation (A) will not be insolvent, (B) will not be left with insufficient capital with which to engage in its business and (C) will not have incurred debts beyond its ability to pay such debts as they mature, and (ii) the capital of the Company will not be impaired. 4.09 OWNERSHIP OF BUYER STOCK. (a) As of the date of execution of this Agreement, the proposed equity commitment of each proposed shareholder of Buyer as of the Effective Time is as set forth in Schedule 4.09(a). (b) Except as set forth in SECTION 4.09(b) of the Buyer Disclosure Letter, as of the date hereof, there are no arrangements, understandings or agreements between any of Buyer or any of their affiliates on the one hand, and any directors, officers or employees of the Company or any Subsidiary or any stockholder of the Company on the other hand, relating to the transactions contemplated hereby. ARTICLE V COVENANTS OF THE COMPANY 5.01 COVENANTS OF THE COMPANY. At all times from and after the date hereof until the Effective Time, the Company covenants and agrees as to itself and its Subsidiaries that (except as expressly contemplated or permitted by this Agreement or as set forth in SECTION 5.01 of the Company Disclosure Letter, or to the extent that Buyer shall otherwise previously consent in writing): (a) ORDINARY COURSE. The Company and its Subsidiaries shall conduct their respective businesses only in, and neither the Company nor any such Subsidiary shall take any action except in, the ordinary course consistent with past practice. (b) Without limiting the generality of paragraph (a) of this Section, (i) the Company and its Subsidiaries shall use all reasonable efforts to preserve intact in all material respects their present business organizations and reputation, to keep available the services of their key officers and employees, to maintain their assets and properties in good working order and condition, ordinary wear and tear excepted, to maintain insurance on their tangible assets and businesses in such amounts and against such risks and losses as are currently in effect, to preserve their relationships with customers and suppliers and others having significant business dealings with them and to comply in all material respects with all laws and orders of all Governmental or Regulatory Authorities 31 applicable to them, and (ii) the Company shall not, nor shall it permit any of its Subsidiaries to, except as otherwise expressly provided for in this Agreement: (A) amend or propose to amend its certificate or articles of incorporation or bylaws (or other comparable corporate charter documents); (B) (w) declare, set aside or pay any dividends on or make other distributions in respect of any of its capital stock except for the declaration and payment of dividends by a wholly owned Subsidiary solely to its parent corporation, (x) split, combine, reclassify or take similar action with respect to any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (y) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such liquidation or a dissolution, merger, consolidation, restructuring, recapitalization or other reorganization or (z) directly or indirectly redeem, repurchase or otherwise acquire any shares of its capital stock or any Option with respect thereto; (C) issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or any Option with respect thereto (other than (w) the issuance of Company Common Stock pursuant to the Employee Stock Purchase Plan, (x) the issuance of Company Common Stock or stock appreciation or similar rights, as the case may be, pursuant to the Company Options Plans, in each case outstanding on the date of this Agreement and in accordance with their present terms, (y) the issuance by a wholly owned Subsidiary of its capital stock to its parent corporation, and (z) the issuance of Company Rights and reservation of Company Series A Preferred Stock pursuant to the Company Rights Agreement in accordance with the terms thereof or modify or amend any right of any holder of outstanding shares of capital stock or Options with respect thereto; (D) acquire (by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner) any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets other than inventory and other assets to be sold or used in the ordinary course of business consistent with past practice or which are material, individually or in the aggregate, to such party and its Subsidiaries taken as a whole; (E) other than dispositions in the ordinary course of its business consistent with past practice or disposition of assets which are not, individually or in the aggregate, material to the Company and its Subsidiaries taken as a whole, sell, lease, grant any security interest in or otherwise dispose of or encumber any of its assets or properties; 32 (F) except to the extent required by applicable law or generally accepted accounting principles, (x) permit any material change in (A) any investment, accounting, financial reporting, allowance or tax practice or policy or (B) any method of calculating any bad debt, contingency or other reserve for accounting, financial reporting or tax purposes or (y) make any material tax election or settle or compromise any material income tax liability with any Governmental or Regulatory Authority; (G) (x) (A) incur (which shall not be deemed to include entering into credit agreements, lines of credit or similar arrangements until borrowings are made under such arrangements) any indebtedness for borrowed money or guarantee any such indebtedness or (B) amend any terms of its existing indebtedness other than in the ordinary course of its business consistent with past practice or (y) voluntarily purchase, exchange, cancel, prepay or otherwise provide for a complete or partial discharge in advance of a scheduled repayment date with respect to, or waive any right under, any indebtedness for borrowed money other than in the ordinary course of its business consistent with past practice; (H) enter into, adopt, amend in any material respect (except as may be required by applicable law) or terminate any Company Employee Benefit Plan, or other agreement, arrangement, plan or policy between the Company or one of its Subsidiaries and one or more of its directors, officers or employees, or, except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company and its Subsidiaries taken as a whole, increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan or arrangement in effect as of the date hereof; (I) make any capital expenditures or commitments for additions to plant, property or equipment constituting capital assets except in the ordinary course of business consistent with past practice; (J) make any change in the lines of business in which it participates or is engaged; or (K) enter into any Contract, commitment or arrangement to do or engage in any of the foregoing. 5.02 NO SOLICITATIONS. Prior to the Effective Time, the Company agrees (a) that neither it nor any of its Subsidiaries or other affiliates shall, and it shall not authorize or permit their respective Representatives (as defined in SECTION 9.11) to, directly or indirectly, initiate, solicit, facilitate or encourage any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, consolidation, recapitalization, 33 reorganization or other business combination involving the Company or any of its Subsidiaries or any acquisition or similar transaction (including, without limitation, a tender or exchange offer) involving the purchase of all or any significant portion of the assets of the Company and its Subsidiaries taken as a whole or 15% or more of the outstanding shares of Company Common Stock (any such proposal or offer being hereinafter referred to as an "ALTERNATIVE PROPOSAL"), or engage in any negotiations concerning, or furnish or disclose any confidential information or data to, or have any discussions with, any person or group relating to an Alternative Proposal (excluding the transactions contemplated by this Agreement), or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal, including, without limitation, by entering into any agreement, arrangement or understanding requiring the Company to abandon, terminate or fail to consummate the Merger or any other transaction contemplated by this Agreement; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties with respect to any of the foregoing, and it will take the necessary steps to inform such parties with respect to the foregoing; and (c) that it will notify Buyer in writing immediately (but in any event within 24 hours) if any such inquiries, proposals or offers are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with, it or any of such persons or groups and shall include in any such notice, the material terms of any such Alternative Proposals; PROVIDED, HOWEVER, that at any time prior to receiving the Company Stockholders' Approval, the Special Committee may (i) furnish information to (but only pursuant to a confidentiality agreement that contains terms that are no more favorable to that person or group than the terms of the Confidentiality Agreement) or enter into discussions or negotiations with any person or group that makes an unsolicited BONA FIDE Alternative Proposal, after the date hereof, if, and so long as (A) the Special Committee determines in good faith by a resolution duly adopted that such proposal is a Superior Transaction (as defined below), (B) the Special Committee, after consultation with its outside counsel, determines in good faith by a resolution duly adopted that the failure to so act is reasonably likely to result in the Special Committee breaching its fiduciary duties to stockholders imposed by law, (C) prior to furnishing such information to, or entering into discussions or negotiations with, such person or group, the Company provides written notice to Buyer to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or group, and (D) the Company keeps Buyer informed of the status and all material information with respect to any such discussions or negotiations; and (ii) to the extent required, comply with Rule 14e-2 promulgated under the Exchange Act with regard to an Alternative Proposal. Nothing in this SECTION 5.02 shall (x) permit the Company to terminate this Agreement (except as specifically provided in ARTICLE VIII), (y) permit the Company to enter into any agreement with respect to an Alternative Proposal for so long as this Agreement remains in effect (other than a confidentiality agreement under the circumstances described above), or (z) affect any other obligation of the Company under this Agreement. "SUPERIOR TRANSACTION" means an Alternative Proposal that the Special Committee has determined, after consultation which Morgan Keegan or another nationally recognized investment banking firm, that the consideration to be received, directly or indirectly, by stockholders of the Company in connection with such Alternative Proposal is superior, 34 from a financial point of view, to the consideration to be received by them in the Merger and is reasonably likely to be completed, including with respect to the financing thereof, taking into account all legal, financial, regulatory and other aspects of that Alternative Proposal as well as the person or group making that Alternative Proposal. 5.03 COMPANY RIGHTS AGREEMENT. The Board of Directors of the Company shall take all action necessary and shall take all action reasonably requested in writing by Buyer in order to render the Company Rights inapplicable to the Merger. 5.04 STOCKHOLDER CLAIMS. The Company shall not settle or compromise any material claim brought by any holder of any securities of the Company or any creditor of the Company under the 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, or under the Credit Agreement dated as of December 28, 1999, among the Company, the Banks from time to time parties thereto and Citizens Bank of Connecticut, as agent, as amended without the prior written consent of Buyer. 5.05 BUSINESS PLAN. The Company will use its reasonable efforts to implement the Business and Restructuring Plans that the Board of Directors, upon the advice of the Special Committee, approved March 9, 2001 and will not amend, modify or terminate either of those plans or take any other action that is designed to interfere with the implementation of either of those plans by the management of the Company, without, in any such case, the approval of the Chairman of the Board as of the date hereof. ARTICLE VI ADDITIONAL AGREEMENTS 6.01 ACCESS TO INFORMATION; CONFIDENTIALITY. The Company shall, and shall cause each of its Subsidiaries to, throughout the period from the date hereof to the Effective Time, (i) provide Buyer and its Representatives with full access, upon reasonable prior notice and during normal business hours, to all officers, employees, agents and accountants of the Company and its Subsidiaries and their respective assets, properties, books and records, but only to the extent that such access does not unreasonably interfere with the business and operations of the Company and its Subsidiaries, and (ii) furnish promptly to such persons (x) a copy of each report, statement, schedule and other document filed or received by the Company or any of its Subsidiaries pursuant to the requirements of federal or state securities laws and each material report, statement, schedule and other document filed with any other Governmental or Regulatory Authority, and (y) all other information and data (including, without limitation, copies of Contracts, Company Employee Benefit Plans and other books and records) concerning the business and operations of the Company and its Subsidiaries as Buyer or any of such other persons reasonably may request. No investigation pursuant to this paragraph or otherwise shall affect any representation or warranty contained in this Agreement or any condition to the obligations of the parties hereto. Any such information or material obtained pursuant to this SECTION 6.01 that 35 constitutes "Evaluation Material" (as such term is defined in the letter agreement dated as of October 18, 2000 between the Company and Buyer (the "CONFIDENTIALITY AGREEMENT")) shall be governed by the terms of the Confidentiality Agreement. 6.02 PREPARATION OF PROXY STATEMENT, SCHEDULE 13E-3 AND OFFERING MATERIALS. (a) The Company shall prepare and file with the SEC the Proxy Statement and Schedule 13E-3 as soon as reasonably practicable after the date hereof, and shall use its best efforts to have the Proxy Statement cleared by the SEC. If at any time prior to the Effective Time any event shall occur that should be set forth in an amendment of or a supplement to the Proxy Statement, the Company shall prepare and file with the SEC such amendment or supplement as soon thereafter as is reasonably practicable. Buyer and the Company shall cooperate with each other in the preparation of the Proxy Statement and Schedule 13E-3, and the Company and Buyer shall notify the other of the receipt of any comments of the SEC with respect to the Proxy Statement or Schedule 13E-3 and of any requests by the SEC for any amendment or supplement thereto or for additional information, and shall provide to the other promptly copies of all correspondence between it or its representatives and the SEC with respect to the Proxy Statement or Schedule 13E-3. The Company and Buyer shall give the other and its respective counsel the opportunity to review the Proxy Statement and Schedule 13E-3 and all responses to requests for additional information by and replies to comments of the SEC before their being filed with, or sent to, the SEC. Each of the Company and Buyer agrees to use its best efforts, after consultation with the other parties hereto, to respond promptly to all such comments of and requests by the SEC and to cause the Proxy Statement to be mailed to the holders of Company Common Stock entitled to vote at the Company Stockholders' Meeting at the earliest practicable time. (b) The Company shall, and shall cause its Subsidiaries to, use all reasonable efforts to cooperate with and assist Buyer in preparing such information packages and offering materials as the Financing Parties (as defined in SECTION 6.13(c)) may reasonably request (collectively, the "OFFERING MATERIALS") for use in connection with the offering and/or syndications of interests, preferred stock, debt securities and loan participations contemplated by the Commitment Letters, including, without limitation, making senior management and other representatives of the Company and its Subsidiaries available (at mutually agreeable times) to participate in meetings with prospective investors and providing such information and assistance as the Financing Parties may reasonably request in connection therewith. 6.03 APPROVAL OF STOCKHOLDERS. The Company shall, through its Board of Directors, duly call, give notice of, convene and hold a meeting of its stockholders (the "COMPANY STOCKHOLDERS' MEETING") for the purpose of voting on the adoption of this Agreement (the "COMPANY STOCKHOLDERS' APPROVAL") as soon as reasonably practicable after the date hereof. The Company shall, through the Special Committee and its Board of Directors, include in the Proxy Statement the recommendation of the Board of Directors of the Company that the stockholders of the Company adopt this Agreement, and shall use its reasonable best efforts to obtain such adoption, unless the Special Committee determines, after consultation with its outside counsel, in good faith by a 36 resolution duly adopted that to make such a recommendation that the Special Committee or the Board of Directors is reasonably likely to breach its fiduciary duties to the stockholders imposed by law. Notwithstanding the foregoing, no change, withdrawal or modification of the recommendation of the Board of Directors of the Company will change any prior approval of the Board of Directors of the Company for the purpose of causing any state anti-takeover statute or other state law to be inapplicable to the transactions contemplated hereby or the obligation of the Board of Directors of the Company to submit this Agreement to the stockholders of the Company for adoption. At such meeting, Buyer shall cause all shares of Company Common Stock then owned by Buyer to be voted in favor of the adoption of this Agreement. 6.04 REGULATORY AND OTHER APPROVALS. Subject to the terms and conditions of this Agreement and without limiting the provisions of SECTIONS 6.02 and 6.03, each of the Company and Buyer will proceed diligently and in good faith to, as promptly as practicable, (a) obtain all consents, approvals or actions of, make all filings with and give all notices to Governmental or Regulatory Authorities or any other public or private third parties required of Buyer, the Company or any of the Company's Subsidiaries to consummate the Merger and the other matters contemplated hereby, and (b) provide such other information and communications to such Governmental or Regulatory Authorities or other public or private third parties as the other party or such Governmental or Regulatory Authorities or other public or private third parties may reasonably request in connection therewith. 6.05(a) SEVERANCE POLICY AND OTHER AGREEMENTS. With respect to any officer or employee who is covered by a severance policy or plan, Buyer shall maintain or cause to be maintained such policy or plan as in effect as of the date hereof. Buyer shall honor or cause to be honored all severance agreements and employment agreements with the Company's directors, officers and employees. (b) CREDIT FOR DEDUCTIBLES. Buyer will, or will cause the Surviving Corporation to, (i) waive all limitations as to preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the employees of the Company under any welfare plan that such employees may be eligible to participate in after the Effective Time, (ii) provide each employee of the Company with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the Effective Time, and (iii) provide each employee of the Company with credit for all service with the Company and its affiliates under each employee benefit plan, program, or arrangement of Buyer in which such employees are eligible to participate; PROVIDED, HOWEVER, that in no event shall the employees be entitled to any credit to the extent that it would result in a duplication of benefits with respect to the same period of service. 6.06 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. (a) From and after the Effective Time and until the sixth anniversary of the Effective Time and for so long thereafter as any claim for indemnification asserted on or prior to such date has not 37 been fully adjudicated, Buyer and the Surviving Corporation (each, an "INDEMNIFYING PARTY") shall indemnify, defend and hold harmless each person who is now or who becomes prior to the Effective Time, a director or officer of the Company or any of its Subsidiaries (the "INDEMNIFIED PARTIES") against (i) all losses, claims, damages, costs and expenses (including reasonable attorneys' fees), liabilities, judgments and settlement amounts that are paid or incurred in connection with any claim, action, suit, proceeding or investigation (whether civil, criminal, administrative or investigative and whether asserted or claimed prior to, at or after the Effective Time) that is based in whole or in part on, or arises in whole or in part out of, the fact that such Indemnified Party is or was a director or officer or agent of the Company or any of its Subsidiaries and relates to or arises out of any action or omission occurring at or prior to the Effective Time ("INDEMNIFIED LIABILITIES"), and (ii) all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case to the full extent a corporation is permitted under applicable law to indemnify its own directors or officers, as the case may be; PROVIDED that no Indemnifying Party shall be liable for any settlement of any claim effected without its written consent, which consent shall not be unreasonably withheld; and PROVIDED, FURTHER, that no Indemnifying Party shall be liable for any Indemnified Liabilities which occur as a result of the gross negligence or willful misconduct of any Indemnified Party. Without limiting the foregoing, in the event that any such claim, action, suit, proceeding or investigation is brought against any Indemnified Party (whether arising prior to or after the Effective Time), (w) the Indemnifying Parties will pay expenses in advance of the final disposition of any such claim, action, suit, proceeding or investigation to each Indemnified Party to the full extent permitted by applicable law; PROVIDED that the person to whom expenses are advanced provides any undertaking required by applicable law to repay such advance if it is ultimately determined that such person is not entitled to indemnification; (x) the Indemnified Parties shall retain counsel reasonably satisfactory to the Indemnifying Parties; (y) the Indemnifying Parties shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties (subject to the final sentence of this paragraph) promptly as statements therefor are received; and (z) the Indemnifying Parties shall use all reasonable efforts to assist in the defense of any such matter. Any Indemnified Party wishing to claim indemnification under this Section, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Indemnifying Parties, but the failure so to notify an Indemnifying Party shall not relieve such Indemnifying Party from any liability which it may have under this paragraph except to the extent such failure materially prejudices such Indemnifying Party. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict or potential conflict on any significant issue between the positions of any two or more Indemnified Parties in which case, the Indemnified Parties may retain more than one law firm. (b) Except to the extent required by law, until the sixth anniversary of the Effective Time, Buyer will not take any action so as to amend, modify or repeal the provisions for indemnification of directors, officers or employees contained in the certificates or articles of incorporation or bylaws (or other comparable charter 38 documents) of the Surviving Corporation and its Subsidiaries (which as of the Effective Time shall be no more favorable to such individuals than those maintained by the Company and its Subsidiaries on the date hereof) in such a manner as would adversely affect the rights of any individual who shall have served as a director, officer or employee of the Company or any of its Subsidiaries prior to the Effective Time to be indemnified by such corporations in respect of their serving in such capacities prior to the Effective Time. (c) Buyer and the Surviving Corporation shall, until the sixth anniversary of the Effective Time, cause to be maintained in effect, to the extent available, the policies of directors' and officers' liability insurance maintained by the Company and its Subsidiaries as of the date hereof (or policies of at least the same coverage and amounts containing terms that are no less advantageous to the insured parties) with respect to claims arising from facts or events that occurred on or prior to the Effective Time; PROVIDED that in no event shall Buyer or the Surviving Corporation be obligated to expend in order to maintain or procure insurance coverage pursuant to this paragraph any amount per annum in excess of two hundred percent (200%) of the aggregate premiums payable by the Company and its Subsidiaries in the current fiscal year (on an annualized basis) for such purpose or pay premiums for more than six years. (d) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and each party entitled to insurance coverage under paragraph (c) above, respectively, and his or her heirs and legal representatives, and shall be in addition to any other rights an Indemnified Party may have under the certificate or articles of incorporation or bylaws of the Surviving Corporation or any of its Subsidiaries, under the DGCL or otherwise. 6.07 EXPENSES. Except as set forth in SECTION 8.02 or in this SECTION 6.07, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost or expense. Contemporaneously with the execution of this Agreement, the Company has paid the $250,000 fee due to the Senior Lender pursuant to the Senior Debt Commitment Letter. 6.08 BROKERS OR FINDERS. Buyer and the Company represents, as to itself and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Morgan Keegan, whose fees and expenses will be paid by the Company in accordance with the Company's agreement with such firm (a true and complete copy of which has been delivered by the Company to Buyer prior to the execution of this Agreement), and Provident Capital Corp., whose fees and expenses will be paid by Buyer in accordance with Buyer's agreement with such firm (a true and complete copy of which has been delivered by Buyer to the Company prior to the execution of this Agreement), and Buyer and the Company shall indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other such fee or 39 commission or expenses related thereto asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliate. 6.09 TAKEOVER STATUTES. If any "fair price", "moratorium", "control share acquisition" or other form of antitakeover statute or regulation shall become applicable to the transactions contemplated hereby, the Company and the members of the Board of Directors of the Company shall grant such approvals and take such actions as are reasonably necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and thereby and otherwise act to eliminate or minimize the effects of such statute or regulation on the transactions contemplated hereby. 6.10 CONVEYANCE TAXES. The Company and Buyer shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time. 6.11 NEW YORK STATE STOCK TRANSFER TAX. The Company shall pay, without deduction or withholding from any amount payable to the holders of Company Common Stock, any New York State Stock Transfer (and any penalties and interest with respect to such taxes), which become payable in connection with the transactions contemplated by this Agreement, on behalf of the stockholders of the Company. The Company and Buyer shall cooperate in the preparation, execution and filing of any required returns with respect to such taxes (including returns on behalf of the stockholders of the Company). 6.12 CONDUCT OF BUSINESS OF BUYER. Prior to the Effective Time, except as may be required by applicable law subject to the other provisions of this Agreement, Buyer shall (a) not incur directly or indirectly any liabilities or obligations other than those incurred in connection with the Merger, and (b) not engage directly or indirectly in any business or activities of any type or kind and not enter into any agreements or arrangements with any person, or be subject to or bound by any obligation or undertaking, which is not contemplated by this Agreement. 6.13 FINANCING. (a) Neither party will, or seek to, without the prior consent of the other party (which consent shall not be unreasonably withheld), amend, modify or waive any material term of the Commitment Letters if such amendment, modification or waiver would (i) reduce the aggregate amount of funds committed under the Commitment Letters, (ii) add significant additional conditions to the consummation of the transactions contemplated by the Commitment Letters or (iii) have a significant adverse affect on or significantly delay the receipt of any of the Required Approvals (as defined in SECTION 7.01(d)) or the consummation of the Merger. Buyer shall enforce, to the fullest extent permitted under applicable law, the provisions of the Buyer Commitment Letters and any definitive agreements entered into in contemplation thereof. 40 The Company shall enforce, to the fullest extent permitted under applicable law, the provisions of the Company Commitment Letters and definitive documents entered into in contemplation thereof. Buyer shall use its reasonable efforts to fulfill all of its obligations under, cause all conditions to funding to be fulfilled under, and cause the funding to occur under the Buyer Commitment Letters or any definitive agreements entered into on contemplation thereof. The Company shall use its reasonable efforts to fulfill all of its obligations under, cause all conditions to funding to be fulfilled under, and cause the funding to occur under the Company Commitment Letters or any definitive agreements entered into on contemplation thereof. Prior to the Effective Time, Buyer, with respect to the Buyer Commitment Letters or any definitive agreements entered into in connection therewith, and the Company, with respect to the Company Commitment Letters or any definitive agreements entered into in connection therewith, shall give the other person prompt written notice of (i) any material breach or threatened material breach by any party of the terms or provisions thereof, (ii) any termination or threatened termination thereof, or (iii) any exercise or threatened exercise of any "market out" or "material adverse change" condition thereof. (b) Buyer and the Company's obligations under SECTION 6.13(a) shall not be construed in any way as restricting the ability of Buyer or the Company, as the case may be, to modify, replace or otherwise alter the terms, conditions or relative amounts of any Financing as long as such modification, replacement (which need not be the same type of financing) or alteration does not (i) reduce the aggregate amount of funds committed under the Commitment Letters or any replacements thereof, or any definitive agreements entered into in connection therewith, (ii) add significant additional conditions to the funding contemplated by any Commitment Letter or any definitive agreements entered into in connection therewith, or (iii) have a significant adverse affect on or significantly delay the receipt of any of the Required Approvals (as defined in SECTION 7.01(d)) or the consummation of the Merger. (c) In connection with the negotiation and execution of the definitive agreements with respect to the Financing, the Company will, at the request of Buyer, make the same representations and warranties to each Equity Investor, Marketing Partner, Senior Lender, or Subordinated Lender, as the case may be (the "FINANCING PARTIES"), as are made by the Company to Buyer in Article III hereof or by the Company in any definitive agreements entered into in connection with the Company Financing, and shall deliver such other documents, instruments, certificates or opinions as are reasonable and customary in financings of this type, and pledge, grant security interests in, and otherwise grant liens on its assets pursuant to such agreements, provided that no obligation of the Company under any such agreement, pledge, or grant shall be effective until the Effective Time. (d) Buyer and the Company will each assist and cooperate with the other person to obtain all relevant components of the Financing. Notwithstanding anything to the contrary, except as provided pursuant to SECTION 6.07, neither Buyer nor the Company will be obligated to advance any funds for fees in respect of the other person's Commitment Letter or subject any of its assets to any Lien prior to the Closing. 41 (e) The obligations contained in this SECTION 6.13 are not intended, nor shall they be construed, to benefit or confer any rights upon any third party. 6.14 NOTICE AND CURE. Each of Buyer and the Company will notify the other of, and will use all reasonable efforts to cure before the Closing, any event, development or circumstance, as soon as practical after it becomes known to such party, that causes or will cause any covenant or agreement of Buyer or the Company under this Agreement to be breached or that renders or will render untrue any representation or warranty of Buyer or the Company contained in this Agreement. Each of Buyer and the Company also will notify the other in writing of, and will use all reasonable efforts to cure, before the Closing, any violation or breach, as soon as practical after it becomes known to such party, of any representation, warranty, covenant or agreement made by Buyer or the Company. No notice given pursuant to this Section shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein. Notwithstanding any provisions in this Agreement to the contrary, the Company shall not be in breach of any of its representations or warranties contained in this Agreement to the extent any officer or director of Buyer had any knowledge of that breach as of the date of this Agreement after review of the representations and warranties in Article III and the schedules related thereto. 6.15 FULFILLMENT OF CONDITIONS. Subject to the terms and conditions of this Agreement, each of Buyer and the Company will take or cause to be taken all reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the other's obligations contained in this Agreement and to consummate and make effective the transactions contemplated by this Agreement, and neither Buyer nor the Company will, nor will it permit any of its Subsidiaries to, take or fail to take any action that could be reasonably expected to result in the nonfulfillment of any such condition. Notwithstanding any provisions in this Agreement to the contrary, the Company shall not be in breach of any of its covenants or agreements contained in this Agreement to the extent that any related action or inaction giving rise to such purported breach was engaged in, authorized, or refused to be taken, by any Person who is also an officer or director of Buyer. In the event that any portion of the Financing becomes unavailable, regardless of the reason therefor, Buyer will use its reasonable best efforts to obtain alternative financing on substantially comparable or more favorable terms from other sources. 6.16 OTHER ARRANGEMENTS. Buyer shall promptly notify the Company of any arrangements, understandings or agreements entered into prior to the Company Stockholders' Meeting between Buyer on the one hand, and any directors, officers or employees of the Company or any Subsidiary or any stockholder of the Company on the other hand, relating to the transactions contemplated hereby. 42 ARTICLE VII CONDITIONS 7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger is subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) STOCKHOLDER APPROVAL. This Agreement shall have been adopted by the requisite vote of the stockholders of the Company under the DGCL. (b) NO INJUNCTIONS OR RESTRAINTS. No court of competent jurisdiction or other competent Governmental or Regulatory Authority shall have enacted, issued, promulgated, enforced or entered any law or order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making illegal or otherwise restricting, preventing or prohibiting consummation of the Merger or the other transactions contemplated by this Agreement. (c) GOVERNMENTAL AND REGULATORY AND OTHER CONSENTS AND APPROVALS. Other than the filing provided for by SECTION 1.03, all consents, approvals and actions of, filings with and notices to any Governmental or Regulatory Authority or any other public or private third parties required of Buyer, the Company or any of their Subsidiaries to consummate the Merger and the other matters contemplated hereby (the "REQUIRED APPROVALS"), the failure of which to be obtained or taken could be reasonably expected to have a material adverse effect on Buyer or the Surviving Corporation and its Subsidiaries, in each case taken as a whole, or on the ability of Buyer and the Company to consummate the transactions contemplated hereby shall have been obtained, all in form stance reasonably satisfactory to Buyer and the Company. 7.02 CONDITIONS TO OBLIGATION OF BUYER TO EFFECT THE MERGER. The obligation of Buyer to effect the Merger is further subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions (all or any of which may be waived in whole or in part by Buyer in its sole discretion): (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Company in this Agreement that are qualified by, or subject to, materiality or material adverse effect shall be true and correct and those that are not so qualified by, or subject to, materiality or material adverse effect shall be true and correct in all material respects, in each case as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties made as of a specified date earlier than the Closing Date, on and as of such earlier date, except as affected by the transactions contemplated by this Agreement, and the Company shall have delivered to Buyer a certificate, dated the Closing Date and executed in the name and on behalf of the Company by any Executive or Senior Vice President, to such effect. (b) PERFORMANCE OF OBLIGATIONS. The Company shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by the Company at or prior to the 43 Closing, and the Company shall have delivered to Buyer a certificate, dated the Closing Date and executed in the name and on behalf of the Company by any Executive or Senior Vice President, to such effect. (c) FINANCING. Buyer shall have obtained financing in an amount that, together with funds available from the Company, is sufficient to pay the aggregate Merger Price per share, the aggregate Option Amounts, the aggregate Warrant Amounts and the aggregate amounts required to be paid pursuant to the Exchange Offer and to make all other necessary payments of fees and expenses required to be paid by the Company and Buyer in connection with the transactions contemplated by this Agreement (the "REQUIRED PAYMENTS"); PROVIDED, that this condition shall not be applicable if the failure of Buyer to receive the proceeds of such financing shall have been occasioned by action or the failure to take action by Buyer which action or inaction also constitutes a breach of any material covenant, representation or warranty of such party hereunder. (d) MARKETING PARTNER FINANCING. All the Marketing Partner Financing shall be paid to the Company at least one business day prior to the Closing Date. (e) DISSENTING SHARES. The Company shall not have received notices from the holder or holders of more than 10% of shares of Company Common Stock issued and outstanding on the record date for the determination of those stockholders of the Company entitled to vote on the Merger that such holders have exercised or intend to exercise their appraisal rights under Section 262 of the DGCL. (f) Gregory G. Landry shall, as instructed by Robert B. Stein, Jr., have either withdrawn as a general partner of DM Management Associates I or assigned his general partnership interest in DM Management Associates I to either Robert B. Stein, Jr. or New DM Management Associates I and the Company, as instructed by Buyer shall have either withdrawn as a limited partner of New DM Management Associates I or assigned its interest to DM Associates Limited Partnership. (g) The Company shall not be in material default under any of its obligations that cannot be cured immediately without having a material adverse effect on the Company. 7.03 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. The obligation of the Company to effect the Merger is further subject to the fulfillment, at or prior to the Closing, of each of the following additional conditions (all or any of which may be waived in whole or in part by the Company in its sole discretion): (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by Buyer in this Agreement that are qualified by, or subject to, materiality or material adverse effect shall be true and correct and those that are not so qualified by, or subject to, materiality or material adverse effect shall be true and correct in all material respects, in each case as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties made as of a specified date earlier 44 than the Closing Date, on and as of such earlier date, except as affected by the transactions contemplated by this Agreement, and Buyer shall have delivered to the Company a certificate, dated the Closing Date and executed in the name and on behalf of Buyer by its Chairman of the Board, President or any Executive or Senior Vice President and in the name and on behalf of Buyer by its Chairman of the Board, President or any Vice President, to such effect. (b) PERFORMANCE OF OBLIGATIONS. Buyer shall have performed and complied with, in all material respects, each agreement, covenant and obligation required by this Agreement to be so performed or complied with by Buyer at or prior to the Closing, and Buyer shall have delivered to the Company a certificate, dated the Closing Date and executed in the name and on behalf of Buyer by its Chairman of the Board, President or any Executive or Senior Vice President and in the name and on behalf of Buyer by its Chairman of the Board, President or any Vice President, to such effect. (c) SOLVENCY. The Board of Directors of the Company shall have received advice reasonably satisfactory to the Special Committee from an independent advisor selected with reasonable care by or on behalf of the Company confirming the belief of Buyer set forth in the last sentence of SECTION 4.08. (d) SPECIAL STOCKHOLDER APPROVAL. This Agreement shall have been approved by the holders of a majority of the shares of Company Common Stock voting (whether in person or by proxy) at the Company Stockholders' Meeting other than shares of Company Common Stock owned beneficially by any Person that is a party to the Voting Agreement (except as to any such affiliate shares of Company Common Stock owned in a financing or advisory capacity). This condition shall not be waived by the Company unless (i) it has given written notice of its intention to so waive to the stockholders of the Company at least 10 business days prior to the Company Stockholders' Meeting, (ii) such notice is filed with the SEC, if required, and (iii) if such notice is so filed, it complies as to form in all material respects with the applicable requirements of the Exchange Act (except as to any information furnished to the Company by Buyer in writing specifically for inclusion in such notice). ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.01 TERMINATION. This Agreement may be terminated, and the transactions contemplated hereby may be abandoned, at any time prior to the Effective Time, whether prior to or after the Company Stockholders' Approval: (a) By mutual written agreement of the parties hereto duly authorized by action taken by or on behalf of their respective Boards of Directors; (b) By either the Company or Buyer upon notification to the non-terminating party by the terminating party: 45 (i) at any time after August 31, 2001 if the Merger shall not have been consummated on or prior to such date and such failure to consummate the Merger is not caused by a breach of this Agreement by the terminating party; (ii) if the Company Stockholders' Approval or the stockholder approval required pursuant to SECTION 7.03(d) (unless waived as provided therein) shall not be obtained by reason of the failure to obtain the requisite vote upon a vote held at a meeting of such stockholders, or any adjournment thereof, called therefor; (iii) if there has been a material breach of any representation, warranty, covenant or agreement on the part of the non-terminating party set forth in this Agreement, which breach is not curable or, if curable, has not been cured within thirty (30) days following receipt by the non-terminating party of notice of such breach from the terminating party; or (iv) if any court of competent jurisdiction or other competent Governmental or Regulatory Authority shall have issued an order making illegal or otherwise restricting, preventing or prohibiting the Merger and such order shall have become final and nonappealable; (c) By the Company if the Special Committee determines in good faith, based upon the advice of outside counsel that failure to terminate the Agreement is reasonably likely to result in the Board of Directors breaching its fiduciary duties to stockholders under applicable law by reason of an unsolicited BONA FIDE Alternative Proposal for a Superior Transaction having been made; PROVIDED that the Company shall have complied with the provisions of SECTION 5.02 and forty-eight (48) hours shall have elapsed after delivery to Buyer of written notice of such determination; and PROVIDED FURTHER that the Company's ability to terminate this Agreement pursuant to this paragraph (c) is conditioned upon the prior payment by the Company to Buyer of any amounts owed by it pursuant to SECTION 8.02(b); (d) By Buyer if the Board of Directors of the Company or the Special Committee shall have withdrawn or modified in a manner adverse to Buyer its approval or recommendation of this Agreement or the Merger or shall have recommended an Alternative Proposal to the stockholders of the Company; (e) By the Company if any of the Buyer Commitment Letters or any definitive agreement entered into in contemplation thereof shall have been terminated at any time when Buyer would not be entitled to terminate this Agreement pursuant to SECTION 8.01(b) or SECTION 8.01(d) and, within twenty (20) business days after any such termination, that Buyer Commitment Letter or any definitive agreement entered into in contemplation thereof shall not have been replaced; or 46 (f) By the Company or Buyer if any of the Company Commitment Letters, or any definitive agreement entered into in contemplation thereof shall have been terminated at any time when the terminating party would not be entitled to terminate this Agreement pursuant to SECTION 8.01(b) or SECTION 8.01(d) (with respect to Buyer only) and, within twenty (20) business days after any such termination, that Company Commitment Letter or any definitive agreement entered into in contemplation thereof shall not have been replaced. 8.02 EFFECT OF TERMINATION. (a) If this Agreement is validly terminated by either the Company or Buyer pursuant to SECTION 8.01, this Agreement will forthwith become null and void and there will be no liability or obligation on the part of either the Company or Buyer (or any of their respective Representatives or affiliates), except (i) that the provisions of the Confidentiality Agreement, the last sentence of SECTION 6.01, SECTION 6.07, SECTION 6.08 and this SECTION 8.02 will continue to apply following any such termination, (ii) that nothing contained herein shall relieve any party hereto from liability for willful breach of its representations, warranties, covenants or agreements contained in this Agreement and (iii) as provided in paragraph (b) below. (b) If this Agreement is terminated for any reason (other than by the Company and the Buyer pursuant to 8.01(a) or by the Company pursuant to SECTION 8.01(b)(iii), then the Company shall pay to Buyer an amount equal to the actual documented reasonable out-of-pocket fees and expenses Buyer incurred in connection with this Agreement and the transactions contemplated hereby by wire transfer of same day funds upon submission of those documented expenses to the Company, subject to a maximum reimbursement amount of $750,000, which shall not include amounts paid pursuant to SECTION 6.07. 8.03 AMENDMENT. This Agreement may be amended, supplemented or modified by action taken by or on behalf of the respective Boards of Directors of the parties hereto at any time prior to the Effective Time, whether prior to or after the Company Stockholders' Approval shall have been obtained, but after such adoption and approval only to the extent permitted by applicable law. No such amendment, supplement or modification shall be effective unless set forth in a written instrument duly executed by or on behalf of each party hereto. 8.04 WAIVER. At any time prior to the Effective Time any party hereto, by action taken by or on behalf of its Board of Directors, may to the extent permitted by applicable law (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties hereto contained herein or in any document delivered pursuant hereto or (iii) waive compliance with any of the covenants, agreements or conditions of the other parties hereto contained herein. No such extension or waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party extending the time of performance or waiving any such inaccuracy or non-compliance. No waiver by any party of any term or condition of this Agreement, in any 47 one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. ARTICLE IX GENERAL PROVISIONS 9.01 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. The representations, warranties, covenants and agreements contained in this Agreement or in any instrument delivered pursuant to this Agreement shall not survive the Merger but shall terminate at the Effective Time, except for the agreements contained in ARTICLE I and ARTICLE II, in SECTIONS 6.05, 6.06, 6.07, 6.08, 6.10 and 6.11 and this ARTICLE IX, which shall survive the Effective Time. 9.02 NOTICES. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Buyer, to: DM Acquisition Corp. c/o Dairy Mart Convenience Stores, Inc. One Dairy Mart Way 300 Executive Parkway West Hudson, Ohio 44236 Facsimile No.: (330) 342-6756 Attn: Robert B. Stein, Jr. with a copy to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, OH 44144-3485 Facsimile No.: (216) 696-0740 Attn: Albert T. Adams, Esq. John M. Gherlein, Esq. If to the Company, to: Dairy Mart Convenience Stores, Inc. One Dairy Mart Way 300 Executive Parkway West Hudson, Ohio 44236 Facsimile No.: (330) 342-6752 Attn: Gregory L. Landry 48 with a copy to: Milbank, Tweed, Hadley & McCloy LLP One Chase Manhattan Plaza New York, New York 10005 Facsimile No.: (212) 530-5219 Attn: Lawrence Lederman, Esq. Roland Hlawaty, Esq. All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. 9.03 ENTIRE AGREEMENT; INCORPORATION OF EXHIBITS. (a) This Agreement supersedes all prior discussions and agreements among the parties hereto with respect to the subject matter hereof, other than the Confidentiality Agreement and the Voting Agreement, which shall survive the execution and delivery of this Agreement in accordance with their terms, and contains, together with the Confidentiality Agreement and the Voting Agreement, the sole and entire agreement among the parties hereto with respect to the subject matter hereof. (b) The Company Disclosure Letter, the Buyer Disclosure Letter and any Exhibit attached to this Agreement and referred to herein are hereby incorporated herein and made a part hereof for all purposes as if fully set forth herein. 9.04 PUBLIC ANNOUNCEMENTS. Except as otherwise required by law or the rules of any applicable securities exchange or national market system, so long as this Agreement is in effect, Buyer and the Company will not, and will not permit any of their respective Representatives to, issue or cause the publication of any press release or make any other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. Buyer and the Company will cooperate with each other in the development and distribution of all press releases and other public announcements with respect to this Agreement and the transactions contemplated hereby, and will furnish the other with drafts of any such releases and announcements as far in advance as practicable. 9.05 NO THIRD PARTY BENEFICIARY. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors or 49 permitted assigns, and except as provided in SECTION 6.06, (which is intended to be for the benefit of the persons entitled to therein, and may be enforced by any of such persons), it is not the intention of the parties to confer third-party beneficiary rights upon any other person. 9.06 NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other parties hereto and any attempt to do so will be void, except that Buyer may assign any or all of its rights, interests and obligations hereunder to another direct or indirect wholly owned Subsidiary of Buyer, PROVIDED that any such Subsidiary agrees in writing to be bound by all of the terms, conditions and provisions contained herein. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 9.07 HEADINGS. The headings used in this Agreement have been inserted for convenience of reference only and do not define, modify or limit the provisions hereof. 9.08 INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law or order, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (i) such provision will be fully severable, (ii) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, and (iii) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. 9.09 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 9.10 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specified terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 9.11 CERTAIN DEFINITIONS. As used in this Agreement: (a) the term "AFFILIATE," as applied to any person, shall mean any other person directly or indirectly controlling, controlled by, or under common control with, that person; for purposes of this definition, "CONTROL" (including, with correlative meanings, the terms "CONTROLLING," "CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as applied to any person, means the possession, directly or indirectly, of the power to direct 50 or cause the direction of the management and policies of that person, whether through the ownership of voting securities, by contract or otherwise; (b) a person will be deemed to "BENEFICIALLY" own securities if such person would be the beneficial owner of such securities under Rule 13d-3 under the Exchange Act, including securities which such person has the right to acquire (whether such right is exercisable immediately or only after the passage of time); (c) the term "BUSINESS DAY" means a day other than Saturday, Sunday or any day on which banks located in the States of Ohio or New York are authorized or obligated to close; (d) the term "KNOWLEDGE" or any similar formulation of "KNOWLEDGE" shall mean, with respect to the Company, the knowledge of the individuals listed in SECTION 9.11 of the Company Disclosure Letter; (e) any reference to any event, change or effect being "MATERIAL" or "MATERIALLY ADVERSE" or having a "MATERIAL ADVERSE EFFECT" on or with respect to an entity (or group of entities taken as a whole) means such event, change or effect is material or materially adverse, as the case may be, to the business, properties, assets, liabilities, financial condition or results of operations of such entity (or of such group of entities taken as a whole); (f) the term "PERSON" shall include individuals, corporations, partnerships, companies, trusts, other entities and groups (which term shall include a "GROUP" as such term is defined in Section 13(d)(3) of the Exchange Act); (g) the "REPRESENTATIVES" of any entity means such entity's directors, officers, employees, legal, investment banking and financial advisors, accountants and any other agents and representatives; (h) the term "SIGNIFICANT SUBSIDIARIES" means, with respect to any party, the Subsidiaries of such party which constitute "significant subsidiaries" under Rule 405 promulgated by the SEC under the Securities Act, any subsidiary that owns, leases or operates any convenience store, Financial Opportunities, Inc., and any other Subsidiary that is set forth on Exhibit 23 to the Company's most recent Annual Report on Form 10-K; and (i) the term "SUBSIDIARY" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which more than fifty percent (50%) of either the equity interests in, or the voting control of, such corporation or other organization is, directly or indirectly through Subsidiaries or otherwise, beneficially owned by such party. 51 9.12 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 52 IN WITNESS WHEREOF, each party hereto has caused this Agreement to be signed by its officer thereunto duly authorized as of the date first above written. DM ACQUISITION CORP. By:/s/ Robert B. Stein, Jr. ------------------------ Robert B. Stein, Jr., President DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry ------------------------ Name: Gregory G. Landry Title: Exec. V.P. EX-10.1.F 3 l88054aex10-1_f.txt EX-10.1(F) 1 EXHIBIT 10.1(f) FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT This FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT (the "FIFTH AMENDMENT") is dated as of the 7th day of May, 2001 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 (as hereinafter defined) (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: The Company, the Banks, and the Agent are parties to a certain Credit Agreement dated as of December 28, 1999 (as amended and in effect from time to time, the "CREDIT AGREEMENT") whereby the Banks agreed to make loans and advances and otherwise extend credit to the Company. The Company has requested that the Banks and the Agent waive certain Events of Default and amend certain terms and conditions of the Credit Agreement. The Banks and the Agent are willing to waive such Events of Default and amend such terms and conditions of the Credit Agreement on the terms and conditions set forth herein. Section 10.1. of the Credit Agreement provides that no amendment, supplement or modification of the Credit Agreement shall be effective unless the same shall be in writing and signed by the Company, the Required Banks and the Agent. NOW, THEREFORE, in consideration of one dollar ($1.00) and the other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Banks and the Agent hereby agree as follows: 1. DEFINED TERMS. Defined terms not defined herein shall have the meanings ascribed to them in the Credit Agreement. 2. AMENDMENT TO CREDIT AGREEMENT. (i) The definition of the term "CLEAN-DOWN PERIOD" is hereby amended and restated in its entirety as follows: "CLEAN-DOWN PERIOD" the period commencing on July 1 and ending on September 30 of each year during the Commitment Period, except for the period commencing July 1, 2001 and ending on September 30, 2001. (ii) The definition of the term "TERMINATION DATE" is hereby amended and restated in its entirety as follows: 2 -2- "TERMINATION DATE" September 15, 2002, or such later date to which the Termination Date may be extended in accordance with subsection 2.15. (iii) Subsection (a) of Section 7.1 of the Credit Agreement, entitled ADJUSTED CONSOLIDATED INDEBTEDNESS TO CONSOLIDATED EBITDA, is hereby amended and restated in its entirety as follows: (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 ---- ----- The FQED ending on or about May 5, 2001 5.75 to 1.00 The FQED ending on or about August 4, 2001 5.75 to 1.00 The FQED ending on or about November 3, 2001 5.15 to 1.00 The FQED ending on or about February 2, 2002 and thereafter 4.65 to 1.00
(iv) Subsection (b) of Section 7.1 of the Credit Agreement, entitled EBITDA TO INTEREST EXPENSES, is hereby amended and restated in its entirety as follows: (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 May 5, 2001 1.25 to 1.00 The FQED ending on or about August 4, 2001 1.25 to 1.00 The FQED ending on or about November 3, 2001 1.40 to 1.00 The FQED ending on or about February 2, 2002 and thereafter 1.75 to 1.00
(v) Subsection (c) of Section 7.1 of the Credit Agreement, entitled FIXED CHARGE COVERAGE, is hereby amended and restated in its entirety as follows: (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 3 -3- 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 May 5, 2001 1.00 to 1.00 The FQED ending on or about August 4, 2001 1.00 to 1.00 The FQED ending on or about November 3, 2001 1.05 to 1.00 The FQED ending on or about February 2, 2002 and thereafter 1.10 to 1.00
(vi) Section 7.1(d) is hereby deleted in its entirety. (vii) The Credit Agreement is hereby amended as set forth in Sections 1, 2 and 3 of that certain First Amendment to Credit Agreement dated as of January 28, 2000 among the Company, the Banks and the Agent (the "FIRST AMENDMENT"); provided, however, that in the event that Discontinued Business Segments are not sold or closed by the Company prior to February 2, 2002, the definitions and amendments to the Credit Agreement set forth in such sections of the First Amendment shall automatically be amended effective for the FQED to occur April 30, 2002 to reflect the terms and conditions set forth in the Credit Agreement in effect immediately prior to the effectiveness of this Fifth Amendment. 3. AMENDMENT FEE. In consideration of the agreement of the Banks to execute and deliver this Fifth Amendment, the Company shall pay to the Agent for the ratable benefit of the Banks an amendment fee in the amount of $1,000,000 (the "AMENDMENT Fee"). The Amendment Fee is earned by the Banks as of the date hereof, and shall be payable in immediately available funds on the Amendment Fee Payment Dates regardless of any event that occurs after the date hereof except as set forth below. The Amendment Fee shall be payable on the following dates (the "AMENDMENT FEE PAYMENT DATES"): (a) $750,000 of the Amendment Fee shall be payable on the date hereof, and (b) $250,000 of the Amendment Fee shall be payable on September 1, 2001; provided, however, that if, prior to September 1, 2001, all of the Obligations owed to the Banks and the Agent are fully and indefeasibly paid in cash, all Commitments have been terminated, and any Letters of Credit have been cancelled, the Amendment Fee shall be reduced by $250,000 such that the $250,000 Amendment Fee otherwise due on September 1, 2001 shall not be required to be made. Any failure of the Company to pay each installment of the Amendment Fee as and when payable under this paragraph shall constitute an Event of Default under Section 8(a) of the Credit Agreement. 4. CONFIRMATION OF AGREEMENTS. The Company, the Banks, and the Agent hereby agree that, except as provided in this Fifth Amendment, the Credit Agreement, the Notes and the Loan Documents, and the grant of the liens, security interests and other encumbrances thereunder, and their agreements, covenants, obligations, representations and warranties thereunder and therein are hereby expressly ratified, confirmed and restated as of the date hereof. 5. EFFECT OF AMENDMENT. The Company, the Banks, and the Agent hereby agree that, except as provided in this Fifth Amendment, the Credit Agreement (as previously amended) remains in full force and effect and has not been modified or amended in any respect, it being the 4 -4- intention of the Company, the Banks, and the Agent that this Fifth Amendment and the Credit Agreement (as previously amended) be read, construed and interpreted as one and the same instrument. 6. BENEFIT. This Fifth Amendment shall inure to the benefit of and bind the parties hereto. 7. AMENDMENTS. This Fifth Amendment shall be modified only by a writing executed by the Company, the Agent and the Required Banks. 8. COUNTERPARTS. This Fifth Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. A facsimile of an executed counterpart shall have the same effect as the original executed counterpart. 9. WAIVERS. Subject to the terms and conditions of this Fifth Amendment, the Banks and the Agent waive those Events of Default that have occurred under the Credit Agreement as a result of the Company's failure on or before February 3, 2001 to comply with those sections of the Credit Agreement set forth on SCHEDULE 1 attached hereto. The waiver set forth in this paragraph 9 shall be effective only for those Events of Default contained in the existing Credit Agreement as specified in the preceding sentence occurring on or before February 3, 2001 and such waiver shall not entitle the Company to any future waiver in similar or other circumstances. Without limiting the foregoing, upon the occurrence of an Event of Default after February 3, 2001, or if an Event of Default has occurred and is continuing on the date hereof that is not set forth on SCHEDULE 1, the Banks and the Agent shall be free in their sole and absolute discretion to accelerate the payment in full of the Company's Obligations to the Banks and the Agent under the Credit Agreement and the other Loan Documents, and may, if the Banks and the Agent so elect, proceed to enforce any or all of Banks' and the Agent's rights under or in respect of the Credit Agreement and the other Loan Documents and applicable law. 10. NO WAIVER BY BANKS OR AGENT. Except as otherwise expressly provided for herein, nothing in this Fifth Amendment shall extend to or affect in any way the Company's Obligations or the Banks' and the Agent's rights and remedies arising under the Credit Agreement or the other Loan Documents, and the Banks and the Agent shall not be deemed to have waived any or all of their remedies with respect to any Event of Default (other than an Event of Default arising under the Credit Agreement as a result of the Company's failure to comply with those sections of the Credit Agreement set forth on SCHEDULE 1 attached hereto and then only to the extent set forth in paragraph 9 hereof) or event or condition which, with notice or the lapse of time, or both would become an Event of Default and which upon the Company's execution and delivery of this Fifth Amendment might otherwise exist or which might hereafter occur. 11. RELEASE AND INDEMNITY. (a) The Company, on behalf of itself, its Subsidiaries and their respective successors and assigns, hereby waives, releases and discharges the Banks and the Agent, any affiliate of the Banks and the Agent and all directors, officers, shareholders, employees and agents of the Banks or the Agent or any affiliate of the Banks or the Agent, from 5 -5- any and all claims, demands, actions or causes of action arising out of or in any way relating to the Credit Agreement, this Fifth Amendment, the credit relationships between the Company, the Banks and the Agent relative thereto, and any documents, agreements, dealings or other matters connected therewith, including without limitation all known and unknown matters, claims, transactions or things occurring prior to the Effective Date (as defined in paragraph 11 below) related to the subject matter thereof and hereof. (b) The Company, on behalf of itself, its Subsidiaries and their respective successors and assigns, hereby waives, releases and discharges the Banks and the Agent, any affiliates of the Banks and the Agent, and all directors, officers, shareholders, employees and agents of the Banks or the Agent or any affiliate of the Banks or the Agent, from any and all claims, demands, actions or causes of action arising out of or in any way relating to any other credit or loan relationship between the Company, the Banks or the Agent, and any documents, agreements, dealings or other matters connected with such other credit or loan relationship, including without limitation all known and unknown matters, claims transactions or things occurring prior to the Effective Date. (c) The Company, on behalf of itself, its Subsidiaries and their respective successors and assigns, agrees, jointly and severally with itself and its Subsidiaries, to indemnify and hold the Banks and the Agent, any affiliate of the Banks and the Agent and all directors, officers, shareholders, employees and agents of the Banks or the Agent or any affiliate of any Bank or the Agent harmless from and against any and all damages, losses, obligations, payments, liabilities, claims, actions or causes of action, fees or expenses (including legal fees) and other matters of every kind and character incurred, sustained or paid by the Banks or the Agent, any affiliate of the Banks or the Agent or any of such directors, officers, shareholders, employees and agents arising out of or in any way relating to the Credit Agreement, this Fifth Amendment, the administration of the credit relationships between the Company, the Banks and the Agent, and any other credit or loan relationship between the Company, the Banks or the Agent, and any documents, agreements, dealings or other matters connected therewith, including without limitation all known and unknown matters, claims transactions or things occurring prior to the Effective Date related to the subject matter thereof or hereof. In the event of litigation or other proceedings relating to any of the foregoing, the Banks and the Agent shall be entitled to select their own legal counsel and, in addition to the foregoing indemnity, the Company and its Subsidiaries agree to promptly pay the reasonable fees and expenses of such counsel. (d) The Company, on behalf of itself and its Subsidiaries, acknowledges that it makes this release and indemnity knowingly, voluntarily and only after considering the ramifications hereof with its legal counsel. 12. EFFECTIVENESS. This Fifth Amendment shall become effective as of the date of the execution and delivery by each of the Company, Banks constituting the Required Banks, and the Agent of a counterpart of this Fifth Amendment, and the payment by the Company to the Agent of (a) the portion of the Amendment Fee that is payable on the date hereof, and (b) the counsel fees incurred by the Agent in connection with the preparation, execution and delivery of this Fifth Amendment (the "EFFECTIVE DATE"). [SIGNATURES FOLLOW ON NEXT PAGE] 6 -6- IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment as of the Effective Date. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry ------------------------- Name: Gregory G. Landry Title: Chief Financial Officer CITIZENS BANK OF CONNECTICUT, Individually and as Agent By: /s/ Patrick C. Joyce ----------------------------- Name: Patrick C. Joyce Title: Vice President NATIONAL CITY BANK By: /s/ Lawrence J. Hannan ----------------------------- Name: Lawrence J. Hannan Title: Senior Vice President PROVIDENT BANK By: ----------------------------- Name: James M. Hojnacki Title: Vice President 7 SCHEDULE 1 1. The failure of the Company to comply with Section 7.1(a) for the four consecutive fiscal quarters ending on February 3, 2001. 2. The failure of the Company to comply with Section 7.1(b) for the four consecutive fiscal quarters ending on February 3, 2001. 3. The failure of the Company to comply with Section 7.1(c) for the four consecutive fiscal quarters ending on February 3, 2001. 4. The failure of the Company to comply with Section 7.1(d). EX-10.9 4 l88054aex10-9.txt EX-10.9 1 Exhibit 10.9 SEVERANCE AGREEMENT THIS AGREEMENT between Dairy Mart Convenience Stores, Inc., a Delaware corporation (hereinafter referred to as the "COMPANY"), and Gregory G. Landry (hereinafter referred to as the "EXECUTIVE"), dated as of this 15th day of March, 2001: WHEREAS, the Executive is the Executive Vice President and Chief Financial Officer of the Company and a director of the Company; WHEREAS, the Company and DM Acquisition Corp. (the "BUYER") have entered into an Agreement and Plan of Merger, dated the date hereof, pursuant to which the Buyer will be merged with and into the Company (the "MERGER"); WHEREAS, it is contemplated that upon consummation of the Merger, the Executive will cease to serve on the Company's board of directors; WHEREAS, the Company has determined to effect certain changes in management of the Company, which changes contemplate, INTER ALIA, the termination of the Executive's employment with the Company; WHEREAS, the Executive will have the right to terminate his employment for Good Reason (as defined in the Employment Agreement) after the closing under the Merger Agreement because the Executive will cease to serve on the Company's board of directors following the closing under the Merger Agreement; WHEREAS, the Company and the Executive desire to confirm the Executive's severance benefits to which he is entitled under the Employment Agreement; NOW, THEREFORE, in consideration of the mutual promises set forth herein and of the Executive's past employment with and contributions to the Company and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Capitalized terms used and not otherwise defined upon first usage herein are defined in EXHIBIT A attached to this Agreement. 1. SEVERANCE BENEFITS. 1.1. BASIC BENEFITS. At the effective time of the Merger, the Executive shall have Good Reason to terminate his employment with the Company and has voluntarily determined to terminate his employment. The date such termination occurs shall be the "Effective Date" and the Executive shall be entitled to the following benefits as provided in the Employment Agreement: 2 (a) SEVERANCE PAY. No later than the fifth business day following the Effective Date, the Company shall pay to the Executive an aggregate amount equal to: (i) his accrued and unpaid Base Salary through the Effective Date, PLUS (ii) $136,500 (representing his bonus amount) MULTIPLIED BY a fraction, the numerator of which is the number of days elapsed from February 4, 2001 through the Effective Date and the denominator of which is 365, PLUS (iii) $1,234,500. (b) GROSS-UP PAYMENT. In addition to the amount set forth in Section 1.1(a) hereof, the Company shall pay to the Executive no later than the fifth business day following the Effective Date the amount of the Gross-Up Payments referred to in Section 12(b)(iii) of the Employment Agreement, subject to the provisions of Section 12(b)(v) of the Employment Agreement. (c) AUTOMOBILE. No later than the fifth business day following the Effective Date, the Company shall 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 Executive's use and the Company shall pay or reimburse all sales or other similar taxes due as a result of such transfer. (d) BENEFITS. Until the earlier of (i) the third anniversary of the Effective Date; or (ii) the date on which the Executive and his dependents shall have become eligible for substantially equivalent coverage provided by a subsequent employer, the Company shall maintain in full force and effect for the benefit of the Executive and his family continued coverage under all health, medical, dental and hospitalization plans (but not any other employee benefits plans, stock programs, qualified plans or other forms of retirement or deferred compensation) maintained by the Company or its successor during such period on the same terms and conditions, including, without limitation, any premium payment obligations applicable to executive officers of the Company. Such period shall be inclusive of any applicable COBRA period. The Executive, however shall not be entitled to participate in any programs under or related to an Internal Revenue Code of 1986, Section 125 program. 3 (e) LIFE INSURANCE POLICIES. As of the Effective Date, the Company shall assign to the Executive all right, title and interest in and to the two life insurance policies covering the Employee's life that are held by the Company, each of which is in the face amount of $250,000 (including the cash surrender value relating thereto). (f) OFFICE EQUIPMENT. As of the Effective Date, subject to compliance with Section 13(b) of the Employment Agreement, the Company shall assign to the Executive all right, title and interest in and to the personal computer of the Company currently used by the Executive in his home. (g) EXPENSE REIMBURSEMENT. The Company shall reimburse the Executive for all business expenses incurred by the Executive through the Effective Date in connection with his employment by the Company promptly upon submission by the Executive to the Company of appropriate vouchers or expense statements, pursuant to, and subject to the Company's normal business practices in this regard. (h) SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ("SERP"). No later than the fifth business day following the Effective Date, the Company shall pay to the Executive an amount equal to his benefits under the Supplemental Executive Retirement Plan calculated on the basis that his Target Retirement Benefit (as defined in the SERP) will be multiplied by a fraction (not greater than one) equal to the number of his credited Years of Benefit Service (as defined in the SERP) as of the Effective Date divided by the total number credited Years of Benefit Service that he would have on the first day of the month next following his 65th birthday. 1.2. OPTIONS AND OTHER STOCK AWARDS. The Company and the Executive acknowledge that (a) all options and other rights to purchase stock (including stock grants) granted under the Company's various stock plans to the Executive as of the Effective Date shall immediately vest and become exercisable in full and the Executive shall be entitled to the rights provided under Section 2.01(e) of the Merger Agreement with respect to the options to acquire 277,500 shares of the Company's common stock held by the Executive (including all such options which have become vested pursuant to this clause (a)) and (b) the Executive shall be entitled to the rights provided under Section 2.01(c) of the Merger Agreement with respect to the 34,875 shares of the Company's common stock owned by the Executive and the 78,750 shares of the Company's common stock which were granted to the Executive on July 14, 1997. Without limiting the foregoing, if the Merger does not occur by July 14, 2001, then in lieu of the Executive receiving such 78,750 shares of the Company's common stock which were granted to the 4 Executive on July 14, 1997, he will receive on the Effective Date a cash bonus equal to $354,375. 2. WITHHOLDING. All payments required to be made by the Company hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it must withhold pursuant to any applicable law or regulation. 3. MUTUAL RELEASE 3.1 EXECUTIVE RELEASE. The Executive understands and agrees that as of the Effective Date he releases and discharges the Company, its affiliates, and each of Company's affiliates, shareholders, officers, directors, employees, and agents (collectively, the "Company Released Parties"), of and from any and all claims, demands, actions or liability whatsoever, based on events or circumstances existing as of the Effective Date, whether known or unknown, arising out of or in connection with his employment by, or membership on the Board of Directors of, the Company or the termination of such employment, including, but not limited to, any and all claims arising under any federal, state or local laws prohibiting age, race, sex, disability and other forms of discrimination, including, but not limited to, age discrimination claims under the Age Discrimination in Employment Act, claims under Title VII of the 1964 Civil Rights Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act, or arising under any other federal, state or local statute relating to employment. The Executive understands that he may be replaced by a younger individual and expressly agrees that among the claims being released herein are any and all claims that might arise out of any such action by the Company or the Company's Released Parties. The Executive voluntarily waives any right to seek reemployment by the Company. The Executive also agrees that neither he nor anyone acting on his behalf will file, claim, sue or cause or permit to be filed or claimed, any action for damages or other relief against the Company or the Company Released Parties involving any matter occurring prior to the date of this Agreement, or involving the effects of actions or practices which arose prior to the date of this Agreement solely arising out of Executive's Employment. The Executive further agrees that he will neither seek nor accept any further benefit or consideration from any source whatsoever in respect to any claims solely arising out of Executive's Employment which he has asserted or could have asserted against the Company or the Company Released Parties. Further, Executive agrees that this Agreement meets the requirements of the Age Discrimination in Employment Act of 1967 ("ADEA"), as 5 amended by the Older Workers' Benefit Protection Act of 1990 ("OWBPA"), including the provisions of 29 U.S.C. ss. 626(f)(1) regarding specific requirements for the waiver of rights and claims thereunder in any way arising prior to the execution of this Agreement. Those requirements include that Executive understands and acknowledges that by executing this Agreement: a. Executive is knowingly and voluntarily waiving any and all rights and claims he may have under the ADEA and OWBPA; b. Executive is receiving hereunder consideration in addition to anything of value to which he is already entitled; c. Executive has been advised to consult with an attorney prior to executing this Agreement; d. Executive has carefully read this Agreement, knows and understand its contents and its significance, and intends to be bound by its terms; e. Executive has been given a period of 21 days from the receipt of this Agreement to consider its contents and ramifications and his decision to sign it (although it may be executed and returned prior to that if desired). f. Executive will be given seven days following execution of this Agreement to revoke it by notifying the Company in writing as provided in Section 7, since it will not become effective or enforceable and no payments will be made under this Agreement until that seven day revocation period has expired. The Executive agrees that the contents of these paragraphs not only release the Company and the Company Released Parties from any and all claims as stated herein which he could or may make on his own behalf, but also those claims solely with respect to Executive's employment which could or may be made by any other person or entity (including Executive's spouse and family members). It is further understood and agreed that this entire Agreement is not to be construed as an admission of liability by the Company or the Company Released Parties. Further, the payment of monies under this Agreement does not constitute an admission by or on behalf of the Company or the Company Released Parties that you are entitled to any payment pursuant to any policy or practice. Nothing in this Agreement shall be construed as a release, waiver or other relinquishment by you of (i) any claims, demands, actions or liabilities based upon Executive's rights pursuant to this Agreement, (ii) any indemnity to which the Executive may be entitled pursuant to the terms and conditions of the Company's Certificate of Incorporation, By-laws or any directors' and officers' liability insurance policy in effect as of the 6 Effective Date (including, without limitation, any right the Executive may have to retain separate counsel and reimbursement by the Company in connection therewith) and (iii) any right to collect any vested benefits to which he may be entitled under the Company's 401(k) retirement plan. 3.2 COMPANY RELEASE. The Company understands and agrees that as of the Effective Date it releases and discharges the Executive of and from any and all claims, demands, actions or liability whatsoever, based on events or circumstances as of the Effective Date, whether known or unknown, arising out of or in connection with the Executive's employment by the Company, or the termination of such employment, except for any claims, demands, actions or liability based upon the Company's rights pursuant to this Agreement. Notwithstanding the foregoing, the obligations and provisions under Section 13 of the Employment Agreement shall survive in accordance with their terms. 4. RESIGNATIONS. 4.1 The Executive shall resign from the offices of Executive Vice President and Chief Financial Officer of the Company on the first business day following the consummation of the Merger. The Executive shall resign as a member of the Board of Directors of the Company immediately prior to the consummation of the Merger pursuant to the terms of the Merger Agreement. 4.2 Prior to the consummation of the Merger, the Executive shall, at the instruction of Robert B. Stein, Jr., withdraw as a general partner of New DM Management Associates I or assign his general partnership interests to either Robert B. Stein, Jr. or New DM Management Associates I, in each case, without receiving any additional consideration therefor, PROVIDED THAT to the extent such withdrawal or assignment results in any taxable income to the Executive that is not (a) able to be offset against prior loss carry-forwards generated by New DM Management Associates I or (b) as a result of the Executive having been allocated prior losses from New DM Management Associates I, the Company shall pay to the Executive a cash bonus in an amount sufficient to satisfy the Executive's tax liability with respect to such income. Contemporaneously with and as a condition of such withdrawal or assignment, the Executive's options that are subject to a pledge under Partnership Agreement of DM Associates Limited Partnership, by and among New DM Management Associates I, HNB Investment Corp. and the Company, as amended, shall be released from that pledge. 7 5. REPRESENTATIONS AND WARRANTIES. 5.1 The Company has all requisite power and full legal right to enter into this Agreement and to perform its agreements and obligations hereunder. This Agreement and the transactions contemplated hereby have been duly approved and authorized by all requisite corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.2 The execution, delivery, and performance by the Company of this Agreement in accordance with its terms, and the consummation by the Company of the transactions contemplated hereby, will not result in any conflict, violation, breach, or default, under or in respect of (x) the charter documents or by-laws of the Company, (y) any judgment, decree, order, statute, rule, or regulation binding on or applicable to the Company or (z) any agreement or instrument to which the Company is a party (including, without limitation, the Merger Agreement). 6. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled exclusively by single-arbitrator arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 7. LEGAL FEES AND EXPENSES. The Company shall pay all legal fees and expenses, including but not limited to, counsel fees, stenographer fees, printing costs, etc., reasonably incurred by the Executive in connection with the negotiation, execution and delivery of this Agreement or in seeking in good faith to obtain any right or benefit to which the Executive is entitled under this Agreement. Any amount payable under this Agreement that is not paid when due shall accrue interest at the prime rate as from time to time in effect at the Company's agent bank until paid in full. 8. NOTICES. Any notices required to be given under this Agreement shall be in writing and shall be deemed given five (5) days after mailing in the continental United States by registered or certified mail, or upon personal receipt after delivery, telex, telecopy, or telegram, to the party entitled thereto at the address stated below or to such changed address as the addressee may have given by a similar notice: TO THE COMPANY: Dairy Mart Convenience Stores, Inc. One Dairy Mart Way 300 Executive Parkway West Hudson, Ohio 44236 Attn: Robert B. Stein, Jr. 8 WITH COPIES TO: Milbank, Tweed, Hadley & McCloy LLP 1 Chase Manhattan Plaza New York, New York 10005-1413 Attn: Roland Hlawaty Baker & Hostetler LLP 3200 National City Center 1900 E. 9th Street Cleveland, Ohio 44114-3485 Attention: Albert T. Adams TO THE EXECUTIVE: Gregory G. Landry 1803 Forest Oaks Drive Hudson, Ohio 44236 WITH A COPY TO: Victor J. Paci, Esq. Bingham Dana LLP 150 Federal Street Boston, MA 02110 9. GENERAL PROVISIONS. 9.1. BINDING AGREEMENT. This Agreement shall be binding upon and inure to the benefit of the parties and be enforceable by the Executive's personal or legal representatives or successors if the Executive dies while any amounts would still be payable to him hereunder, benefits would still be provided to his family hereunder, or rights would still be exercisable by him hereunder as if he had continued to live. Such amounts shall be paid to the Executive's estate, such benefits shall be provided to the Executive's family, and such rights shall remain exercisable by the Executive's estate in accordance with the terms of this Agreement. This Agreement shall not otherwise be assignable by the Executive. 9.2. SUCCESSORS. This Agreement shall inure to and be binding upon the Company and the Company's successors and assigns. The Company shall require any successor to all or substantially of the business and/or assets of the Company by sale, merger (where the Company is not the surviving corporation), consolidation, lease or otherwise, by agreement in form and substance satisfactory to the Executive, to assume this Agreement expressly. This Agreement shall not otherwise be assignable by the Company. In the event that it is impracticable for a successor of the Company to perform the Company's obligations under paragraph 1.1(d), of this Agreement, the Company shall pay to the Executive, in a lump sum payment without discounting to present value, an amount equal to the aggregate of all remaining payments due under such paragraph 1.1(d). 9 9.3. AMENDMENT OR MODIFICATION; WAIVER. This Agreement may not be amended or modified unless agreed to in writing by the Executive and the Company. No waiver by either party of any breach of this Agreement shall be deemed a waiver of a subsequent breach. 9.4. SEVERABILITY. In the event that any provision of this Agreement shall be determined to be invalid or unenforceable, such provision shall be enforceable in any jurisdiction in which valid and enforceable, and in any event the remaining provisions shall remain in full force and effect to the fullest extent permitted by law. 9.5. RIGHTS GRANTED. This Agreement shall not give the Executive any right to compensation or benefits from the Company or any Subsidiary, except for the rights specifically stated herein, including those certain severance and other benefits that become due as of the Effective Date. 9.6. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Ohio, without regard to conflict of law principles. 10. EXCLUSIVE AGREEMENT. It is agreed and understood that this Agreement represents the entire agreement between the Company and the Executive concerning the subject matter hereof and, as of the Effective Date, this Agreement shall supersede all prior agreements and understandings concerning the Executive and the Executive's rights upon the termination of his employment, including, without limitation, the Employment Agreement (except with respect to Section 13 thereof). Until the Effective Date, the Employment Agreement shall remain in full force and effect except as modified hereby and, after the Effective Date, to the extent there is any express conflict between the Employment Agreement and this Agreement, the provisions of this Agreement shall control. 11. EFFECTIVENESS OF AGREEMENT. This Agreement will only become effective upon the consummation of the Merger and will terminate upon the termination of the Merger Agreement, except for the provisions of Section 7 hereof which shall be effective as of the date hereof and which shall survive termination of the Merger Agreement. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the day and year first above written. Dairy Mart Convenience Stores, Inc. Executive By its Authorized Representative By: /s/ Robert B. Stein, Jr. /s/ Gregory G. Landry ------------------------------ --------------------- Name: Robert B. Stein, Jr. Gregory G. Landry Title: Chairman, President and C.E.O. 11 EXHIBIT A DEFINITIONS The following terms as used in this Severance Agreement have the following meanings: (a) "BASE SALARY" means the Executive's base salary, exclusive of any bonus or other benefits he may receive, at the annual rate in effect on the Effective Date, which annual rate is $275,000. (b) "COMPANY" means Dairy Mart Convenience Stores, Inc. or any successor. (c) "EMPLOYMENT AGREEMENT" means the Employment Agreement effective as of January 1, 2000 between the Company and the Executive. (d) "SUBSIDIARY" means any corporation in which the Company owns, directly or indirectly, 50 percent (50%) or more of the total combined voting power of all classes of stock. EX-10.18 5 l88054aex10-18.txt EX-10.18 1 Exhibit 10.18 LIMITED PARTNERSHIP AGREEMENT of DM Associates Limited Partnership March 12, 1992 2 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I DEFINITIONS AND PARTIED.................................................................................1 Section 1.1 - Definitions................................................................................1 ARTICLE II FORMATION..............................................................................................6 Section 2.1 - Formation..................................................................................6 Section 2.2 - Name.......................................................................................6 Section 2.3 - Office and Agent for Service...............................................................6 Section 2.4 - Documents to be Filed......................................................................6 ARTICLE III PURPOSES AND POWERS...................................................................................6 Section 3.1 - Purposes and Powers........................................................................6 ARTICLE IV TERM...................................................................................................7 Section 4.1 - Term.......................................................................................7 ARTICLE V PARTNERSHIP CAPITAL.....................................................................................7 Section 5.1 - Capital Contributions......................................................................7 Section 5.2 - Additional Limited Partners................................................................7 Section 5.3 - Capital Accounts...........................................................................8 Section 5.4 - Non-Assessability..........................................................................8 Section 5.5 - Limitation of Liability of Limited Partners................................................8 Section 5.6 - Withdrawal; Interest.......................................................................9 ARTICLE VI DISTRIBUTIONS OF CASH AND ALLOCATION OF INCOME.........................................................9 Section 6.1 - General....................................................................................9 Section 6.2 - Distributions of Cash Flow.................................................................9 Section 6.3 - Distributions of Cash from Interim Capital Transactions....................................9 Section 6.4 - Distributions on Liquidation..............................................................10 Section 6.5 - Allocations of Net Profits and Net Loss...................................................11 Section 6.6 - Allocation of Gain and Loss from Capital Transactions (other than upon a liquidation)...........................................................11 Section 6.7 - Allocation of Net Profits and Net Loss from Capital Transactions Upon a Liquidation of the Partnership........................................11 Section 6.8 - Minimum Gain Chargeback; Qualified Income Offset..........................................12 Section 6.9 - Monthly Segments; Allocations Among Partners..............................................13 Section 6.10 - No Negative Restoration..................................................................13 Section 6.11 - Accounting...............................................................................13 Section 6.12 - Book-up Provisions.......................................................................14 Section 6.13 - Section 704(c) Allocations...............................................................14 Section 6.14 - Special 35% Profits Limitation...........................................................14
3 ARTICLE VII TAX MATTERS PARTNER..................................................................................14 Section 7.1 - Tax Matters Partner.......................................................................14 ARTICLE VIII RIGHTS, OBLIGATIONS AND REPRESENTATIONS OF THE GENERAL PARTNER......................................15 Section 8.1 - Power and Authority of the General Partner................................................15 Section 8.2 - Actions Requiring a Super Majority........................................................15 Section 8.3 - Notification of Approval Required.........................................................15 Section 8.4 - Reimbursement.............................................................................15 Section 8.5 - Representations by General Partner........................................................16 Section 8.6 - Other Activities..........................................................................16 Section 8.7 - Periodic Reporting........................................................................16 ARTICLE IX OTHER PARTNER PROVISIONS..............................................................................16 Section 9.1 - Actions of the General Partner............................................................16 Section 9.2 - Third Party Reliance on Authority of the General Partner..................................17 ARTICLE X RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.............................................................18 Section 10.1 - Authority of Limited Partners............................................................18 Section 10.2 - Rights of Limited Partners...............................................................18 Section 10.3 - Assignment by Partners...................................................................18 Section 10.4 - Right of First Refusal...................................................................19 Section 10.5 - Right to Gift Interest...................................................................19 ARTICLE XI SPECIAL TRANSFER PROVISIONS...........................................................................19 Section 11.1 - Transfer of Limited Partnership Interest.................................................19 ARTICLE XII POWER OF ATTORNEY....................................................................................20 Section 12.1 - Power of Attorney........................................................................20 Section 12.2 - Assignment...............................................................................21 Section 12.3 - Admission of Limited Partner.............................................................21 Section 12.4 - Irrevocable..............................................................................21 Section 12.5 - Amendments by General Partner............................................................21 ARTICLE XIII INDEMNIFICATION.....................................................................................21 Section 13.1 - Indemnification of General Partner.......................................................21 Section 13.2 - Indemnification of Partnership...........................................................21 ARTICLE XIV RESTRICTION AGAINST TRANSFERS BY GENERAL PARTNER; REMOVAL OF GENERAL PARTNER.........................22 Section 14.1 - Removal of General Partner...............................................................22 Section 14.2 - Effect of Removal........................................................................22 Section 14.3 - Successor................................................................................22 Section 14.4 - Transfer of General Partner's Interest...................................................22 ARTICLE XV DISSOLUTION AND TERMINATION...........................................................................22 Section 15.1 - Events of Dissolution....................................................................22 Section 15.2 - Priority of Distribution.................................................................23
4 Section 15.3 - Period of Dissolution....................................................................24 Section 15.4 - Statement................................................................................24 Section 15.5 - Liability for Capital Contributions......................................................24 Section 15.6 - Distribution of Assets...................................................................24 ARTICLE XVI CONCLUDING PROVISIONS................................................................................25 Section 16.1 - Entire Agreement.........................................................................25 Section 16.2 - Amendments...............................................................................25 Section 16.3 - Successors...............................................................................25 Section 16.4 - Captions.................................................................................25 Section 16.5 - Notice...................................................................................25 Section 16.6 - Arbitration..............................................................................25 Section 16.7 - Counterparts.............................................................................26 Section 16.8 - Partial Invalidity.......................................................................26 Section 16.9 - Counsel..................................................................................26 Section 16.10 - Applicable Law..........................................................................26 Section 16.11 - Exhibits................................................................................26 Section 16.12 - Genders.................................................................................26
5 LIMITED PARTNERSHIP AGREEMENT OF DM ASSOCIATES LIMITED PARTNERSHIP THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement"), dated as of March 12 , 1992 by and among DM MANAGEMENT ASSOCIATES, a Connecticut general partnership (the "General Partner"), and the undersigned persons and entities whose names are listed on Exhibit A hereto as Limited Partners (individually a "Limited Partner" and collectively, the "Limited Partners"). The General Partner and the Limited Partners are referred to individually as a "Partner" and collectively as the "Partners." WITNESSETH: ---------- WHEREAS the parties hereto desire to enter into this agreement pursuant to the laws of the State of Connecticut for the purpose of creating a limited partnership to acquire, hold and ultimately dispose of approximately 34% of the outstanding stock of DMCS, which stock represents approximately 60% of the voting power of DMCS (the "DMCS Shares"). NOW, THEREFORE, it is hereby agreed as follows: ARTICLE I ---------- Definitions and Partied ----------------------- SECTION 1.1 - DEFINITIONS. The words, phrases and parties defined in this Article shall have the meanings indicated. Whenever the words, phrases and parties defined in this Article, or elsewhere in this Agreement, are intended to have their defined meanings, the first letter of the word or the first letters of all substantive words in the phrase shall be capitalized. Otherwise, any word, phrase or party name that appears in this Agreement shall have the meaning denoted by its contest. ACT shall mean the Connecticut Uniform Limited Partnership Act as the same may be, from time to time, amended. AFFILIATE of a Person (the "Primary Person") means (a) any Person 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 the director or officer (i) of the Primary Person, (ii) of any Subsidiary of the Primary Person, or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, directly or indirectly, (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. AGREEMENT shall mean this document, which is the Limited Partnership Agreement of the DM Associates Limited Partnership. BALANCE OF THE CLASS A LIMITED PARTNER'S 9% PREFERRED RETURN shall mean an amount equal to the excess of (i) a return at the rate of nine percent (9%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership, or portion thereof) of the Unrecovered Capital of the Class A Limited Partner for the period from 6 the date hereof through the date of determination, which amount shall be reduced to reflect the timing and amount of any prior distributions of the Balance of the Class A Limited Partner's 9% Preferred Return pursuant to Section 6.3(d), less (ii) an amount equal to a return at the rate of six percent (6%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership, or portion thereof) of the Unrecovered Capital of the Class A Limited Partner for the period from the date hereof through the date of determination. BALANCE OF THE LIMITED PARTNERS' 15% PREFERRED RETURN shall mean an amount equal to the excess of (i) a return at the rate of fifteen percent (15%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership or portion thereof) of the Unrecovered Capital of the applicable Limited Partner for the period from the date hereof through the date of determination, which amount shall be reduced to reflect the timing and amount of any prior distributions to the applicable Limited Partner of the Balance of the Limited Partners' 15% Preferred Return pursuant to Section 6.3(g); less (ii) an amount equal to a return at the rate of nine percent (9%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership, or portion thereof) of the Unrecovered Capital of the applicable Limited Partner for the period from the date hereof through the date of determination. BALANCE OF THE SPECIAL 15% PRIORITY shall mean an amount equal to a return at the rate of fifteen percent (15%) per annum, compounded annually, on the principal amount outstanding from time to time on the CDA Loan for the period from the date hereof through the date of determination, less an amount equal to a return at the rate of nine percent (9%) per annum, compounded quarterly, on the principal amount outstanding from time to time on the CDA Loan for the same period, which amount shall be reduced to reflect the timing and amount of any prior distributions of the Balance of the Special 15% Priority pursuant to Section 6.3(h). CAPITAL CONTRIBUTIONS shall mean, with respect to any Partner, the amount of money and the fair market value of any property (including DMCS Shares) contributed to the Partnership pursuant to the terms of this Agreement. CAPITAL TRANSACTION shall mean a sale, financing, refinancing, or termination and liquidation of the Partnership, or any other disposition of the Partnership Property, or any part of, or interest in, the Partnership Property, which, in accordance with generally accepted accounting principles, is attributable to capital. CASH FLOW shall mean with respect to any period, the amount, (if any) by which the cash received from all sources other than: (a) Capital Contributions (except the amount of any reserve originating from a Capital Contribution which is used to pay an Operating Cost); and (b) Capital Transactions, exceeds the operating costs with respect to such period. CASH FROM CAPITAL TRANSACTIONS shall mean with respect to any period, the amount (if any) by which the cash received from Capital Transactions exceeds the costs and expenses attributable to such Capital Transactions. 7 CDA shall mean the Connecticut Development Authority. CDA LOAN shall mean a nonrecourse loan in the amount of $7,100,000 from CDA, or any successor creditor thereto, due July 31, 1997. CDA LOAN AGREEMENT shall mean the Loan Agreement and Stock Pledge Agreement between the Partnership and the CDA and the Irrevocable Special Proxy granted by the Partnership to the CDR, all dated as of February ___, 1992. CLASS A LIMITED PARTNERS shall mean those partners designated on Exhibit A hereto as being Class A Limited Partners. CLASS B LIMITED PARTNERS shall mean those partners designated on Exhibit A hereto as being Class B Limited Partners. CLOSING DATE shall mean the date the Partnership acquired the DMCS Shares, which was __________________, 1992. DMCS shall mean Dairy Mart Convenience Stores, Inc., a Delaware corporation. DMCS SHARES shall mean shares of Class H Common Stock, Par value $.01 per share of Dairy Mart Convenience Stores, Inc. 15% PREFERRED RETURN shall mean, with respect to the General Partner, an amount equal to a return at the rate of fifteen percent (15%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership or portion thereof) of the Unrecovered Capital of the General Partner for the period from the date hereof through the date of determination, which amount shall be reduced to reflect the timing and amount of any prior distributions of the 15% Preferred Return pursuant to Section 6.3(i). GENERAL PARTNER shall mean DM MANAGEMENT ASSOCIATES, a Connecticut general partnership. GROSS ASSET VALUE means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except that the Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market value, as determined by the General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a DE MINIMIS Capital Contribution; (b) the distribution by the Partnership to Partner of more than a DE MINIMIS amount of Partnership property as consideration for an interest in the Partnership if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (c) the liquidation of the Partnership within the meaning of Regulations Section 1.7041(b)(2)(ii)(g); 8 (d) the Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and (e) the Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to I.R.C. Section 734(b) or I.R.C. Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection to the extent the Partners determine that an adjustment pursuant to subparagraph (b) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection. INDIVIDUAL CLASS B LIMITED PARTNER shall mean Charles Nirenberg. INTERIM CAPITAL TRANSACTION shall mean any financing, refinancing or sale of a portion of the assets of the Partnership and any similar items which, in accordance with generally accepted accounting practices, are attributable to capital but which do not result in the dissolution of the Partnership. LIMITED PARTNERS shall mean the Class A Limited Partner or Partners and the Class B Limited Partners, all of which persons and entities are listed as Limited Partners in Exhibit A attached hereto. MAJORITY shall mean Partners owning more than fifty percent (50%) of the Percentage Interests in the Partnership. NET PROFITS and NET LOSSES means, for each fiscal year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with I.R.C. Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to I.R.C. Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Section shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in I.R.C. Section 705(a)(2)(H) or treated as I.R.C. Section 705(A)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Section shall be subtracted from such taxable income or loss; (c) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to the provisions of this Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profits or Net Losses; and (d) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by 9 reference to the Gross Asset Value of the property dispersed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value. 9% PREFERRED RETURN shall mean, with respect to each Class H Limited Partner, an amount equal to a return at the rate of nine percent (9%) per annum, compounded annually, on the average daily balance (determined for each fiscal year of the Partnership or portion thereof) of the Unrecovered Capital of such Class H Limited Partner for the period from the date hereof through the date of determination, which amount shall be reduced to reflect the timing and amount of any prior distributions of the 9% Preferred Return pursuant to Sections 6.3(e). PARTNERS shall mean the General Partner and the Limited Partners. PARTNERSHIP shall mean DM Associates Limited Partnership. PARTNERSHIP PROPERTY shall mean all assets held by the Partnership, including the DMCS Shares, subject to liabilities of the Partnership. PERCENTAGE INTEREST shall mean each Partner's interest in the Partnership. Each Partner's initial Percentage Interest in the Partnership shall be as set forth on Exhibit A. PERSON shall mean an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. REPRESENTATIONS AGREEMENT shall mean the Representations Agreement among HNB Investment Corp., Charles Nirenberg, Frank Colaccino, Gregory Landry, Mitchell Kupperman and Robert Stein. 6% PREFERRED RETURN shall mean, with respect to the Class A Limited Partner, an amount equal to a return at the rate of six percent (6%) per annum compounded annually, on the average daily balance (determined for each fiscal year of the Partnership or portion thereof) of the Unrecovered Capital of the Class A Limited Partner for the period from the date hereof through the date of determination, which amount shall be reduced to reflect the timing and amount of any prior distributions of the 6% Preferred Return pursuant to Section 6.3(b). SUBSIDIARY shall mean 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. SUPER MAJORITY shall mean Limited Partners owning sixty percent (60%) or more of the Percentage Interests of the Partnership. UNRECOVERED CAPITAL shall mean at any time the excess of all amounts contributed to the Partnership by a Partner over, with respect to the General Partner, all amounts previously distributed to the General Partner pursuant to Section 6.3(f), with respect to the Class A Limited 10 Partner, all amounts previously distributed to the Class A Limited Partner under Section 6.3(a) and with respect to the Class H Limited Partner all amounts previously distributed to the Class H Limited Partner under Section 6.3(c). ARTICLE II ---------- Formation --------- SECTION 2.1 - FORMATION. The General Partner and the Limited Partners hereby agree to form a limited partnership pursuant to the Act. The Partnership shall commence on the date of recordation of a Certificate of Limited Partnership with the Secretary of State of the State of Connecticut. SECTION 2.2 - NAME. The Partnership shall be conducted under the name of DM Associates Limited Partnership. SECTION 2.3 - OFFICE AND AGENT FOR SERVICE. The principal office of the Partnership shall be located at 240 South Road, Enfield, Connecticut, Attn: Frank Colaccino, or such other place or places as the General Partner may, from time to time, designate after notice to all the Limited Partners. The agent for service of process shall be Frank Colaccino, or such successor as may, from time to time, be designated by the General Partner. SECTION 2.4 - DOCUMENTS TO BE FILED. The Partners, or the General Partner as attorney-in-fact for one or more of the Partners, shall sign and file as required: (a) A Certificate of Limited Partnership, meeting the requirements of the Act, filed in accordance with this Agreement and such further amendments to the Certificate as may be required or permitted by this Agreement, all of which shall be filed 'for record in the office of the Connecticut Secretary of State. The General Partner shall not be required to deliver or mail a copy of any such Amended 'and Restated Certificate of Limited Partner-ship to any Limited Partner; and (b) All other certificates required to be filed in Connecticut or in any other state or by the federal government. ARTICLE III ----------- Purposes and Powers ------------------- SECTION 3.1 - PURPOSES AND POWERS. The purpose of the Partnership is to acquire the DMCS Shares and to hold, manage, sell, and ultimately dispose of the DMCS Shares and to make any other investments agreed to by a Super Majority of the Partners. The Partnership is authorized to enter into all contracts, agreements, mortgages, leases, notes and other documents and perform all acts contemplated by this Agreement in furtherance of, or incidental to, such purpose. 11 ARTICLE IV ---------- Term ---- SECTION 4.1 - TERM. The Term of the Partnership commenced on January 31, 1992, the date the Partnership was formed, and shall continue until the earlier of five years and six months after the Closing Date ("Term") or December 31, 1997, provided, however, that the Partnership shall be sooner dissolved, and the Term thereby shortened, upon the happening of any of the events set forth in Article XV of this Agreement. ARTICLE V --------- Partnership Capital ------------------- SECTION 5.1 - CAPITAL CONTRIBUTIONS. The capital of the Partnership shall be contributed and adjusted as follows: (a) The General Partner has contributed or will contribute on the Closing Date, the amount of cash capital set forth on Exhibit A in exchange for the Percentage Interest in the Partnership also set forth on Exhibit A. (b) Each Limited Partner has contributed to the Partnership, or will contribute on the Closing Date, the amount of capital, as set forth on Exhibit A, and shall receive a Percentage Interest in the Partnership, also as set forth on Exhibit A. Such capital shall be contributed in cash or, with respect to contributions to the Partnership on or prior to the Closing Date by the Class H Limited Partners, in shares of stock of the DMCS, valued for such purposes, at $12 per share. SECTION 5.2 - ADDITIONAL LIMITED PARTNERS. Except as expressly provided herein, the General Partner is not authorized to admit additional Partners to the Partnership or sell additional Partnership interests without a Super Majority vote of Limited Partners. Notwithstanding the foregoing, the General Partner shall be permitted at any time on or prior to six months after the Closing Date to admit up to five (5) additional Class H Limited Partners to the Partnership so long as (i) such additional Limited Partners are employees of DMCS at the time they are admitted to the Partnership, (ii) the interest in the Partnership received by such employees is acquired directly from the Individual Class B Limited Partner at a price to be mutually determined between the General Partner and the Individual Class H Limited Partner, (iii) such additional Class H Limited Partners own in the aggregate no more than a 1.25% Percentage Interest in the Partnership, (iv) the admission of the new Class B Limited Partner complies with the provisions of Section 10.3(a) through (e) and (v) the admission of the new Class H Limited Partners does not dilute the interest of the Class A Limited Partner or the General Partner or reduce any amounts receivable by the Class A Limited Partner or the General Partner in their capacity as such. The General Partner is authorized to do all things necessary to effectuate the admission of such additional Limited Partners, each of whom shall become a signatory by executing a conformed counterpart of this Agreement and each such additional Partner shall be deemed to have adopted and to have agreed to be bound by all of the provisions of this Agreement. The original of this Agreement, executed by the General Partner and the original Partners, and the duly executed counterparts as aforementioned duly attested by the General Partner, taken together, shall constitute a single instrument. 12 SECTION 5.3 - CAPITAL ACCOUNTS. The Partnership shall establish for each Partner a Capital Account which shall be maintained as follows: (a) To each Partner's Capital Account there shall be credited such Partner's Capital Contributions, such Partner's distributive share of profits and any items in the nature of income or gain that are specifically allocated pursuant to Article VI hereof, and the amount of arty Partnership liabilities that are assumed by such Partner or that are secured by any Partnership property distributed to such Partner. (b) From each Partner's Capital Account there shall be debited the amount of cash and the fair market value of any Partnership property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of losses, and any items in the nature of expenses or losses that are specially allocated pursuant to Article VI hereof, and the amount of any liabilities of such Partner that are assumed by the Partnership or that are secured by any property contributed by such Partner to the Partnership. (c) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (d) Loans made by any Partner to the Partnership shall not be considered a Capital Contribution to the Partnership and shall not be credited to the Partner's capital account. (e) The foregoing provisions and other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Sections 1.704-1 (b), and shall be interpreted and applied in a manner consistent with such Regulation. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the Treasury Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Article XV hereof upon the dissolution of the Partnership. The General Partner shall adjust the amounts debited or credited to Capital Accounts with respect to: (a) any property contributed to the Partnership or distributed to the Partners, and (b) any liabilities that are secured by such contributed or distributed property or that are assumed by the Partnership or the Partners, in the event the General Partner shall determine such adjustments are necessary or appropriate pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv). The General Partner also shall make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-1(b). SECTION 5.4 - NON-ASSESSABILITY. No Limited Partner shall be obligated to make any additional contributions to the Partnership. SECTION 5.5 - LIMITATION OF LIABILITY OF LIMITED PARTNERS. The liability of any Limited Partner to provide funds or any other property to the Partnership shall be limited to the amount of the Partner's required Capital Contribution. The Limited Partners shall have no further liability to contribute money to the Partnership for, or in respect of, the liabilities or obligations of the 13 Partnership nor shall any Limited Partner be personally liable for any obligations of the Partnership. SECTION 5.6 - WITHDRAWAL; INTEREST. Except as otherwise herein expressly provided: (a) no Limited Partner shall have the right to withdraw any part of his Capital Contribution to the Partnership; (b) no Limited Partner, as a Limited Partner, shall have the right to receive any funds or property of the Partnership; and (c) no interest shall be paid by the Partnership to any Partner with respect to any Capital Contribution. ARTICLE VI ---------- Distributions of Cash And Allocation of Income ---------------------------------------------- SECTION 6.1 - GENERAL. The General Partner shall have sole discretion as to the making and timing of the distributions of Cash Flow and Cash from Capital Transactions subject to the following provisions: (a) The Partnership shall retain such funds as the General Partner deans necessary to cover its business needs, which shall include reserves against possible losses and the payment or making provision for the payment, when due, of obligations of the Partnership and obligations secured by any lien on, or security interest in, property of the Partnership, or reserves to enable the Partnership to make future distributions to the Partners in accordance with any business plan established by the General Partner. (b) Except as otherwise provided in this Agreement, no Limited Partner shall have priority over any other Limited Partner either as to return of Capital Contributions or as to distributions. Except as provided in Section 15.6 hereof, no Limited Partner shall have the right to demand or receive property other than cash in return of his Capital Contributions or as to other distributions. SECTION 6.2 - DISTRIBUTIONS OF CASH FLOW. Any Cash Flow that is available for distribution shall be distributed, not more often than monthly, but at the sole discretion of the General Partner to the Partners in accordance with their Percentage Interests. SECTION 6.3 - DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. After providing for the satisfaction of all current debts and obligations of the Partnership, including any required payments on any loan or other financing, the General Partner shall distribute the net proceeds from an Interim Capital Transaction, to the Partners to the extent available (after establishment of reasonable reserves) in the following manner and order of priority: (a) First, an amount of such net proceeds equal to the aggregate balance of the Class A Limited Partner's Unrecovered Capital shall be distributed to the Class A Limited Partner; (b) Second, an amount of such net proceeds equal to the aggregate balance of the Class A Limited Partner's 6% Preferred Return shall be distributed to the Class A Limited Partner; 14 (c) Third, an amount of such net proceeds equal to the aggregate balance of the Unrecovered Capital of the Class B Limited Partners shall be distributed to the Class B Limited Partners; (d) Fourth, an amount of such net proceeds equal to the Balance of the Class A Limited Partner's 9% Preferred Return shall be distributed to the Class A Limited Partner; (e) Fifth, an amount of such net proceeds equal to the Class B Limited Partners' 9% Preferred Return shall be distributed to the Class B Limited Partners; (f) Sixth, an amount of such proceeds up to the Unrecovered Capital of the General Partner shall be distributed to the General Partner; (g) Seventh, to (i) the Class A Limited Partner to the extent of its Balance of the Limited Partners' 15% Preferred Return, and (ii) the Class B Limited Partners, to the extent of their Balance of the Limited Partners' 15% Preferred Return. To the extent that the amount available for distribution under this Section 6.3(g) is less than the sum of the amounts referred to in sections 6.3(g)(i) and (ii), then the amount to be distributed to each group hereunder shall be based upon a fraction of the amount available, the numerator of such fraction being the amount referred to in either Section 6.3(g)(i) or (ii), as the case may be, and the denominator of such fraction being the total of the amounts referred to in Sections 6.3(g)(i) and (ii); (h) Eighth, an amount of such net proceeds equal to the Balance of the Special 15% Priority shall be distributed 75% to the Class B Limited Partners and 25% to the General Partner; (i) Ninth, an amount of such proceeds equal to the 15% Preferred Return shall be distributed to the General Partner. (j) Thereafter, any remaining net proceeds shall be distributed three-quarters (75%) to the Limited Partners (to be shared by them pro rata based upon the relative Percentage Interests of the Limited Partners) and one-quarter (25%) to the General Partner. SECTION 6.4 - DISTRIBUTIONS ON LIQUIDATION. All amounts distributed in liquidation of the Partnership or, except under circumstances with respect to which this Agreement or any other agreement with the Partners whose interests are being liquidated contemplates otherwise, of the interests of one or more Partners, shall be distributed in accordance with the positive Capital Account balances of the Partners, the interests of which are being liquidated, as determined after taking into account all Capital Account adjustments for the taxable year in which such liquidation occurs, including adjustments under Section 6.7 of this Agreement. Distributions pursuant to this Section 6.4 shall be made by the end of such taxable year (or, if later, within 90 days after the date of such liquidation). Notwithstanding anything contained in this Section 6.4, (except as provided in Section 6.14), it is the intention of the Partners that the distributions on liquidation of the Partnership be made in a manner similar to the distributions of Interim Capital Transactions contained in Section 6.3 and, to the extent the ultimate distributions to be made on liquidation do not conform to the economic arrangement set forth in Section 6.3 the Partners agree and acknowledge that the Capital Accounts of the Partners will be adjusted to assure that the ultimate distributions to Partners reflect the distribution priorities contained in Section 6.3. 15 SECTION 6.5 - ALLOCATIONS OF NET PROFITS AND NET LOSS. Subject to Section 6.8 of this Agreement, Net Profits and Net Loss shall be allocated to the Partners for each fiscal year of the Partnership, or part of thereof, in accordance with their Percentage Interests. SECTION 6.6 - ALLOCATION OF GAIN AND LOSS FROM CAPITAL TRANSACTIONS (OTHER THAN UPON A LIQUIDATION). Subject to Section 6.8 of this Agreement, Net Profits from interim Capital Transactions (other than upon a liquidation of the Partnership) shall be allocated among the Partners in the following amounts and priorities: (a) First, to those Partners to whom distributions were made or are to be made under Section 6.3 as (i) 6% Preferred Return, (ii) Balance of the Class A Limited Partner's 9% Preferred Return, (iii) 9% Preferred Return, (iv) Balance of the Limited Partners' 15% Preferred Return, (v) Balance of the Special 15% Priority, or (vi) 15% Preferred Return from the net proceeds from the Interim Capital Transactions, in the amount by which any such distribution exceeded, or with respect to prospective distributions, will exceed his or its Capital Account. In the event the Net Profits to be allocated are less than the aggregate excess described above, each Partner will be allocated that portion of the Net Profits to be allocated pursuant to this Section 6.6, the numerator of which is the differential between its distribution and its Capital Account and the denominator of which is the aggregate differential for all Partners; and (b) Thereafter, the balance of Net Profits from Interim Capital Transactions shall be allocated 75% to the Limited Partners (to be shared by them pro rata based upon their relative Percentage Interests) and 25% to the General Partner; (c) Net losses from Interim Capital Transactions shall be allocated among the Partners as follows: (1) First, to the Partners in proportion to their Capital Accounts, until their Capital Accounts are reduced to zero; and (2) Thereafter, the balance of Net Losses, if any, shall be allocated among the Partners pro rata in accordance with their Percentage Interests. SECTION 6.7 - ALLOCATION OF NET PROFITS AND NET LOSS FROM CAPITAL TRANSACTIONS UPON A LIQUIDATION OF THE PARTNERSHIP. (a) Except as provided in Section 6.8, all Net Profits of the Partnership in connection with a dissolution and winding up of the Partnership shall be allocated to the Partners in the following manner and priority: (1) First, to the Class A Limited Partner until the positive balance in the Capital Account of the Class A Limited Partner is equal to the sum of the Unrecovered Capital of the Class A Limited Partner and the 6% Preferred Return; (2) Then, to the Class B Limited Partners until the positive balance in the Capital Account of the Class B Limited Partners is equal to the Unrecovered Capital of the Class B Limited Partners. (3) Then, to the Class A Limited Partner until the positive balance in the Capital Account of the Class A Limited Partner is increased by an amount equal to the Balance of the Class A Limited Partner's 9% Preferred Return; 16 (4) Then, to the Class B Limited Partners until the positive balance in the Capital Account of the Class B Limited Partners is increased by an amount equal to the 9% Preferred Return; (5) Then, to the General Partner until the positive balance of the Capital Account of the General Partner is equal to the Unrecovered Capital of the General Partner; (6) Then, to the Limited Partners until the positive balance in the Capital Account of the Limited Partners is increased by an amount equal to the Balance of the Limited Partners' 15% Preferred Return under Section 6.3(g); (7) Then, to the Class B Limited Partners and the General Partner until the positive balance in their Capital Accounts is increased by the Balance of the Special 15% Priority that is or was distributed to such Partners under Section 6.3(h); (8) Next, to the General Partner until the positive balance in the Capital Account of the General Partner is increased by an amount equal to the 15% Preferred Return; (9) Thereafter, to the Partners in accordance with, and in proportion to the amounts received, or to be received, by them pursuant to Section 6.3(j). (b) Net Losses from Capital Transactions upon a liquidation of the Partnership shall be allocated first to those Partners with positive Capital Account balances, pro rata, until such Capital Account balances have been reduced to zero. The balance of Net Losses, if any, shall be allocated, pro rata, in accordance with the Partners' Percentage Interests. SECTION 6.8 - MINIMUM GAIN CHARGEBACK; QUALIFIED INCOME OFFSET. Notwithstanding any allocation in this Article VI: (a) No Net Loss and no Net Loss from Capital Transactions shall be allocated to any Partner to the extent that such allocation would cause or increase the amount of a deficit balance in such Partner's Capital Account at a time when any other Partner has a positive balance in his Capital Account. Any Net Loss and any Net Loss from Capital Transaction not allocable to a Partner by reason of the foregoing sentence shall be allocated to any remaining Partners having positive Capital Account balances until such balances have been reduced to zero. (b) In the event that: (i) any Partner or Partners unexpectedly receives any adjustment, allocation, or distribution described in Treasury Regulation Sections 1.704-1(b)(2)(ii) (d)(4), (5) or (6), and (ii) such adjustment, allocation or distribution causes or increases a deficit balance in such Partner's or Partners' Capital Accounts) as of the end of the Partnership taxable year to which such adjustment, allocation or distribution relates, then, notwithstanding the provisions of Sections 6.5, 6.6 and 6.7 hereof, items of gross income (consisting of a pro rata portion of each item of gross income) for such taxable year and each subsequent year shall be allocated among all such Partners in proportion to such deficit balances or increases in such deficit balance created or caused by such adjustment, allocation or distribution, as the case may be, to eliminate such deficit balances or increases in such deficit balances, as the case may be, as quickly as possible. (c) In the event that during a Partnership taxable year there is a net decrease in the Partnership "Minimum Gain" (within the meaning of Treasury Regulation Section 1.704-1(b)(4) (iv)(c)), then, prior to any other allocation under Sections 6.5, 6.6 and 6.7, of all items of income and gain, each Partner must be allocated items of income and gain for such year (and, if necessary, for subsequent years) in proportion to, and to the extent of, an amount equal to the 17 greater of (i) the portion of such Partner's share of the net decrease in Partnership Minimum Gain during such year that is allocable to the disposition of Partnership Property subject to one or more nonrecourse liabilities of the Partnership, or (ii) the deficit balance in such Partner's Capital Account at the end of such year (determined before any allocation of Partnership income, gain, loss, deduction, or Code Section 705(a)(2)(H) expenditures for such year and after making the adjustments required by Treas. Reg. ss.1.704-1(b) (2)(ii)(d). For purposes of clauses (a), (b) and (c) of this Section 6.8, the Capital Account balances of all Partners shall be adjusted as provided in Treasury Regulation Section 1.704-1(b)(2) (ii)(d) and to reflect each Partner's share of the Partnership minimum gain as provided in Treasury Regulation Section 1.704-1 (b)(4)(iv) as of the end of the Partnership taxable year. SECTION 6.9 - MONTHLY SEGMENTS; ALLOCATIONS AMONG PARTNERS. (a) Except as otherwise provided in this Agreement, all income, gains, losses, deductions, credits and cash flow that are allocated or distributed to the Limited Partners shall be allocated or distributed among them in proportion to their respective Percentage interest as measured on the last day of the appropriate monthly segment. (b) The Partnership shall divide each fiscal year into 12 monthly segments for the purpose of allocating income, gains, losses, deductions, credits and distributions to Partners who were members of the Partnership at the end of each such monthly segment (hereinafter "segment"). In any case, each segment shall be based on calendar months so that segments shall end on the last day of each month whether or not the fiscal year is less than 12 months. Any Partner entering the Partnership during any month shall be deemed to enter the Partnership on the first day of the month and the income, gain, loss, deduction and distributions, if any, attributable to such Partner will be allocated to such Partner based on the closing of the books method. (c) Any allocations or distributions made hereunder to the Class H Limited Partners shall be shared between them in accordance with their relative Percentage Interests in the Partnership. SECTION 6.10 - NO NEGATIVE RESTORATION. In no event shall any Partner, by reason of his or its execution of this Agreement, be liable to pay for any loss beyond the amount of his or its Capital Contribution, or be personally liable for any debts of the Partnership except to the extent provided by the Act, or this Section 6.10. Each Limited Partner understands, however, that to the extent required by applicable partnership law, if he or it receives the return in whole or in part of his or its Capital Contribution, he may be liable to the Partnership for any sum, not in excess of such return with interest necessary to discharge the Partnership's liabilities to creditors. SECTION 6.11 - ACCOUNTING. The Partnership shall use the method of accounting directed by the General Partner. The fiscal year of the Partnership shall be the calendar year except that in any year the Partnership shall commence or terminate for federal income tax purposes, the then current fiscal year shall either begin on the date of commencement or end on the date of such termination, as the case may be. 18 SECTION 6.12 - BOOK-UP PROVISIONS. Notwithstanding anything else contained herein, if the General Partner in its sole discretion so determines, upon the receipt of additional Capital Contributions from Partners, the assets of the Partnership shall be valued by the General Partner, any unrecognized gain or loss with respect to the Partnership's assets shall be allocated to the Capital Accounts of the Partners in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), the Capital Accounts of the Partners shall be maintained in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g), and the allocations of items of taxable income, gain, deduction and loss with respect to such assets shall be made in accordance with Treasury Regulation Section 1.704-1(b)(4)(i). SECTION 6.13 - SECTION 704(C) ALLOCATIONS. In accordance with Code section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership, including DMCS Shares, shall, solely for tax purposes, be allocated among the Partners so as to take into account the variation between the adjusted basis of the property to the Partnership for federal income tax purposes and its initial gross value. Allocations pursuant to this Section 6.13 are solely for purposes of federal, state and local taxes and shall not affect or be taken into account in computing any Partner's Capital Account or share of Net Profits or Net Losses or other items or distributions pursuant to any provision of this Agreement. SECTION 6.14 - SPECIAL 35% PROFITS LIMITATION. Notwithstanding anything contained in this Agreement to the contrary, the individual Class B Limited Partner's profits interest in the Partnership (as such term is defined in Code section 4946) (when combined with the indirect profits interest in the Partnership held by Mitchell Kupperman) shall in no event exceed 354. In the event that the Individual Class B Limited Partner's profits interest in the Partnership were to exceed 354 (when combined with the indirect profits interest of Mitchell Kupperman), the Partners agree and acknowledge that any return in excess of such 35% profits interest in the Partnership shall be reallocated away from the Individual Class B Limited Partner and to The Nirenberg Family Charitable Foundation, or any successor to the Class B Limited Partner interest held by The Nirenberg Family Charitable Foundation, so that after such reallocation has been effectuated the individual Class B Limited Partner's profits interest in the Partnership (when combined with the indirect, profits interest in the Partnership held by Mitchell Kupperman) is no greater than 35%. ARTICLE VII ----------- Tax Matters Partner ------------------- SECTION 7.1 - TAX MATTERS PARTNER. The Partnership hereby designates the General Partner to act as the Tax Matters Partner in accordance with Internal Revenue Code Section 6231, as the same may be, from time to time, amended. In the event that the General Partner ceases, for any reason, to be a general partner, or if it shall resign as Tax Matters Partner, the remaining General Partner, if any, shall be the Tax Matters Partner, and, if there is no remaining General Partner, then a Super Majority of the Partners shall designate the Partner to serve as Tax Matters Partner. 19 ARTICLE VIII ------------ Rights, Obligations and Representations of the General Partner -------------------------------------------------------------- SECTION 8.1 - POWER AND AUTHORITY OF THE GENERAL PARTNER. (a) Except for actions requiring approval by a Super majority or majority, full and complete discretion in the management and control of the affairs of the Partnership shall be vested in the General Partner, the Managing Partner of which is Frank Colaccino. (b) Notwithstanding anything herein to the contrary, the General Partner's management authority under Section 8.l(a) shall include, but not be limited to, (i) the right to determine who gets elected to the Board of Directors of DMCS and to otherwise exercise all rights the Partnership has with respect to voting and holding the DMCS Shares, (ii) the authority, on behalf of the Partnership, to execute any Purchase and Sale Agreements with respect to the acquisition or disposition of the DMCS Shares, and (iii) to execute financial applications for, and all documents pertaining to, the financing, if any, of the acquisition of the DMCS Shares and/or any subsequent financing, refinancing or disposition of the DMCS Shares, all upon such terms and conditions as the General Partner, in its sole discretion, shall determine. SECTION 8.2 - ACTIONS REQUIRING A SUPER MAJORITY. In addition to actions set forth elsewhere in this Agreement, the following actions of the Partnership shall require approval by a Super majority: (a) changing the nature of the Partnership business; or (b) any modification of the CDA Loan Agreement or any agreements in respect of any other material indebtedness of the Partnership; (c) converting the DMCS Shares to Class A Common Stock of DMCS; or (d) approving an amendment, other than an amendment in accordance with Section 12.5, to this Agreement. SECTION 8.3 - NOTIFICATION OF APPROVAL REQUIRED. When, under any provision of this Agreement, the approval or ratification of a Super Majority is required, the General Partner shall send notice in accordance with Section 16.5. SECTION 8.3A ACTIONS REQUIRING APPROVAL OF A MAJORITY. In addition to the actions set forth elsewhere in this Agreement, the Partnership shall not sell, transfer or exchange more than 1,115,245 DMCS Shares in the aggregate (including all prior transfers of DMCS Shares by the Partnership) without the approval of a majority. SECTION 8.4 - REIMBURSEMENT. The General Partner shall be entitled to current reimbursement from the Partnership's assets for reasonable costs and expenses incurred by the General Partner while acting on behalf of the Partnership. The Tax Matters Partner shall be entitled to reimbursement for all reasonable costs and expenses incurred by him in connection with any audit, administrative proceeding or judicial proceeding, including, but not by way of limitation, the fees of accountants, attorneys and other professional advisors. 20 SECTION 8.5 - REPRESENTATIONS BY GENERAL PARTNER. The General Partner does hereby represent and warrant that: (a) the appropriate documents have been or will be filed which will constitute the Partnership as duly organized and validly existing under the laws of the State of Connecticut; and (b) the execution and delivery of all instruments and the performance of all acts heretofore or hereafter made or taken, or to be made or taken, pertaining to the Partnership or the Partnership Property by the General Partner have been or will be duly authorized by all necessary action and the consummation of any such transactions with, or on behalf of, the Partnership will not constitute a violation of any law, administrative regulation or court decree. SECTION 8.6 - OTHER ACTIVITIES. The General Partner shall devote only such time to the Partnership's business as shall be reasonably required. The Limited Partners hereby acknowledge that the partners of the General Partner are officers of DMCS and that as such, a substantial portion of their time will be devoted to their responsibilities and obligations to DMCS as officers of DMCS. The Limited Partners acknowledge that they will not consider such responsibilities of the partners of the General Partner to conflict with the ability of the General Partner to act as General Partner of the Partnership. The Limited Partners hereby expressly waive any claim they may have against the General Partner, or the partners of the General Partner, for breach of the General Partner's fiduciary obligation to the Partnership due, or relating to the status of the partners of the General Partner as officers of DMCS, provided, however, that the waiver set forth herein is not intended to, and does not, waive any claim that the Partnership may have, in its capacity as a shareholder, against the said officers by virtue of any willful misconduct by said officers. SECTION 8.7 - PERIODIC REPORTING. The General Partner shall furnish to the Limited Partners, within 10 days after they are received by the General Partner, copies of all proxy statements, annual reports, and other Securities and Exchange Commission filings received by the General Partners from DMCS. In addition, the General Partner shall provide to the Limited Partners copies of all financial statements and other reports and certificates provided to the CDA, when and as such reports and other information are provided to the CDA. ARTICLE IX ---------- Other Partner Provisions ------------------------ SECTION 9.1 - ACTIONS OF THE GENERAL PARTNER. Whenever in this Agreement or any other agreement contemplated herein, the General Partner is permitted or required to make a decision (i) in its "discretion" or "sole discretion", with "complete discretion" or under a grant of similar authority or latitude, the General Partner shall be entitled to consider only such interest and factors as it desires and shall have no duty or obligation to consider any interest of or factors affecting the Limited Partners or their assigns or (ii) in its "good faith" or under another express standard, the General Partner shall be subject to only such express standard and shall not be subject to any other or different standards imposed by the Act, any other applicable law, statute, rule or regulation, or any other agreement contemplated herein. Each Limited Partner and each assignee hereby agrees that any standard of care or duty imposed in this Agreement or any other 21 agreement contemplated herein or under the Act or any other applicable law, rule, or regulation, shall be modified, waived or limited in each case as required to permit the General Partner to act under this Agreement or any other agreement contemplated herein and to make any decision pursuant to the authority prescribed in this Section 9.1, so long as such action or decision does not constitute gross negligence, malfeasance or fraud and is not reasonably believed by the General Partner to be inconsistent with the overall purposes of the Partnership. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by the General Partner to be genuine and to have been signed or presented by the proper party or parties. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisors selected by the General Partner. The opinion of such person as to matters which the General Partner believes to be within such person's professional or expert competence shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by the General Partner in good faith and in accordance with such opinion. SECTION 9.2 - THIRD PARTY RELIANCE ON AUTHORITY OF THE GENERAL PARTNER. The signed statement of the General Partner reciting that the General Partner has authority to undertake any act or has the necessary votes or consents of the Partners to take any such act, when delivered to any third party, including any lender or purchaser (including any purchaser of the DMCS Shares from the Partnership) ("Third Party"), shall be all of the evidence such Third Party shall need concerning the capacity of such General Partner and any such Third Party shall be entitled to rely upon such statement and shall not be required to inquire further as to any of the facts contained in such statement, said facts being deemed to be true insofar as such Third Party is concerned (provided, however, that such Third Party may not rely upon such statement and deem it to be true if such Third Party has actual knowledge to the contrary). After delivering such statement, the General Partner by its signature alone, may sign any instrument and bind the Partnership and the Partnership Property just as though all of the Partners had also signed. The Limited Partners and/or their assigns hereby waive any and all defenses or other remedies that may be available against any such Third Party or other person to contest, negate or disaffirm any action of the General Partner in connection with any such statement provided for in this Section 9.2. Each contract, agreement, deed, mortgage, security agreement, promissory note or other instrument or document executed by the General Partner, or its representative, with respect to the business or property of the Partnership shall be conclusive evidence in favor of any and every person relying thereon or claiming thereunder that (a) at the time of the execution and delivery thereof, this Agreement was in full force and effect, (b) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Partnership, and (c) the General Partner, or its representative, was duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Partnership. Such statement shall not, however, have any effect between the Partners unless the action in question was in fact authorized pursuant to this Agreement. 22 ARTICLE X --------- Rights and Obligations of Limited Partners ------------------------------------------ SECTION 10.1 - AUTHORITY OF LIMITED PARTNERS. Except as set forth in this Agreement, or as permitted by the General Partner, no Limited Partner (unless such Limited Partner shall also be a General Partner acting in such capacity) shall: (a) take part in the management of the business or transact any business on behalf of the Partnership; or (b) have the power to execute instruments or documents on behalf of the Partnership or bind the Partnership in any manner. SECTION 10.2 - RIGHTS OF LIMITED PARTNERS. Each Limited Partner (or its duly authorized agent) shall have the right: (a) under reasonable circumstances to inspect at the office of the Partnership during ordinary business hours and to copy at the requesting Partner's expense: (1) the list of the names and business addresses of the Partners; and (2) the Certificate of Limited Partnership, including amendments, and powers of attorney utilized in the execution of such documents; and (3) Partnership income tax returns for the three most recent years; and (4) the written Partnership Agreement with all Amendments; and (5) financial statements of the Partnership for the three most recent years. (b) to obtain from the General Partner from time to time on reasonable demand just and reasonable information including the state of the business and financial condition of the Partnership and copies of the Partnership tax returns after such become available. SECTION 10.3 - ASSIGNMENT BY PARTNERS. Except as provided in Article XI, or Sections 10.5 or 5.2, and except for any transfer by the Class A Limited Partner of all or any portion of its interest in the Partnership to any Affiliate of such Limited Partner, no Limited Partner may transfer his interest in the Partnership, voluntarily or involuntarily, unless such Limited Partner complies with the right of refusal provisions contained in Section 10.4. No such assignee shall become a Partner of the same class as his assignor unless: (a) such person executes an instrument reasonably satisfactory to the General Partner accepting and adopting the terms and provisions of this Agreement; and (b) in the case of assignments other than by operation of law, the assignor states his intention in writing to have his assignee become a Partner of the same class; and (c) such assignee executes a Power of Attorney as described in Article XII and such other documents as the General Partner may reasonably require; and (d) all expenses and costs relating to the assignment, including the General Partner's attorneys' fees, shall be paid by the assignor or assignee; and 23 (e) except for employees of DMCS who acquire their Class B Limited Partner interest in the Partnership pursuant to Section 5.2, the transferee is not a person or entity (i) which owns, operates or franchises convenience stores and/or gasoline stations (a "Competing Person") or (ii) which controls, is controlled by, or is under common control with a Competing Person. If the foregoing conditions are not complied with, the Partnership need not recognize such assignment for any purpose. The assignment by a Limited Partner or by an assignee of a Limited Partner, shall become effective on the day of receipt by the General Partner of evidence of such assignment and of compliance with this Section 10.3. SECTION 10.4 - RIGHT OF FIRST REFUSAL. Except with respect to (i) transfers permitted pursuant to Article XI or Section 5.2, or (ii) transfers by the Class A Limited Partner of all or, a portion of its interest in the Partnership to any Affiliate of such Limited Partner, in the event a Limited Partner desires to sell all or any part of his interest in the Partnership, the Limited Partner may sell such interest only in accordance with this Section. In the event a Limited Partner receives a bona fide offer ("Offer") to purchase his interest (excluding an offer to purchase from another Partner), then such Limited Partner shall provide the General Partner with a copy of the Offer. In the event a Limited Partner has not received an Offer but desires to sell all or any part of his interest in the Partnership, he may give the General Partner a written statement indicating the price and term: that such Partner would be willing to sell such interest (also an "Offer"). The General Partner shall then have a period of twenty (20) days ("Notice Period") within which to give written notice to the Limited Partner of its intention to purchase such interest (or cause the Partnership to purchase such interest) in accordance with the terms of the Offer. Failure to notify the Limited Partner within the Notice Period shall be deemed a rejection. If the Offer is rejected, the selling Limited Partner shall be free to consummate such sale in accordance with the Offer for a period of one hundred and twenty (120) days next following the end of the Notice Period, provided that all of the requirements of Section 10.3 are complied with. Failure to consummate such sale within the one hundred and twenty (120) day period shall cause such interest to be resubjected to the right of first refusal set forth in this Section. In the event more than one Partner accepts the Offer, then each such accepting Partner shall be entitled to purchase a proportionate amount of the interest being sold. SECTION 10.5 - RIGHT TO GIFT INTEREST. Notwithstanding the transfer restrictions contained in this Article X, The Nirenberg Family Charitable Foundation, Inc. (the "Foundation") shall be permitted to transfer its Class B interest in the Partnership by gift so long as such transfer is necessary or required to avoid the imposition on the Foundation, or on any of its affiliates, of the "excess business holdings" excise tax under Code section 4943. ARTICLE XI ---------- Special Transfer Provisions --------------------------- SECTION 11.1 - TRANSFER OF LIMITED PARTNERSHIP INTEREST. Commencing five years and six months after the Closing Date, if the Term of the Partnership has been extended beyond such date, any Limited Partner whose Percentage Interest in the Partnership is greater than 30% may sell all or a portion of his or its limited partnership interest in the Partnership, so long as such sale is made in accordance with the following provisions: 24 (a) The Limited Partner must notify the General Partner, in writing, of his or its desire to sell his or its interest in the Partnership. On behalf of the Limited Partnership, the General Partner will thereafter negotiate with the Limited Partner to acquire the Limited Partner's interest in the Partnership. If, within 30 days after receipt of such written notice by the General Partner, the General Partner and the Limited Partner do not reach an agreement as to the acquisition by the Partnership of the interest of the Limited Partner in the Partnership, the Limited Partner will thereafter have the right to offer his or its Limited Partnership interest to a third party. (b) if the Limited Partner receives an offer to purchase his or its Limited Partnership interest from a third party (the "Offer"), the Limited Partner shall comply with the provisions of Section 10.4 above. (c) If the Limited Partner and the General Partner cannot agree on the terms on which the Partnership would acquire the Limited Partner's interest in accordance with Section 11.1(a) herein, and if the Limited Partner is unable to find a third party purchaser within 60 days thereafter, then the Limited Partner will have the right to either: (i) demand that the Limited Partnership be dissolved, and that the assets of the Partnership be distributed to the Partners in accordance with Article XV of this Agreement; or (ii) cause the assets of the Limited Partnership to be sold. In the event the assets of the Partnership are distributed, the Limited Partner will also have the right to request that DMCS file a registration statement on the Limited Partner's behalf on terms and conditions that are customarily applicable to registration rights granted to the holders of convertible securities and, in such event, General Partner will use its best efforts to cause such registration statement to be filed and become effective. ARTICLE XII ----------- Power of Attorney ----------------- SECTION 12.1 - POWER OF ATTORNEY. Each Limited Partner irrevocably constitutes and appoints the General Partner as his true and lawful attorney, in his name, place and stead, to make, execute, acknowledge and file: (a) a Certificate of Limited Partnership setting forth the terms of this Agreement as required by the laws of the State of Connecticut; and (b) any Certificate or other instrument which may be required to be filed by the Partnership under the laws of the State of Connecticut or which the General Partner shall deem it advisable to file; and (c) any and all amendments or modifications of the Agreement described in Section 12.5 and any Amended Certificates of Limited Partnership required as a result of any such Amendments; and (d) all documents which may be required to effectuate the formation, qualification, continuation, dissolution or termination of the Partnership. 25 SECTION 12.2 - ASSIGNMENT. The foregoing Power of Attorney, as well as all other such Powers of Attorney contained in this Agreement, shall survive the delivery of an assignment by any Limited Partner of the whole or any portion of his interest in this Partnership. SECTION 12.3 - ADMISSION OF LIMITED PARTNER. The General Partner shall require an assignee of a Limited Partner to execute as a condition to his admission as a Limited Partner, a Power of Attorney satisfying the requirements of this Article. SECTION 12.4 - IRREVOCABLE. The foregoing Power of Attorney is a special Power of Attorney coupled with an interest, is irrevocable and shall survive the death, disability, bankruptcy, insolvency or dissolution of the Limited Partner. SECTION 12.5 - AMENDMENTS BY GENERAL PARTNER. The General Partner, through use of the Powers of Attorney, shall have the right to amend this Agreement, if such Amendments are: (a) of an inconsequential nature and do not affect the rights of the Limited Partners in any material respect; (b) required or contemplated by this Agreement as, for example, upon the admission of additional Limited Partners; (c) in the opinion of counsel to the General Partner, necessary to conform to the requirements of state or Federal law. Any Amendment so made shall be deemed effective as of the date of this Agreement; or (d) approved by a Super Majority of the Partners. ARTICLE XIII ------------ Indemnification --------------- SECTION 13.1 - INDEMNIFICATION OF GENERAL PARTNER. Except as provided in this Article XIII, the General Partner shall not be liable to the Limited Partners due to any actions taken by the General Partner. In addition, any act or omission by the General Partner the effect of which may cause or result in loss or damage to the Partnership or the Limited Partners, if done in good faith and in accordance with sound business practices and otherwise in accordance with the terms of this Agreement, shall not subject the General Partner, or any of its partners, representatives, successors and assigns, to any liability. The Partnership agrees to indemnify and hold the General Partner, their representatives, successors and assigns, harmless from any claim, loss, expense, liability, action or damage resulting from any such act or omission, including, without limitation, reasonable costs and expenses of administrative reviews and hearings with the IRS or other government agencies, litigation and appeal (and the reasonable fees and expenses of attorneys and accountants engaged by the General Partner in connection with any such administrative procedure or in the prosecution or defense of such litigation or appeal), but the General Partner shall not be entitled to be indemnified or held harmless due to, or arising from, its gross negligence or willful misconduct. SECTION 13.2 - INDEMNIFICATION OF PARTNERSHIP. The General Partner shall indemnify and hold the Partnership, and the Limited Partners harmless from and against any claim, loss, 26 expense, liability, action or damage including, without limitation, reasonable costs and expenses of litigation and appeal (and the reasonable fees and expenses of counsel) due to or arising out of such General Partner's gross negligence or willful misconduct. ARTICLE XIV ----------- Restriction Against Transfers By General Partner; Removal of General Partner ---------------------------------------------------------------------------- SECTION 14.1 - REMOVAL OF GENERAL PARTNER. The General Partner may be removed as the General Partner only for gross negligence or willful misconduct. Removal of a General Partner may be effected only by delivery of a written notification to, the General Partner requesting removal of the General Partner, which notification must be signed by a Super Majority of the Partners. The notification shall set forth in reasonable detail the cause for removal, and shall bear the witnessed and notarized signature of each Limited Partner joining in said notification. The notification must also set forth the name and address of a general partner which the signatory Limited Partners propose in substitution for the removed General Partner. SECTION 14.2 - EFFECT OF REMOVAL. The removal of the General Partner shall be effective upon election of a successor General Partner. A General Partner so removed shall be entitled to receive that amount that would be due him had the assets of the Partnership been sold at their fair market value as of the date of the removal and such proceeds were distributed among the Partners in accordance with Section 6.4. Such removed General Partner shall not be entitled to any other distributions or to exercise any of the rights of a Partner. The Percentage Interest of the removed General Partner shall, as of the effective date of such removal, be vested in the successor General Partner if the removed General Partner was the sole General Partner. SECTION 14.3 - SUCCESSOR. The consent of a Super Majority is required to choose an additional or successor General Partner, but no sole remaining General Partner may be removed unless and until a successor General Partner shall have been elected. In the event that the sole remaining General Partner is removed and no successor shall be elected within 90 days of the effectiveness of such removal, then the Partnership shall be dissolved. SECTION 14.4 - TRANSFER OF GENERAL PARTNER'S INTEREST. The General Partner may not sell, transfer (voluntarily or by operation of law), assign or encumber by pledge or otherwise any part of its general partnership interest, nor may more than 50% of the beneficial ownership of the General Partner be sold or transferred (other than to persons who are already partners of the General Partner on the date hereof), without first obtaining the written consent of a Super Majority of the Limited Partners, which consent shall not be unreasonably withheld or delayed. ARTICLE XV Dissolution and Termination --------------------------- SECTION 15.1 - EVENTS OF DISSOLUTION. The Partnership shall be dissolved upon the happening of the first to occur of the following: (a) The expiration of its Term, as provided in Section 4.1. (b) A disposition by the Partnership of more than 1,115,245 DMCS Shares in the aggregate (including all prior dispositions of DMCS Shares by the Partnership), except that 27 upon the happening of such event, the General Partner can extend the Partnership for reasonable periods of time upon the vote of a Super Majority of the Partners. (c) The bankruptcy, insolvency, death, incompetency or other event set forth in Section 34-28 of the Connecticut General Statutes ("Event of Withdrawal") by, of, on to the General Partner except that the Partnership shall not be dissolved if either: (1) a remaining General Partner, if any, continues the business of the Partnership, or (2) within 90 days followings such event a Super Majority of Limited Partners agree in writing to continue the business of the Partnership and to the appointment of one or more successor General Partner. (d) A determination by the General Partner to dissolve the Partnership. (e) The failure to elect a successor to a sole remaining General Partner who has withdrawn, dissolved or been removed within the time required by Section 14.3. (f) Any Limited Partner electing pursuant to Section 11.1(c)(i) to cause the Partnership to be dissolved. SECTION 15.2 - PRIORITY OF DISTRIBUTION. If the Partnership shall terminate for any reason, the General Partner shall proceed to the liquidation of the Partnership, subject to the rights of the Class A Limited Partner under Section 15.6 hereof to elect to receive certain distributions in kind, and the proceeds of such liquidation shall be applied and distributed in the following order of priority: (a) To expenses of liquidation, and to creditors, including Partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the Partnership, except for distributions due Partners under Sections 34-20(d) and 34-27(d) of the Act. (b) To the setting up of any reserves which the General Partner may deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner (other than any liabilities for which the General Partner is not entitled to indemnification under Article XIII or in respect of which the General Partner must indemnify the Partners or the Partnership, in each case because of the General Partner's gross negligence or willful misconduct) arising out of, or in connection with, the Partnership. Such reserve shall be paid over by the General Partner to a commercial bank or an attorney-at-law of the State of Connecticut, as escrowee, to be held for the purpose of disbursing such reserves in payment of any of the aforementioned contingencies, and, at the expiration of such period, as the General Partner shall deem advisable, to distribute the balance thereafter remaining in the manner hereinafter provided. (c) To Partners and former Partners in satisfaction of liabilities for distributions under Sections 34-20(d) and 34-27(d) of the Act. (d) Any balance then remaining shall be distributed among all Partners in accordance with Section 6.4. 28 SECTION 15.3 - PERIOD OF DISSOLUTION. A reasonable time (but in no event later than the latter of the end of the taxable year of the liquidation of the Partnership or 90 days after the date of the termination) shall be allowed for the orderly liquidation of the assets of the Partnership and the discharge of liabilities to creditors so as to enable the General Partner to minimize the normal losses attendant upon a liquidation. SECTION 15.4 - STATEMENT. Each of the Partners shall be furnished with a statement prepared by the Partnership's then independent accountants, which shall set forth the assets and liabilities of the Partnership as of the date of complete liquidation. Upon the General Partner complying with the foregoing distribution plan (including payment over to an escrowee if there are sufficient funds therefor), the General Partner shall execute and cause to be filed a Certificate of Cancellation of the Partnership. SECTION 15.5 - LIABILITY FOR CAPITAL CONTRIBUTIONS. The General Partner shall not be personally liable for the return of the Capital Contributions of the Limited Partners or any portion of such Capital Contribution. Any such return, if any, shall be made solely from Partnership assets. SECTION 15.6 - DISTRIBUTION OF ASSETS. (a) Upon any termination or dissolution of the Partnership, the Class A Limited Partner shall have the right, upon written notice to the General Partner (the "Notice"), to elect to receive its distribution in the form of the assets of the Partnership if the Class A Limited Partner shall determine in its reasonable judgment that the net sales value of the Partnership's assets would be insufficient to enable such Limited Partner to recover its Unrecovered Capital and the 6% Preferred Return. In such event, the assets of the Partnership shall be valued at their fair market sales value which, in the case of any DMCS Shares held by the Partnership, shall equal the average closing sale price of such stock for the ten (10) trading days immediately preceding the date of termination or dissolution as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or if then listed on an exchange, the principal exchange. The Class A Limited Partner may give the Notice up to 150 days prior to a scheduled termination or dissolution of the Partnership, and for such purposes (but not for purposes of determining the value of the assets for the distribution or the right of the Class A Limited Partner ultimately to receive its distribution in kind, which shall be determined as of the date of termination or dissolution), the fair market sales value of the assets of the Partnership shall be determined as of the date of the Notice (and in the case of any DMCS Shares, shall equal the average closing sales price of such stock for the ten trading days immediately preceding the date of the Notice as reported by the National Association of Securities Dealers, Inc. Automated Quotation system, or if then listed on an exchange, the principal exchange). (b) Notwithstanding the Class A Limited Partner's right to receive DMCS Shares contained in Section 15.6(a), if the General Partner, within 60 days after receipt of the Notice enters into a binding contract on behalf of the Partnership, to sell the assets of the Partnership (the "Sales Contract") at a net sales value which would allow the Class A Limited Partner to recover its Unrecovered Capital plus the 6% Preferred Return, then the General Partner shall be free to consummate such sale in accordance with the Sales Contract for a period of ninety (90) days next following the date of the Sales Contract. Failure to consummate such 29 sale within the ninety day period shall entitle the Class A Limited Partner to receive the assets of the Partnership pursuant to Section 15.6(a). ARTICLE XVI ----------- Concluding Provisions --------------------- SECTION 16.1 - ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties. There are no oral understandings, terms or conditions, and no party has relied upon any representation, express or implied, not contained in this Agreement except as set forth in the Representations Agreement SECTION 16.2 - AMENDMENTS. Except as provided in Section 12.5, this Agreement may not be amended in any respect whatsoever except by a further agreement, in writing, fully executed by each of the parties. SECTION 16.3 - SUCCESSORS. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon and inure to the benefit of the parties and to their respective heirs, personal representatives, successors and assigns. SECTION 16.4 - CAPTIONS. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. SECTION 16.5 - NOTICE. Any notice, demand, offer or other written instrument ("Notice") required or permitted to be given shall be in writing signed by the party giving such Notice and shall be hand delivered or sent, postage prepaid, by Certified or Registered Mail, Return Receipt Requested, to the parties at the addresses as set forth in this Agreement. Any Notice to be given to the estate of any deceased person shall be addressed to the personal representative of such deceased person at his address or, if there be no personal representative, to the estate of the deceased person at his address as set forth in this Agreement. Any party shall have the right to change the place to which such Notice shall be sent or delivered by similar notice sent in like manner to all other parties hereto. The effective date of any offer, demand, notice or instrument shall be the date of the mailing (if by mail) or addressee's receipt (if hand delivered) of such offer, demand, notice or instrument. SECTION 16.6 - ARBITRATION. Any disagreement arising among the parties as to the conduct of the Partnership business, or as to its termination, or as to any other matter, cause or thing whatsoever not herein otherwise provided for, shall be settled and conclusively determined by arbitration, and each of the parties hereto seeking arbitration shall appoint one such arbitrator and both of such arbitrators shall appoint a third arbitrator, and the decision of two of such arbitrators, when made in writing, shall be conclusive upon the parties hereto. (a) The appointment of the arbitrators by the respective parties hereto shall be made as follows: The party seeking arbitration hereunder shall serve a notice in writing upon the other party hereto, setting forth the disagreement or disagreements that he desires to be arbitrated, as well as the name of the arbitrator; and, thereupon, the other party hereto, shall 30 within fifteen (15) days after the receipt of such notice serve upon the party seeking arbitration a notice in writing stating the name of his arbitrator. (b) The failure of a party to appoint an arbitrator shall authorize the other party to make an appointment for the one so in default. (c) If the two arbitrators appointed hereunder shall fail, within fifteen (15) days after the second of the arbitrators shall have been appointed, to select a third arbitrator then, and in any such event, any Judge of the Superior Court of the State of Connecticut, upon application made by either party for that purpose, shall be authorized and empowered to appoint such third arbitrator. SECTION 16.7 - COUNTERPARTS. This Agreement may be executed in one or more copies and/or by the affixation of signature pages executed by the Partners to one or more copies, each of which shall be deemed an original. SECTION 16.8 - PARTIAL INVALIDITY. The invalidity of one or more of the phrases, sentences, clauses, Sections or Articles contained in this Agreement shall not affect the validity of the remaining portions so long as the material purposes of this Agreement can be determined and effectuated. SECTION 16.9 - COUNSEL. The Limited Partners expressly understand and acknowledge that Schatz & Schatz, Ribicoff & Kotkin, is counsel to the Partnership and to the General Partner, but does not represent the Limited Partners in any matter connected with this Agreement. SECTION 16.10 - APPLICABLE LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Connecticut. SECTION 16.11 - EXHIBITS. All exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference and shall be deemed a part of this Agreement as if fully set forth in this Agreement. SECTION 16.12 - GENDERS. Any reference to the masculine gender shall be deemed to include the feminine and neuter genders, and vice versa, and any reference to the singular shall include the plural, and vice versa, unless the context otherwise requires. 31 Dated as of the 12th day of March, 1992. DM ASSOCIATES LIMITED PARTNERSHIP GENERAL PARTNER DM MANAGEMENT ASSOCIATES by /s/ Frank Colaccino ------------------- FRANK COLACCINO Its Managing Partner LIMITED PARTNERS Class A Limited Partner HNB INVESTMENT CORP. By /s/ Charles W. Salyer --------------------- Its: Vice President Class B Limited Partners /s/ Charles Nirenberg ------------------- Charles Nirenberg THE NIRENBERG FAMILY CHARITABLE FOUNDATION, INC. By /s/ Charles Nirenberg --------------------- its President 32 STATE OF CONNECTICUT ) ) ss. COUNTY OF ) Before me, the undersigned, this ____ day of ______________, 1992, personally appeared FRANK COLACCINO, known to me to be the Managing Partner of DM MANAGEMENT ASSOCIATES, a partnership, and that he as such Managing Partner, signer, and sealer of the foregoing instrument, acknowledged the execution of the same to be his free act and deed individually and as such managing Partner, and the free act and deed of said partnership. In Witness Whereof, I hereunto set my hand. /s/ Notary Public ------------------------------------ Notary Public My Commission Expires: March 31, 1995 Commissioner of the Superior Court STATE OF CONNECTICUT ) ) ss. COUNTY OF ) Before me, the undersigned, this ____ day of ___________________, 1992, personally appeared CHARLES W. SALYER, known to me to be the VICE PRESIDENT, and that he as such officer, signer and sealer of the foregoing instrument, acknowledged the execution of the same to be his free act and deed individually and as such officer, and the free act and deed of said corporation. In Witness Whereof, I hereunto set my hand. /s/ Notary Public ------------------------------------ Notary Public My Commission Expires: March 31, 1995 Commissioner of the Superior Court 33 STATE OF CONNECTICUT ) ) ss. COUNTY OF ) Before me, the undersigned, this ____ day of __________________, 1992, personally appeared CHARLES NIRENBERG, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged that he executed the same .for the purposes therein contained as his free act and deed. In Witness Whereof, I hereunto set my hand. /s/ Notary Public ------------------------------------ Notary Public My Commission Expires: March 31, 1995 Commissioner of the Superior Court STATE OF CONNECTICUT ) ) ss. COUNTY OF ) Before me, the undersigned, this ____ day of ___________________, 1992, personally appeared CHARLES NIRENBERG, known to me to be the PRESIDENT, and that he as such officer, signer and sealer of the foregoing instrument, acknowledged the execution of the same to be his free act and deed individually and as such officer, and the free act and deed of said corporation. In Witness Whereof, I hereunto set my hand. /s/ Notary Public ------------------------------------ Notary Public My Commission Expires: March 31, 1995 Commissioner of the Superior Court 34 EXHIBIT A Capital Percentage Partner Contribution Interest ------------ -------- General Partner DM Management associates $ 700,000 4.32% Class A Limited Partner: HNB Investment Corp. 8,000,000 49.38% Class B Limited Partners: Charles Nirenberg 7,400,000 45.68% The Nirenberg Family Charitable Foundation, Inc. 100,000 0.62% ---------- -------- TOTAL $16,200,000 100.00% 35 EXHIBIT F --------- Agreement relating to the Joint Filing of this Schedule 13D as required by Rule 13d-1(f) 36 EXHIBIT F ---------- The undersigned agree that a statement on Schedule 13D to be filed with the Securities and Exchange Commission on March 13th, 1992, will be filed on behalf of each of them as members of a group. DM Associates Limited Partnership By DM Management Associates DM Management Associates Its General Partner By /s/ Frank Colaccino by /s/ Frank Colaccino ------------------- ------------------- Frank Colaccino Frank Colaccino Its Managing General Partner Its Managing General Partner /s/ Frank Colaccino ------------------- Frank Colaccino EX-10.22.B 6 l88054aex10-22_b.txt EX-10.22(B) 1 Exhibit 10.22(b) EXECUTION COPY FIRST AMENDMENT THIS AMENDMENT, dated as of March 15, 2001 (the "Amendment"), to the Amended and Restated Rights Agreement, dated as of February 8, 2000, (the "Rights Agreement"), by and between Dairy Mart Convenience Stores, Inc., a Delaware corporation (the "Company"), and American Stock Transfer & Trust Company, a New York corporation, as Rights Agent (the "Rights Agent"). WHEREAS, the Company and the Rights Agent are parties to the Rights Agreement; and WHEREAS, pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent desire to amend the Rights Agreement as set forth below. NOW, THEREFORE, in consideration of the premises and the mutual promises set forth herein, the parties hereto agree as follows: Section 1. AMENDMENTS TO SECTION 1. (a) The definitions of "Beneficial Owner" and "Beneficially Own" are amended by adding the following at the end thereof: "Notwithstanding anything contained in this Agreement to the contrary, neither Acquisition Corp. nor any of its Affiliates or Associates shall be deemed to be the Beneficial Owner of, or to beneficially own, any of the Common Shares of the Company solely by virtue of the approval, execution or delivery of the Merger Agreement." (b) The following definitions are added to Section 1 of the Rights Agreement: "Acquisition Corp." shall mean DM Acquisition Corp., a Delaware corporation. "Merger" shall mean the merger of Acquisition Corp. with and into the Company in accordance with the General Corporation Law of the State of Delaware upon the terms and subject to the conditions set forth in the Merger Agreement. "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as of March 15, 2001, between Acquisition Corp. and the Company, but shall not include any amendment to such Merger Agreement. 2 Section 2. EXPIRATION DATE. Section 7(a) of the Rights Agreement is hereby amended by replacing the word "or" with a comma immediately prior to the symbol "(ii)" and by adding immediately prior to the parenthetical at the end thereof the following: or (iii) immediately prior to the Effective Time (as defined in the Merger Agreement) of the Merger; whereupon the Rights shall expire" Section 3. NEW SECTION 34. The following is added as a new Section 34 to the Rights Agreement: "Section 34. THE MERGER, ETC. Notwithstanding anything in this Agreement to the contrary, none of (a) the approval, execution or delivery of the Merger Agreement or the performance by any party of the transactions contemplated thereby or permitted thereunder shall cause (i) Acquisition Corp. or any of its Affiliates or Associates to be an Acquiring Person, (ii) a Share Acquisition Date to occur or (iii) a Distribution Date to occur in accordance with the terms hereof, which Distribution Date, if any, shall instead be indefinitely deferred until such time the Board of Directors may otherwise determine." Section 4. SEVERABILITY. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 5. GOVERNING LAW. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts made and to be performed entirely within such State. Section 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 7. EFFECT OF AMENDMENT. Except as expressly modified herein, the Rights Agreement, as previously amended, shall remain in full force and effect in accordance with the provisions thereof. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed all as of the day and year first above written. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry -------------------------------------- Name: Gregory G. Landry Title: Executive Vice President AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ Herbert L. Lemmer -------------------------------------- Name: Herbert L. Lemmer Title: Vice President EX-10.27 7 l88054aex10-27.txt EX-10.27 1 Exhibit 10.27 SUPPLEMENT TO THE EMPLOYMENT AGREEMENT This Supplement to the Employment Agreement (the "Supplemental Agreement") is effective on the date it is signed by both parties 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 J. WAYNE COLLEY, with his residence located at 4837 Arbour Green Drive, Bath, Ohio 44333 (the "Employee"). WITNESSETH: ----------- WHEREAS, pursuant to an Employment Agreement dated January 18, 2000, (the "Employment Agreement"), which is attached hereto as Exhibit A, between Company and Employee, Employee has been employed by Company as Executive Vice President and Chief Operating Officer of the Company; and WHEREAS, in connection with discussions between the Employee and the Company as evidenced by the letter executed on April 5, 2001 (the "Separation Letter"), the parties have agreed to enter into an agreement to terminate Employee's employment with the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: PURPOSE ------- The purpose of this Supplemental Agreement is to amend and supplement the terms of the Employment Agreement as a result of the parties agreeing to terminate the Employee's employment with the Company as of March 30, 2001, as evidenced by the Separation Letter. It is the intention of the parties that Paragraphs 1-11 of this Supplemental Agreement shall replace in all material aspects, Paragraphs 1-11 of the Employment Agreement, unless otherwise noted below. All other provisions of the Employment Agreement remain intact, unless otherwise noted below. 1. DEFINITIONS. The definitions in this Supplemental Agreement shall have the same meanings as set forth in the Employment Agreement. 2. EMPLOYMENT. The employment of the Employee by the Company is terminated effective March 30, 2001 (the "Date of Termination"). 3. TERM. Notwithstanding Paragraph 3 of the Employment Agreement, the "Employment Term," as such term is defined in the Employment Agreement, shall end on the Date of Termination. 4. DUTIES. Employee is released from his duties under the Employment Agreement as of the Date of Termination. However, Employee shall have the continuing obligations provided in Paragraphs 13(a) and 13(b) of the Employment Agreement. 2 5. SALARY. The Company is released from its obligation to pay the Employee his Base Salary pursuant to Paragraph 5 of the Employment Agreement as of the Date of Termination. 6. BONUS ARRANGEMENTS. Employee shall not be entitled to receive any bonus payments from the Company. 7. EXPENSES.Pursuant to the Employment Agreement, the Company agreed to reimburse Employee for reasonable and necessary travel, business, entertainment and other business expenses. The Company agrees to reimburse 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, prior to March 30, 2001, upon submission by the Employee to the Company of vouchers or expense statements (i) satisfactorily evidencing the occurrence of such expenses and (ii) that would enable the Company to deduct expenses from its income under applicable tax laws. Any submissions pursuant to this Paragraph must be made to the Company prior to May 15, 2001. 8. EMPLOYEE BENEFITS, VACATION. (a) Other than the group health benefits and the Company retirement plans, the Employee's participation, if any, in all other employee benefit plans, programs, policies and arrangements of the Company, including any disability or life insurance benefits, shall be deemed to have terminated as of March 30, 2001, and Employee shall not be entitled to accrue any other benefit. (b) The Company shall pay the Employee for any accrued but unused vacation, for a period of up to four (4) weeks. (c) Employee shall be entitled to any retirement benefits Employee has accrued ("accrued retirement benefits") up to March 30, 2001. Employee shall not be eligible to accrue any retirement benefits after March 30, 2001. 9. Automobile. The Employee agrees to return the Company-leased vehicle, and any other property of the Company in his possession, no later than April 11, 2001, or such date as may be mutually agreed between the Company and the Employee. 10. PERMANENT DISABILITY. The Employee's ability to receive any Company provided permanent disability benefits shall be deemed to have terminated on March 30, 2001. 11. DEATH. The Employee's ability to receive any Company provided death benefits shall be deemed to have terminated on March 30, 2001. 12. TERMINATION. (a) Notwithstanding the terms of Paragraphs 12(b)(i) and (ii) of the Employment Agreement, the Company's sole Base Salary payment obligation shall be to pay the Employee, as severance pay and in consideration of the Employee's continued obligations provided for in Paragraph 13(a) and 13(b) of the Employment Agreement, his 3 regular bi-weekly pay from the Date of Termination through either the closing of the Company's pending sale/merger, or July 28, 2001, whichever comes first. Within five (5) business days of the end of the bi-weekly payments, the Employee will receive a lump sum equal to the difference between one (1) year of Base Salary, as that term is defined under the Employment Agreement, and the sum of the bi-weekly payments that have already been paid to the Employee, pursuant to this Paragraph 12(a). (b) Notwithstanding Paragraph 12(b)(vi) of the Employment Agreement, the Company agrees to provide Employee and his eligible dependents with the health, medical, dental and hospitalization plans maintained by the Company in which the Employee and his dependents currently participate, as the same may be modified from time to time, for a period of one (1) year from the Date of Termination, March 30, 2001, until March 30, 2002. The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") period shall begin March 30, 2001. After March 30, 2002, the Employee and his eligible dependents shall be entitled to continue the health, medical, dental and hospitalization plans at their own expense for the remaining portion of such COBRA eligibility period. 13. DEDUCTIONS AND WITHHOLDING. The Employee agrees that the Company shall withhold from any and all payments to be made to the Employee pursuant to this Supplemental 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. 14. RELEASE OF COMPANY. As consideration for the covenants, payments and benefits contained herein, Employee, for himself and his heirs, agents, representatives, successors and assigns, hereby irrevocably and unconditionally releases, remits, acquits, and discharges Company, its officers, directors, shareholders, agents, employees, affiliates, related companies or entities, successors and assigns (separately and collectively "Releasees"), jointly and individually, from any and all claims, obligations, demands, liabilities, damages and causes of action of any nature or kind whatsoever, known or unknown, which Employee has or may have against Releasees, including, but not limited to, those based upon, relating to, or arising from the creation, existence or termination of the "employer/employee" relationship, and does hereby covenant not to file a lawsuit to assert such claims. This includes, but is not limited to, any and all claims or liabilities arising under or out of any federal, state or local law, rule or regulation, whether those claims are past or present, whether they arise from equity, common law, tort or statute, such as ERISA, and whether they arise from labor laws or discrimination laws, such as the Age Discrimination in Employment Act of 1967, as amended by the Older Workers Benefit Protection Act of 1974, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act of 1990, or any other federal, state or local law, rule or regulation dealing with employment discrimination on any basis. This release also applies to any claim, whether or not based on any contract, express or implied, oral or in writing, to continued employment with Company. Further, this release applies to claims for any relief, no matter how called, including but not limited to wages, backpay, frontpay, compensatory damages, punitive damages or damages for pain or suffering. 4 Employee further agrees that he will neither seek nor accept any further benefit or consideration from any source whatsoever in respect to any claims which Employee has asserted or could have asserted against Company. Employee has twenty-one (21) days from the date Employee receives this Supplemental Agreement to sign and return an executed copy of the Supplemental Agreement. If Employee decides to sign this Supplemental Agreement, Employee will then have a period of seven (7) calendar days following signing to decide whether or not to change his mind and revoke or cancel the Agreement. Employee may revoke or cancel this Supplemental Agreement only by giving formal, written notice of revocation to Alice Guiney, Vice President, Human Resources, Dairy Mart Convenience Stores, Inc., 300 Executive Parkway West, Hudson, Ohio 44236. For this notice of revocation to be effective, it must be delivered to Alice Guiney or to someone authorized to receive documents for her, at the above address, by no later than the close of business on the eighth (8th) day following the date Employee signed the Supplemental Agreement. If notice that Employee has so revoked is not received by Alice Guiney, or someone authorized to receive documents for her, by the close of business on the eighth (8th) day following the date Employee signed the Supplemental Agreement, then the ninth (9th) day after Employee's signing shall become the effective date of this Agreement. On that date, the rights of both Company and Employee would then become fully enforceable. Employee acknowledges that: (a) Employee has had ample time to review all provisions of this Supplemental Agreement and fully understands what its provisions mean, (b) Employee has been encouraged by Dairy Mart to review this Supplemental Agreement with his legal counsel and other advisors, and has had ample time to do this, and (c) Employee is entering into this Supplemental Agreement of Employee's own free will and choice, without being pressured, forced or coerced into signing; Employee is of sound mind; and there is no reason why Employee would be unable to make a knowing and voluntary decision to agree to this Supplemental Agreement. 15. RELEASE OF EMPLOYEE. As consideration for the covenants contained herein, the Company, its officers, directors, shareholders, agents, employees, affiliates, related companies or entities, successors and assigns (separately and collectively "Releasors") hereby irrevocably and unconditionally release, remit, acquit, and discharge the Employee from any and all claims, obligations, demands, liabilities, damages and causes of action of any nature or kind, whatsoever, known or unknown, which Releasors have or may have against Employee, including but not limited to, those based upon, relating to, or arising from the creation, existence or termination of the "employer/employee" relationship, and do hereby covenant not to file lawsuit to assert such claims. This includes, but is not limited to, any and all claims or liabilities arising under or out of any federal, state or local law, rule or regulation, whether those claims are past or present, whether they arise from equity, common law, tort or statute. Further, this release applies to claims for any relief, no matter how called, including but not limited to, compensatory damages or punitive damages. Releasors further agree that they will neither seek nor accept any further benefit or consideration from any source whatsoever in respect to any claims which Releasors have asserted or could have asserted against Employee. 16. NO ADMISSION OF LIABILITY OR WRONGDOING. Employee hereby agrees that the execution of this Supplemental Agreement does not in any way admit liability or wrongdoing by any party. 5 17. NO WAIVER OF PROSPECTIVE CLAIMS. Employee acknowledges and agrees that this Supplemental Agreement does not waive any claims he or the Company may have which arise after the date this Supplemental Agreement is signed. 18. NO RELIANCE. Employee acknowledges and agrees that he has not relied on any representations, promises or agreements of any kind made to him in connection with his decision to sign this Supplemental Agreement, except for those set forth in this Supplemental Agreement and the documents attached hereto. 19. OTHER BENEFITS. Employee understands that this Supplemental Agreement in no way affects any rights he may otherwise have for benefits under the retirement plans, or any other applicable retirement plan of Company, or with respect to workers' compensation benefits or unemployment compensation entitlements under applicable local law. 20. CONFIDENTIALITY. The parties hereto agree that the terms and conditions of this Supplemental Agreement are confidential and shall not be disclosed to any person other than those who must perform tasks to effectuate this Supplemental Agreement. 21. LEGALLY BINDING. The parties hereto intend this Supplemental Agreement to be legally binding upon and inure to the benefit of each of them and their respective successors and assigns. 22. GOVERNING LAW. This Supplemental Agreement shall be governed by and interpreted under the laws of the State of Ohio without giving effect to the conflict of laws provisions thereof. 23. SEVERABILITY. The parties agree that the invalidity or unenforceability of any provision of this Supplemental Agreement shall not affect the validity or enforceability of any other provision of this Supplemental Agreement, which shall remain in full force and effect. Consequently, if a final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the parties agree that the court making such determination shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable terms or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and that the failure to exercise such power would be inconsistent with the specific and mutual intent of the parties hereto. 6 IN WITNESS WHEREOF, the parties have executed this Supplemental Agreement in duplicate at ____________________, _____________________, this ____ day of _________________, 2001. PLEASE READ THIS DOCUMENT CAREFULLY. IT IS A LEGAL DOCUMENT. IT INCLUDES AN AGREEMENT BY EMPLOYEE TO GIVE UP ALL KNOWN AND UNKNOWN CLAIMS AGAINST DAIRY MART CONVENIENCE STORES, INC., ITS SUCCESSORS, SUBSIDIARIES AND AFFILIATES (AND ALL EMPLOYEES, AGENTS AND OFFICERS OF SUCH ENTITIES). REFER TO PARAGRAPHS ABOVE FOR THE TIME LIMITS WHICH YOU ARE AFFORDED 1N CONNECTION WITH YOUR DECISION IN THIS MATTER. EMPLOYEE DAIRY MART CONVENIENCE STORES, INC. /s/ Wayne Colley By:/s/ Alice Guiney - ------------------------------------ --------------------------------- J. WAYNE COLLEY Its:V.P. Human Resources ------------------------------------ April 20, 2001 April 20, 2001 - ------------------------------------ ------------------------------------ Date Date Witness: Witness: /s/ Terry Frame /s/ Michael Ewald - ------------------------------------ ------------------------------------ EX-10.29 8 l88054aex10-29.txt EX-10.29 1 Exhibit 10.29 DAIRY MART CONVENIENCE STORES, INC. CHANGE OF CONTROL SEVERANCE PLAN WHEREAS, the Board of Directors (the "Board") of Dairy Mart Convenience Stores, Inc. (the "Company") recognizes that the possibility of a Change of Control (as hereinafter defined) exists and that the possibility, or the occurrence, of a Change of Control can result in significant distraction of its personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of certain employees in the event of a possibility, or occurrence, of a Change of Control and to ensure the Participants' (as hereinafter defined) continued dedication and efforts in such event without undue concern for the Participants' personal financial and employment security; WHEREAS, in order to induce the Participants to remain in the employ of the Company or any Employer (as hereinafter defined), particularly in the event of a possibility, or the occurrence, of a Change of Control, the Company desires to establish this Change of Control Severance Plan (the "Plan") to provide the Participants with certain benefits in the event of certain terminations of their employment within one year following a Change of Control; NOW, THEREFORE, the Company does hereby establish the Plan in accordance with the following terms: 1. TERM OF PLAN. This Plan shall become effective on the Effective Date and shall remain in effect until the first anniversary of a Change of Control; PROVIDED, HOWEVER, that in the event that a Change of Control does not occur prior to May 25, 2001, then this Plan shall not become effective; PROVIDED, FURTHER, that in the event that a Change of Control does occur prior to May 25, 2001, the Company shall in all events remain liable to provide any amounts or benefits to which a Participant became entitled hereunder prior to the first anniversary of such Change of Control. 2. EMPLOYEES COVERED. This Plan shall apply to the Employees employed by any Employer on the day immediately preceding the Effective Date (the "Participants"). 3. DEFINITIONS. For purposes of this Plan, the following definitions shall apply: "Base Salary" shall mean a Participant's annual base salary on the Effective Date. The annual base salary for full-time hourly-paid Participants shall be their hourly wage rate multiplied by 2,080 hours. The annual base salary for part-time hourly-paid Participants shall be their hourly base wage rate multiplied by either their hours worked per week during the 52 week period which ends on their Termination Date or 2,080 hours, whichever is less. 1 2 "Cause" shall mean the termination of a Participant due to: (i) the failure of the Participant to perform substantially the Participant's duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is made upon the Participant by an officer of the Employer or the Participant's superior; or (ii) (A) an indictment of the Participant for or the Participant's plea of guilty or NOLO CONTENDERE to, a felony or (B) the willful engaging by a Participant in misconduct which is materially and demonstrably injurious to the Company or any Employer. "Change of Control" shall mean any of the following events: (i) If any "person" (as the terms used in Sections 13(d) and 14(d) of the Exchange Act), other than Gregory G. Landry, Robert B. Stein, Jr., or DM Associates Limited Partnership, 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) 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 Company; or (iii) A tender offer is completed for 20% or more of the voting securities of the Company then outstanding. "Directors" shall mean employees in those positions listed on Exhibit B, or the employees' successors. "Disability" shall mean the Participant's absence from the full-time performance of the Participant's duties, (as they existed immediately prior to such absence) for 180 consecutive business days, when the Participant is disabled as a result of incapacity due to physical or mental illness or serious injury. 2 3 "Effective Date" shall mean the date on which a Change of Control occurs, provided that a Change of Control occurs prior to May 25, 2001; in the event that no Change of Control occurs prior to such date, then this Plan shall not become effective. "Employee" shall mean any employee of any Employer, other than those employees who (A) are party to employment agreements with the Company or any Employer or (B) are regularly and customarily employed in store positions (e.g.: Customer Service Managers, General Managers, Co-Managers, QSR Managers, Assistant Customer Service Managers, Customer Service Associates, etc.). "Employer" shall mean the Company or any subsidiary of the Company for which a Participant performs services or is employed thereby, as applicable to each Participant. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exempt/Professional Employees" shall mean employees who possess salaried positions but are not Vice Presidents, Directors, or Managers as listed in Exhibits A, B, and C, respectively, and who are not Non-Exempt Employees. "Good Reason" shall mean the occurrence after a Change of Control of any of the following events or conditions which is not cured within thirty (30) days after the Company receives written notice from the Participant setting forth in reasonable detail the basis for the Participant's claim of Good Reason: (i) any reduction in the Participant's Base Salary from the Base Salary in effect immediately prior to the Change of Control; (ii) any significant diminution in the Participant's duties or responsibilities from those he or she held immediately prior to the Effective Date; and (iii) the Participant is required to be based at a location more than 50 miles from the location where the Participant was based and performed services immediately prior to the Effective Date or any substantial increase in the Participant's business related travel over the level of travel required of such Participant immediately prior to the Effective Date. "Managers" shall mean employees in those positions listed on Exhibit C, or the employees' successors. "Non-Exempt Employees" shall mean employees who possess hourly-paid positions. "Retirement" shall mean a termination of employment by the Participant pursuant to late, normal or early retirement under a pension plan sponsored by the Company, as defined in such plan. "Termination Date" shall mean in the case of the Participant's death, his date of death, or in all other cases, the date specified in any notice of termination. 3 4 "Vice Presidents" shall mean employees in those positions listed on Exhibit A, or the employees' successors. 4. COMPENSATION UPON TERMINATION. The Participant shall be entitled to the severance benefits provided in this Section 4 hereof in the event the Participant's employment is terminated, within one year following a Change of Control, by an Employer without Cause or by the Participant for Good Reason. Notwithstanding the foregoing, the Participant shall not be entitled to severance benefits in the event of a termination of employment (i) by the Company for Cause, (ii) by the Participant without Good Reason, or (iii) on account of death, Disability or Retirement; PROVIDED, HOWEVER, that any termination of employment which is coincident with or subsequent to a termination by the Company without Cause or by the Participant for Good Reason will not prevent the Participant from receiving severance benefits hereunder (e.g., if a Participant terminates his employment for Good Reason, but simultaneously retires under a pension plan, such Participant shall be entitled to benefits under the Plan). Upon termination of the Participant's employment as provided above, each Participant shall be entitled to the following benefits: (a) SEVERANCE. The Participants shall receive cash severance payments, payable in installments pursuant to the normal payroll practices of the Company, equal to the amounts listed in the following table; PROVIDED, HOWEVER, that the minimum severance any Participant shall receive shall not be less than the minimum severance for their position (as listed below):
------------------------------ -------------------------------------------- ----------------------- POSITION SEVERANCE FORMULA MINIMUM ------------------------------ -------------------------------------------- ----------------------- Non-Exempt Employees 1 week of Base Salary for each full or 8 weeks of Base Salary partial year of service ------------------------------ -------------------------------------------- ----------------------- Exempt/Professional Employees 1 week of Base Salary for each full or 12 weeks of Base partial year of service Salary ------------------------------ -------------------------------------------- ----------------------- Managers & Directors 1 week of Base Salary for each full or 16 weeks of Base partial year of service Salary ------------------------------ -------------------------------------------- ----------------------- Vice Presidents 1 week of Base Salary for each full or 52 weeks of Base partial year of service Salary ------------------------------ -------------------------------------------- -----------------------
In no event shall any Participant be entitled to receive more than 2 years of Base Salary. (b) ADDITIONAL PAYMENTS. In addition to the severance payment in (a), above, the Participants shall receive additional payments, also payable in installments pursuant to the normal payroll practices of the Company, as follows: (i) any accrued but unpaid Base Salary through the Termination Date; and (ii) an amount, if any, equal to any earned but unused vacation pay, in each case, in full satisfaction of the Participant's rights thereto. (c) WELFARE BENEFITS. The Company and the Participant shall continue to make such contributions as were required to be paid by the Company and the Participant immediately prior to the Termination Date for, and the Participant shall continue to receive, medical and 4 5 dental benefits for the Participant and the Participant's eligible dependents on the same basis as in effect prior to the Change of Control or the Participant's Termination Date, whichever is deemed to provide for more substantial benefits, for a period equal to the number of weeks the Participant is entitled to severance payments pursuant to subsection (a) above (the "Severance Period"); thereafter, the Participant may continue to be covered under the plans of the Employer providing such benefits at the Participant's expense at the applicable Consolidated Omnibus Reconciliation Act of 1985, as amended ("COBRA") rate for the duration of the COBRA period which begins to run as of the Termination Date of the Participant; PROVIDED, HOWEVER, in the event that the Participant commences comparable benefit coverage with a subsequent employer during the Severance Period, such Employer benefit coverage shall cease. (d) OUTPLACEMENT. The Company may, in its sole discretion, provide the Participant with outplacement services at a firm of the Company's choosing, so long as such services do not exceed 10% of the Participant's Base Salary. (e) WITHHOLDING. Payments and benefits provided pursuant to this Section 4 shall be subject only to any applicable payroll and other taxes required to be withheld. (f) NO MITIGATION. The Participant shall not be required to mitigate the amount of any payment provided for in this Plan by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Participant in any subsequent employment, other than is set forth in Section 4(b). (g) OFFSET FOR OTHER SEVERANCE. In the event that the Participant is eligible for severance under any other plan or agreement of the Company or any Employer, then any cash severance amounts payable pursuant to this Plan shall be reduced by the amount of any cash severance payments payable under such other plan or agreement. 5. NOTICES. (a) Termination of the Participant by the Company for any reason shall be made by delivery to the Participant a written notice specifying the basis for such termination ("Notice of Termination"). For the purposes of this Plan, notices and all other communications provided for in the Plan shall be in writing and shall be deemed to have been duly given when personally delivered, delivered by a nationally recognized overnight delivery service, or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the General Counsel with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 6. AMENDMENT AND TERMINATION. The Plan may not be amended and shall terminate on the first anniversary of the Effective Date; PROVIDED, HOWEVER, that the termination of the Plan shall not alter or curtail the entitlements of a Participant accrued under the terms of this Plan by virtue of a termination of the Participant's employment prior to such termination and the Company shall continue to provide the benefits or payments to which a Participant had become entitled hereunder prior to the termination of this Plan; PROVIDED, FURTHER, that, in the 5 6 event that a Change of Control has not occurred prior to May 25, 2001, then this Plan shall not become effective and shall be of no force and effect. 7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Plan shall prevent or limit the Participant's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Participant may qualify, nor shall anything herein limit or reduce such rights as the Participant may have under any agreements with the Company or any of its subsidiaries (although any such severance benefits reduce the severance payable under this Plan). Amounts which are vested benefits or which the Participant is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Plan. 8. JOINT AND SEVERAL LIABILITY. Each entity included in the definition of "Employer" and any successors or assigns shall be jointly and severally liable with the Company under this Plan. 9. GOVERNING LAW. This Plan shall be governed by and construed and enforced in accordance with the laws of the State of Ohio without giving effect to the conflict of law principles thereof. For purposes of jurisdiction and venue, the Company and each Employer hereby consents to jurisdiction and venue in any action, suit or proceeding in any court of competent jurisdiction in any state in which the Participant resides at the commencement of such action, suit of proceeding and waives any objection, challenge or dispute as to such jurisdiction or venue being proper. 10. SUCCESSORS AND ASSIGNS. This Plan shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and the Company shall require any successor or assign to expressly assume and agree to maintain this Plan and to perform under this Plan to the same extent that the Company would be required to perform under the Plan if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. 11. SEVERABILITY. The provisions of this Plan shall be deemed severable, and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of the other provisions hereof. IN WITNESS WHEREOF, this instrument has been executed on this 20TH day of JUNE, 2000. DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry -------------------------- Name: Gregory G. Landry Title: Vice Chairman 6 EX-10.31 9 l88054aex10-31.txt EX-10.31 1 Exhibit 10.31 THIS AGREEMENT IS NOT AN OFFER WITH RESPECT TO ANY SECURITIES OR A SOLICITATION OF ANY KIND. SUCH AN OFFER OR SOLICITATION WILL BE MADE IN COMPLIANCE WITH ALL APPLICABLE SECURITIES LAWS. EXCHANGE AND VOTING AGREEMENT THIS EXCHANGE AND VOTING AGREEMENT (this "AGREEMENT") is dated as of March 15, 2001, by and among Dairy Mart Convenience Stores, Inc., a Delaware corporation ("DMC"), and the Noteholders of DMC listed on Schedule I attached hereto (together with their respective successors, transferees and assigns, each a "NOTEHOLDER" and, collectively, the "NOTEHOLDERS"). WHEREAS, in connection with a contemplated merger of DM Acquisition Corp. ("ACQUIROR") with and into DMC, pursuant to an Agreement and Plan of Merger dated the date hereof by and between DMC and the Acquiror (the "MERGER AGREEMENT"), DMC desires to exchange those certain notes (the "NOTES") issued pursuant to the Amended and Restated Indenture by and among DMC, its subsidiaries listed therein and First Bank N.A., as Trustee, dated as of December 1, 1995 (the "INDENTURE"), for a combination of cash, notes and warrants, as described in the term sheet (the "TERM SHEET") attached hereto as Exhibit A (the "EXCHANGE"); WHEREAS, in order to facilitate the Exchange, DMC intends to deliver, in writing, to each holder of the Notes an Offer to Exchange and Consent Solicitation (the "SOLICITATION") requesting it to tender its Notes in the Exchange and consent to the amendment of the Indenture (the "AMENDED INDENTURE"), all in accordance with the Term Sheet; WHEREAS, in anticipation of the Solicitation, DMC desires to enter into this Agreement (this Agreement is the "LOCKUP AGREEMENT" referred to in the Term Sheet) with the Noteholders, representing in the aggregate approximately 70% of the aggregate principal amount of the Notes, in order to, among other things, obtain their agreement to tender their Notes in the Exchange and to agree on its own behalf to effect the Exchange and to consummate the transactions contemplated in the Merger Agreement; WHEREAS, the Noteholders desire to enter into this Agreement and confirm their agreement to tender their Notes in the Exchange and to consent to the amendment of the Indenture in accordance with the Term Sheet; and WHEREAS, each of DMC, the Noteholders, and Acquiror have reviewed, or have had the opportunity to review, with the assistance of professional and legal advisors of their choosing, the proposed terms of the transactions contemplated in the Term Sheet (such transactions constituting, the "RESTRUCTURING"). NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound, the parties hereby agree as follows: 2 ARTICLE 1. THE EXCHANGE; AMENDED INDENTURE Section 1.01 COVENANTS. (a) VOTING AND SUPPORT OF EXCHANGE AND AMENDED INDENTURE. Each of the Noteholders agrees that, if the terms of the documents implementing the Restructuring are consistent with the Term Sheet and this Agreement has not been terminated in accordance with its terms, it shall (i) tender its Notes in the Exchange and vote to amend the Indenture as requested and to adopt the Amended Indenture, (ii) refrain from, directly or indirectly, supporting or consenting to any other restructuring, exchange, consent solicitation, sale or acquisition relating to DMC or its affiliates, (iii) permit DMC to disclose the existence and material terms of this Agreement in any solicitation or related document without disclosing the identity or individual holding of any Noteholder, subject to the provisions of Article 4 of this Agreement, unless required by law or by order of a court of competent jurisdiction, and (iv) not instruct the Indenture Trustee to take any action that is inconsistent with the terms and conditions of this Agreement and, if the Indenture Trustee takes or threatens any such action, direct the Indenture Trustee not to take such action. (b) TRANSFER OF NOTES. Except as expressly provided herein, this Agreement shall not in any way restrict the right or ability of any Noteholder to sell, assign, pledge, transfer or otherwise dispose of any of the Notes it holds or manages. Each Noteholder agrees that, during the term of this Agreement, it shall not sell, assign, pledge, transfer or otherwise dispose of any of the Notes it holds or manages unless and until the transferee delivers to the transferor and DMC, prior to or contemporaneously with the effective date of such transfer, a written agreement or acknowledgement whereby such transferee has assumed all obligations of the transferor hereunder. In the event that other holders of Notes subsequently join in the transactions contemplated by this Agreement, such holders shall agree in writing at the time they join to be bound by this Agreement in its entirety without revision, and also shall provide DMC with the principal amount of the Notes held for inclusion on the respective signature page. (c) MUTUAL ASSURANCES. DMC and the Noteholders hereby covenant to one another to use their reasonable best efforts, as expeditiously as possible and during the term of this Agreement, to perform their respective obligations under this Agreement and take all the actions necessary to consummate the Restructuring. The parties further agree to take such other actions as are reasonably necessary and appropriate to carry out the foregoing and to effectuate the Exchange and evidence the Noteholders' vote including, but not limited to, the execution and delivery of an exchange agreement, transmittal letters, written consents or other documents containing customary terms and provisions. DMC hereby covenants to use its reasonable best efforts to perform its obligations, as expeditiously as possible, under the Merger Agreement and take all actions necessary to consummate the transactions contemplated by the Merger Agreement. (d) PREPARATION OF RESTRUCTURING DOCUMENTS (i) DMC shall prepare the solicitation documents necessary to effectuate the Exchange, all documentation related thereto or 3 required thereunder, all of which shall be prepared and contain provisions consistent with the Term Sheet; and (ii) The Noteholders shall prepare the new indenture pursuant to which DMC will issue the New Senior Secured Subordinated Notes to be received by Noteholders in the Exchange consistent with the terms thereof set forth in the Term Sheet. ARTICLE 2. TERMINATION EVENTS Section 2.01 TERMINATION BY NOTEHOLDERS. This Agreement shall terminate and all of the obligations of DMC and the Noteholders shall be of no further force or effect in the event that any of the following occurs (each, a "TERMINATION EVENT"): (a) immediately and automatically upon the giving of written notice of termination by those Noteholders holding a majority of the Notes listed on Schedule I hereto to DMC if: (i) DMC fails to make the scheduled March 15, 2001 interest payment to Noteholders in accordance with the Indenture; (ii) DMC fails to either (x) make the scheduled March 15, 2001 $20 million payment due under the Credit Agreement dated as of December 28, 1999, as amended (the "CREDIT AGREEMENT"), currently in effect between DMC and Citizens Bank of Connecticut ("CITIZENS"), as agent to the syndicate of banks named therein, or (y) enter into a written amendment, waiver or forbearance agreement with Citizens whereby Citizens agrees to either (1) permanently waive or remove the condition described in the preceding clause (x), or (2) forbear from asserting any rights or remedies it may have in connection with any default under the preceding clause (x) under the Credit Agreement or otherwise taking action against DMC with respect thereto at least until August 31, 2001; (iii) DMC fails to file its preliminary proxy materials with the United States Securities and Exchange Commission (the "SEC") by April 30, 2001; (iv) DMC fails to close both the Exchange and the merger of DMC and Acquiror, as contemplated in the Merger Agreement and pursuant to the specific terms thereof without material change, as well as all financing and vendor transactions contemplated in the Merger Agreement, and in each case do so by August 31, 2001; or (v) Prior to the closing of the Exchange and the merger of DMC and Acquiror if (x) the projected total liabilities of DMC immediately after such closing, calculated in accordance with generally 4 accepted accounting principles consistently applied, as certified by a duly authorized officer of DMC and of Acquiror to the Noteholders within 10 business days prior to the termination date of the Exchange announced in the Solicitation, exceeds $234,000,000 (which number shall be subject to upward adjustment for changes or conditions affecting convenience store chains generally or regionally or changes in the financial markets or economic, tax or regulatory conditions generally or regionally), (y) the E&Y Report (as defined below) projects EBITDA for DMC for the twelve months following such closing ("Pro Forma EBITDA") to be less than $20,000,000, or (z) if the E&Y Report is dated prior to thirty days before the termination date of the Exchange announced in the Solicitation, the Company and Acquiror shall fail to deliver to the Noteholders within 10 business days prior to such termination date, a certificate from a duly authorized officer of DMC and of Acquiror that Pro Forma EBITDA (assuming the methodology of the E&Y Report) is $20,000,000 or greater. "E&Y Report" shall mean the certain report being prepared by Ernst & Young LLP in connection wit the merger of DMC and Acquiror for the benefit of The Provident Bank, that is to be delivered after the date hereof and prior to closing; or (b) five (5) business days after the Noteholders holding a majority of the Notes listed on Schedule I hereto have delivered written notice of termination to DMC that DMC has materially breached an obligation of DMC under this Agreement, and such failure remains uncured at the conclusion of such period. Section 2.02 TERMINATION BY DMC. This Agreement shall terminate and all of the obligations of DMC and the Noteholders shall be of no further force or effect in the event that any of the following occurs (each, also a "TERMINATION EVENT"). (a) immediately and automatically upon the giving of written notice of termination by DMC to counsel for the Noteholders if the fiduciary duties of DMC, as reasonably determined by the Board of Directors of DMC upon the advice of counsel, require the termination of this Agreement to implement another restructuring transaction; and (b) five (5) business days after DMC has delivered written notice of termination to counsel for the Noteholders that this Agreement has been materially breached by Noteholder(s) owning or controlling with the power to vote 20% of the aggregate face amount of the Notes, and such failure remains uncured at the conclusion of such period. 5 ARTICLE 3. REPRESENTATIONS AND WARRANTIES Section 3.01 (a) Each party represents and warrants to the other parties that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) its execution, delivery and performance of this Agreement are within the power and authority of such party and have been duly authorized by such party and that no other approval or authorization is required, (iii) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable in accordance with the terms hereof, subject to bankruptcy, insolvency, fraudulent conveyance and similar laws affecting the rights or remedies of creditors generally, and (iv) none of the execution and delivery of this Agreement or compliance with the terms and provisions hereof will violate, conflict with or result in a breach of, its certificate of incorporation or bylaws or other constitutive document, any applicable law or regulation, any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which it is a party or by which it is bound or to which it is subject. (b) Each of the Noteholders further represents and warrants to DMC, as to itself, that (i) it is the owner of, and/or the investment advisor or manager (with the absolute power to vote, transfer, and dispose of the Notes on behalf of the owners of such Notes) of accounts for the holders or beneficial owners of, the aggregate principal amount of the Notes set forth on its respective signature page, (ii) the respective aggregate principal amount of Notes set forth on its respective signature page is true and correct as of the date hereof (iii) except as contemplated herein, it has not transferred, assigned or otherwise disposed of, or entered into any agreement (whether written or oral) to transfer, assign or otherwise dispose of, its right, title and interest in and to the Notes which it holds, and (iv) upon delivery of such Notes to DMC on the consummation of the Exchange, DMC shall acquire all right, title and interest to such Notes, free and clear of any lien, claim, encumbrance or other restriction. (c) DMC represents and warrants to the Noteholders that there are no actions, suits, claims, proceedings or, to their knowledge, investigations pending or, to their knowledge, threatened against DMC or any of its current or former directors or officers that would give rise to a material claim for indemnification against DMC by any of such directors or officers under applicable law or the certificate of incorporation and/or by-laws of DMC. (d) DMC represents and warrants to the Noteholders as follows: (i) SEC REPORTS AND FINANCIAL STATEMENTS. Each form, report, schedule, registration statement, definitive proxy statement and other document (together with all amendments thereof and supplements thereto) filed by DMC or any of its subsidiaries with the SEC since December 31, 1997 (as such documents have since the time of their filing been amended or supplemented, the "DMC SEC REPORTS"), are all the documents (other than preliminary material) that DMC and its subsidiaries were required to file with the SEC since such date. As of their respective dates, the DMC SEC Reports (i) complied as to form in all material respects with 6 the requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "SECURITIES Act"), or the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "EXCHANGE ACT"), as the case may be, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim consolidated financial statements (including, in each case, the notes, if any, thereto) included in the DMC SEC Reports (the "DMC FINANCIAL STATEMENTS") complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto and except with respect to unaudited statements as permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of the unaudited interim financial statements, to normal, recurring year-end audit adjustments (which are not expected to be, individually or in the aggregate, materially adverse to DMC and its subsidiaries taken as a whole)) the consolidated financial position of DMC and its consolidated subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. (ii) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the DMC SEC Reports filed prior to the date of this Agreement, (a) since October 28, 2000, there has not been any change, event or development having, or that could be reasonably expected to have, individually or in the aggregate, a material adverse effect on DMC and its subsidiaries taken as a whole, other than events, changes or effects that (i) are caused by general economic conditions in any region in which DMC and its subsidiaries conduct business or conditions affecting the types of businesses operated by DMC and its subsidiaries, which conditions do not affect DMC and its subsidiaries in a disproportionate manner, or (ii) are related to or result from the execution and delivery of this Agreement or from any action or inaction on the part of the Noteholders or any of their respective affiliates, and (b) except as disclosed in Section 3.06 of the Company Disclosure Letter, which is incorporated herein by reference, in conjunction with the Merger Agreement (as that term is defined in the Merger Agreement), between such date and the date hereof (i) DMC and its subsidiaries have conducted their respective businesses only in the ordinary course consistent with past practice and (ii) neither DMC nor any of its subsidiaries has taken any action which, if taken after the date hereof, would 7 constitute a breach of any provision of clause (ii) of Section 5.01(b) of the Merger Agreement. (iii) ABSENCE OF UNDISCLOSED LIABILITIES. Except for matters reflected or reserved against in the balance sheet for the period ended October 28, 2000 included in the DMC Financial Statements or as disclosed in Section 3.07 of the Company Disclosure Letter in conjunction with the Merger Agreement, neither DMC nor any of its subsidiaries had at such date, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due) of any nature that would be required by generally accepted accounting principles to be reflected on a consolidated balance sheet of DMC and its consolidated subsidiaries (including the notes thereto), except liabilities or obligations (i) which were incurred in the ordinary course of business consistent with past practice or (ii) which have not been, and could not be reasonably expected to be, individually or in the aggregate, materially adverse to DMC and its subsidiaries taken as a whole. (e) The Noteholders have no actual knowledge of any breach of any of DMC's representations or warranties contained herein. ARTICLE 4. CONFIDENTIALITY Section 4.01 CONFIDENTIALITY. Unless required by law or by order of a court of competent jurisdiction, the parties shall not, directly or indirectly, use or disclose to any person any information relating to the transactions contemplated hereby, including without limitation, the existence of this Agreement or the Term Sheet or of any transactions contemplated therein including the Exchange, the Amended Indenture and Acquiror's acquisition by merger of DMC, provided that the parties may disclose such information to their legal counsel and other advisors in connection with their negotiation and evaluation of the transactions contemplated hereby and to other holders of Notes not a party hereto in connection with attempts to gain their consent to the Exchange and the Amended Indenture, subject in each case to their agreement to be bound by this covenant. Section 4.02 PUBLIC ANNOUNCEMENT. No party hereto shall make any announcement regarding the subject matter of this Agreement to which the other parties hereto shall reasonably object. Each party shall afford the other parties hereto a reasonable opportunity to review and comment upon each announcement proposed to be made by it prior to the release thereof. Section 4.03 DISCLOSURE OF INDIVIDUAL HOLDING. Unless required by applicable law or regulation or by order of a court of competent jurisdiction, DMC shall not disclose the principal amount of Notes held by any individual Noteholder without the prior written consent of such Noteholder, provided, however, that DMC may disclose such information to its directors, officers, employees, attorneys, accountants, financial advisors and other agents and representatives. If the disclosure of such information is so required by law, DMC shall afford the affected Noteholder a 8 reasonable opportunity to review and comment upon any such disclosure. If DMC is requested in any proceeding to disclose any such information, it shall give reasonable notice to such Noteholder of such request so that it may seek an appropriate protective order. The foregoing shall not prohibit DMC from disclosing the aggregate principal amount of Notes held by the Noteholders as a group. ARTICLE 5. MISCELLANEOUS Section 5.01 DOCUMENTATION SATISFACTORY. All agreements, documents and instruments relating to this Agreement, the Exchange, the Solicitation and the merger of DMC and Acquiror, shall be reasonably satisfactory to each party hereto. The Noteholders shall receive advance copies of all relevant documents and papers relating to these transactions as they may reasonably request. Section 5.02 SPECIFIC PERFORMANCE. It is understood and agreed by each of the parties hereto that money damages would not be a sufficient remedy for any material breach of this Agreement by any party and each non-breaching party shall be entitled to specific performance and injunctive relief or other equitable relief as a remedy for any such breach. This provision is without prejudice to any other rights or remedies, whether at law or in equity, that any party hereto may have against any other party hereto for any failure to perform its obligations under this Agreement. Section 5.03 RESERVATION OF RIGHTS. Except as expressly provided in this Agreement, nothing herein is intended to, or does, in any manner, waive, limit, impair or restrict the ability of any of the parties hereto to protect and preserve its rights, remedies and interests, including, without limitation, the claims of each of the Noteholders against DMC. If the transactions contemplated herein are not consummated, or if this Agreement is terminated for any reason, the parties hereto fully reserve any and all of their rights. Pursuant to Federal Rule of Evidence 408 and any applicable state rules of evidence, this Agreement shall not be admitted into evidence in any proceeding other than in a proceeding to enforce its terms or relating to a party's material breach of its obligations hereunder. Section 5.04 FEES AND EXPENSES. During the term of this Agreement, DMC shall pay the reasonable and actual fees and expenses of the Noteholders' counsel, in accordance with the terms of the letter agreement dated as of December __, 2000. Notwithstanding anything herein to the contrary, DMC's termination of such letter agreement shall be deemed a termination of the Noteholders' obligations hereunder. Section 5.05 AMENDMENTS. This Agreement may not be amended except by an instrument in writing signed by all parties hereto. Section 5.06 SUCCESSORS AND ASSIGNS. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns. Without in any manner limiting the scope, extent or effect of the foregoing, the respective Noteholders shall not transfer, assign or otherwise dispose of their right, title and interest in and to, as applicable, the Notes, except in accordance with section 1.01(b) hereof. Nothing in the Agreement, express or implied, shall give to any person or entity, other than the parties hereto, any benefit or any legal or equitable right, remedy, or claim under this Agreement. The parties intend that there shall be no third-party beneficiaries of or to this Agreement. 9 Section 5.07 NOTICES. In addition to any notice requirement set forth in any indenture or other agreement, any notice required or desired to be served, given or delivered under this Agreement shall be in writing, and shall be deemed to have been validly served, given or delivered if provided by personal delivery, or upon receipt of fax delivery, as follows: (a) if to DMC, to: Dairy Mart Convenience Stores, Inc. One Dairy Mart Way 300 Executive Parkway West Hudson, Ohio 44236 Attn: Mr. Gregory G. Landry Fax: (330) 342-6872 with a copy to: Milbank, Tweed, Hadley & McCloy LLP One Chase Manhattan Plaza New York, New York 10005-1413 Attn: Roland Hlawaty, Esq. and Dennis F. Dunne, Esq. Fax: (212) 530-5219 1. if to the Noteholders, to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 590 Madison Avenue New York, New York 10022 Attention: Stephen B. Kuhn, Esq. and Ira Dizengoff, Esq. Fax: 212-872-1002. 2. If to the Acquiror, to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114-3485 Attn: Phillip Callesen, Esq. Fax: 216 696-0740 Section 5.10 HEADINGS. The headings of this Agreement are for reference only and shall not limit or otherwise affect the meaning hereof. Section 5.09 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to internal conflicts of law principles. Section 5.08 COUNTERPARTS. This Agreement may be executed in counterparts in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective as against DMC upon the 10 delivery to DMC of executed counterparts by holders of Notes in the aggregate face amount of at least $61 million. Section 5.11 TERM SHEET. The provisions of the Term Sheet are incorporated herein and are made a part of this Agreement and any reference to the Agreement herein shall be deemed to include a reference to the Term Sheet. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Term Sheet. Section 5.12 PROFESSIONAL ADVICE OBTAINED. Each of the Parties has received independent legal and professional advice from advisors of its choice with respect to the provisions hereof and the advisability of entering into the agreements set forth herein. Prior to the execution hereof, each of the Parties and their applicable advisors reviewed the Agreement. Section 5.13 FURTHER ASSURANCES. The parties hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver such other agreements, certificates, instruments and documents as any other party hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. Section 5.14 NO CONSIDERATION FOR VOTES. The parties hereto hereby acknowledge that no consideration has been paid or shall be due or paid to the Noteholders for their agreement to tender their Notes in the Exchange, to vote to amend the Indenture, or to take any other action contemplated by this Agreement, other than DMC's obligation to use its reasonable best efforts to effectuate the transactions contemplated herein. Section 5.15 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first written above. 11 HIGH YIELD PORTFOLIO, A SERIES OF INCOME TRUST By: /s/ Peter J. Anderson --------------------- Name: Peter J. Anderson Title: Vice President of Income Trust AXP BOND FUND, INC. By: /s/ Peter J. Anderson --------------------- Name: Peter J. Anderson Title: Vice Pres. of AXP Bond Fund, Inc. AXP VARIABLE PORTFOLIO--EXTRA INCOME FUND, A SERIES OF AXP VARIABLE PORTFOLIO INCOME SERIES, INC. By: /s/ Peter J. Anderson --------------------- Name: Peter J. Anderson Title: Vice Pres. of AXP Variable Portfolio Income Series, Inc. ING CAPITAL ADVISORS, INC. By: AMERICAN EXPRESS ASSET MANAGEMENT GROUP, INC. its authorized Signatory By: /s/ Peter J. Anderson --------------------- Name: Peter J. Anderson Title: Chairman of the Board Aeriel CBO, LIMITED By: AMERICAN EXPRESS ASSET MANAGEMENT GROUP, INC. its authorized Signatory By: /s/ Peter J. Anderson --------------------- Name: Peter J. Anderson Title: Chairman of the Board 12 MW Post Advisory Group By: /s/ Alan Schweitzer --------------------- Name: Alan Schweitzer Title: Managing Director 13 PAM CAPITAL FUNDING, LP By: HIGHLAND CAPITAL MANAGEMENT LP, as Collateral Manager By: /s/ James Dondero --------------------- Name: James Dondero, CFA, CPA Title: President, Highland Capital Management, L.P. PAMCO CAYMAN LTD. By: HIGHLAND CAPITAL MANAGEMENT LP, as Collateral Manager By: /s/ James Dondero --------------------- Name: James Dondero, CFA, CPA Title: President, Highland Capital Management, L.P. ML CBO IV (CAYMAN) LTD. By: HIGHLAND CAPITAL MANAGEMENT LP, as Collateral Manager By: /s/ James Dondero --------------------- Name: James Dondero, CFA, CPA Title: President, Highland Capital Management, L.P. 14 DAIRY MART CONVENIENCE STORES, INC. By: /s/ Gregory G. Landry --------------------- Name: Gregory G. Landry Title: Exec. V.P. 15 SCHEDULE 1 ---------- Noteholders NAME High Yield Portfolio, a series of Income Trust AXP Bond Fund, Inc. AXP Variable Portfolio--Extra Income Fund, A Series of AXP Variable Portfolio Income Series, Inc. ING Capital Advisors, Inc. Aeriel CBO, Ltd. MW Post Advisory Group PAM Capital Funding, LP PAMCO Cayman Ltd. ML CBO IV (Cayman) Ltd. Aggregate Principal Amount of Notes held by such entities as a group $61,950,000.00 EX-21 10 l88054aex21.txt EX-21 1 Exhibit 21 DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT ------------------------------ Dairy Mart, Inc. (a Massachusetts corporation) Dairy Mart Farms, Inc. (a Connecticut corporation) Dairy Mart East, Inc.(a Rhode Island corporation) CIA Food Marts, Inc. (a New York corporation) The Lawson Company (a Delaware corporation) The Lawson Company (an Ohio corporation) LMC, Inc. (an Ohio corporation) Golden Stores, Inc. (an Ohio corporation) Quick Shops, Inc. (an Ohio corporation) Open Pantry Properties, Inc. (an Ohio corporation) Convenient Industries of America, Inc. (a Kentucky corporation) CONNA Corporation (a Kentucky corporation) Remote Services, Inc. (a Kentucky corporation) Food Merchandisers, Inc. (a North Carolina corporation) Oscar Ewing, Inc. (a Kentucky corporation) Financial Opportunities, Inc. (a Kentucky corporation) EX-23 11 l88054aex23.txt EX-23 1 Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8, File No. 33-8209, File No. 33-47893, File No. 333-56377, and File No. 333-52614. ARTHUR ANDERSEN LLP /s/ Arthur Andersen - ------------------- Cleveland, Ohio May 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----