<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended JANUARY 31, 1998
[ ] 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)
Registrant's telephone number, including area code (330) 342-6600
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock (Par Value $.01)
Class B Common Stock (Par Value $.01)
(Titles of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 27, 1998, 3,133,862 shares of Class A Common Stock and 1,528,049
shares of Class B Common Stock were outstanding, and the aggregate market value
of both classes of Common Stock outstanding of DAIRY MART CONVENIENCE STORES,
INC., held by nonaffiliates was approximately $14,917,474.
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1998 definitive proxy statement to be filed pursuant to
Registration 14A within 120 days after the end of the Registrant's fiscal year
are incorporated by reference in Part III.
FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include statements relating to the
Company's plans and objectives to upgrade and remodel store locations, to build
new stores and increase gasoline sales, to improve certain aspects of the
franchise program, to sell or lease certain assets, as well as the availability
of supplies of gasoline, the estimated costs for environmental remediation and
the sufficiency of the Company's liquidity and the availability of capital. Such
statements are based on management's current expectations and are subject to a
number of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Such factors
and uncertainties include, but are not limited to, the availability of financing
and additional capital to fund the Company's business strategy on acceptable
terms, if at all, the future profitability of the Company, the availability of
desirable store locations, the Company's ability to negotiate and enter into
lease, acquisition and supply agreements on acceptable terms, competition and
pricing in the Company's market area, volatility in the wholesale gasoline
market due to supply interruptions, modifications of environmental regulatory
requirements, detection of unanticipated environmental conditions, the timing of
reimbursements from state environmental trust funds, the Company's ability to
manage its long-term indebtedness, weather conditions, the favorable resolution
of certain pending and future litigation, and general economic conditions. 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.
PART I
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ITEM 1. BUSINESS
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 approximately 627
stores under the "Dairy Mart" name in seven states located in the Midwest and
Southeast. Approximately 293 stores sell gasoline and approximately 158 stores
are franchised.
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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.
Dairy Mart stores offer a wide range of products and services which cater to the
convenience needs of its customers, including milk, ice cream, groceries,
beverages, snack foods, candy, deli products, publications, health and beauty
aids, tobacco products, lottery tickets and money orders. The stores are
typically located in densely populated, suburban areas on sites which are easily
accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli items,
coffee, fountain drinks and other fast food items.
The Company is incorporated in Delaware and maintains its principal executive
offices at One Dairy Mart Way, 300 Executive Parkway West, Hudson, Ohio 44236.
The Company's telephone number is (330) 342-6600.
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STORES
The Company's stores are generally located in densely populated suburban areas,
and are situated close to single-family homes and apartments to attract
neighborhood shoppers. Store location, design, lighting and layout are intended
to cater to customers' desire for fast and convenient access. Approximately 293
locations also sell gasoline, which the Company believes is an important
convenience for customers. Shelving and displays, including refrigeration units,
deli and other fast food counters and displays, are designed to encourage
customers to purchase high profit margin products including impulse purchase
items such as candy, fountain drinks and ice cream novelties. Stores are located
on sites which are well-lit, easily accessible by customers and provide ample
parking. All of the Company's stores also offer extended hours for additional
convenience, with over one-half of the stores open 24 hours per day. A typical
Dairy Mart store ranges between 2,400 and 3,700 square feet and is a free
standing structure.
As of January 31, 1998, the Company operated and franchised retail convenience
stores in the following states:
<TABLE>
<CAPTION>
NUMBER OF
STORES
- ------------------------------------------------------------------------------
<S> <C>
Ohio.....................................................................390
Kentucky.................................................................134
Michigan..................................................................32
Pennsylvania..............................................................32
Indiana...................................................................20
Tennessee.................................................................13
North Carolina........................................................... 6
---
Total Stores.......................................................627
---
</TABLE>
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:
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997 February 3, 1996
---------------------------- -------------------------- ---------------------------
Company Franchise Company Franchise Company Franchise
Operated Operated Total Operated Operated Total Operated Operated Total
-------- -------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At beginning of period... 543 268 811 587 290 877 644 317 961
Opened or acquired...... 7 - 7 9 - 9 8 - 8
Closed or sold.......... (89) (102) (191) (55) (20) (75) (68) (24) (92)
Transferred (net)....... 8 (8) -- 2 (2) -- 3 (3) --
---- ---- ---- ---- ---- ---- ---- ---- ----
At end of period........ 469 158 627 543 268 811 587 290 877
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
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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 1998, the Company closed 19 of its
retail convenience stores and seven of its retail gasoline facilities because of
their inability to meet the Company's economic and non-economic criteria for
long-term stability and growth. Another 16 stores were sold to independent
operators in fiscal year 1998.
NEW STORES
A major component in the Company's growth strategy is to continue to build new
stores and increase gasoline sales. During fiscal year 1998 the Company opened
seven new 3,700 square foot stores, all which offer gasoline through modern
facilities which include credit card readers in the dispensers. Three of the
new stores include branded food service which carries relatively higher gross
profit margins.
The Company intends to substantially accelerate the pace of new store
development during fiscal year 1999 with a target of 25 new stores located in
Ohio and Northern Kentucky. The Company believes adequate sources of financing
will continue to be available to support new store development.
TECHNOLOGICAL UPGRADE
The Company completed the first phase of its store automation program in fiscal
year 1998. Phases two and three are scheduled to be completed during the next
two fiscal years.
Phase one provided a new foundation for store accounting and management
reporting. This 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 forms the basis for the formation
and implementation of improved merchandising strategies.
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Phase two, the implementation of a centralized pricebook, allows the definition
of market zones and the management of retail pricing strategy from the corporate
office. The implementation of a centralized pricebook is expected to improve
retail margins through increased accuracy of retail pricing and verification of
agreed upon vendor costs. Also, pricebook is expected to save input time, reduce
input errors, and provide greater control over store merchandise inventory.
Phase three, the implementation of a store level computer system, streamlines
the data entry process by allowing store managers to directly input their
inventory and operating results into the accounting system. A series of
exception-based reports allows management to verify input accuracy, maintain
accounting controls, and produce detailed reports on a daily basis. Store level
systems have also been interfaced to the point-of-sale devices to save input
time and increase control.
Future automation phases, which are an extension of the current implementations,
are expected to include scanning, time and attendance, and gasoline pump control
at the point-of-sale device.
GASOLINE OPERATIONS
Gasoline sales enable the Company to significantly increase a store's total
level of sales without a commensurate increase in overhead. Gasoline sales
accounted for approximately 38% of total revenues in fiscal year 1998, 42% for
fiscal year 1997 and 40% in fiscal year 1996. As of January 31, 1998, 293 stores
sold gasoline. Financial information related to the Company's gasoline
operations for the last three fiscal years is set forth in Note 12 to the
Consolidated Financial Statements.
The Company's gasoline pricing strategy has historically been designed, in
part, to provide value to customers by offering the same quality gasoline
offered by major oil companies at prices which are generally below nationally
advertised brands and comparable to other convenience store chains. The Company
obtains its gasoline from major oil company suppliers, primarily through spot
market purchases, and believes that there are adequate supplies of fuel
available from a number of sources at competitive prices.
Gasoline profit margins have a significant impact on the Company's income. Such
profit margins could be adversely influenced by factors beyond the Company's
control, such as volatility in the wholesale gasoline market due to supply
interruptions. In addition, gasoline profit margins are continually influenced
by competition in each local market area.
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The Company has entered into discussions with several major oil companies with
the goal of reaching agreements with one or more of them which will result in
certain of the Company's gasoline locations selling branded gasoline and in
upgrading certain of the Company's gasoline facilities. Although there are no
assurances any such agreement will be consummated, the Company believes offering
gasoline product with a major oil company brand would enable it to compete more
effectively.
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. General merchandise
available includes gasoline (at 293 stores), cigarettes, health and beauty aids,
publications, lottery tickets and money orders.
The Company has installed branded food service at 27 store locations, including
18 Taco Bells(R), 1 Pizza Hut(R) and 8 Subways(R). The Company has entered into
an agreement with Restaurants Developers Corporation to install Mr. Hero(R)
sandwiches and Arabica(R) Coffee houses, well-established regional brands with
strong consumer recognition in Northeastern Ohio. These branded food service
offerings allow the Company to offer competitive, high-quality food service and
increase customer traffic providing ancillary sales opportunities for gasoline
and other convenience items.
In recent years, the Company has altered the mix of products and services to
emphasize the sale of items carrying higher profit margins. Fast food items
carry higher profit margins and tend to lead to the purchase of other high
profit margin products and impulse items, including salty-snacks, candy and
beverages. Dairy Mart offers a number of private label products such as milk,
bakery products, juices, dips and cheeses which generally carry a higher gross
profit margin than the Company's average gross profit margin on comparable
products. In fiscal year 1998, Dairy Mart completed the installation of
approximately 500 automated teller machines (ATMs) in its stores. Dairy Mart has
no capital investment in the ATMs and receives monthly fee income from the owner
and operator of the ATMs.
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FRANCHISE OPERATIONS
The Company franchises 158 stores. Franchise stores generally follow the same
operating policies as Company stores, and are subject to Company supervision
under franchise agreements. Company operated and franchise stores are of the
same basic store design and sell substantially the same products.
The Company offers two types of franchising arrangements: a "full" franchise and
a "limited" franchise. Under a full franchise agreement, the franchisee
purchases and owns both the merchandise inventory and the equipment located in
the store, and leases or subleases the store from the Company. Under a limited
franchise agreement, the franchisee owns only the merchandise inventory while
the Company retains ownership of the store equipment. Franchise fees are higher
for limited franchisees. As of January 31, 1998, there were 69 full franchise
locations and 89 limited franchise locations.
INTERNATIONAL OPERATIONS
The Company conducts business outside the United States as a licensor or as a
consultant. Currently, the Company is a party to two agreements with convenience
store operators in South Korea and Malaysia. As with the Company's prior
international arrangements, both agreements require a specified commitment of
Company personnel, but do not require any significant commitment of capital. At
the end of fiscal year 1998, there were 261 stores in South Korea and 21 stores
in Malaysia operating under these agreements.
ADVERTISING
To promote a uniform image for all stores, the Company designs and coordinates
advertising for all stores to complement its marketing strategy, which is
derived, in part, from market surveys and research. In-store, newspaper,
direct-mail advertising, special promotions and seasonal radio and television
advertising usually feature certain items which can be purchased at the stores,
and frequently include national brand items for which advertising costs are
often supplemented by the national brand suppliers. Sales promotions are
generally established and maintained on a bi-weekly or monthly basis.
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COMPETITION
The convenience store and retail gasoline industries are highly competitive. The
number and type of competitors vary by location. The Company presently competes
with other convenience stores, large integrated gasoline service station
operators, supermarket chains, neighborhood grocery stores, independent gasoline
service stations, fast food operations and other similar retail outlets, some of
which are well recognized national or regional retail chains. Some of the
Company's competitors have greater financial resources than the Company. Key
competitive factors include, among others, location, ease of access, store
management, product selection, pricing, hours of operation, store safety,
cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the Company's stores generally experience higher
revenues and profit margins during the warmer weather months, which fall within
the Company's second and third fiscal quarters.
EMPLOYEES
As of January 31, 1998, exclusive of franchisees and franchisees' employees, the
Company employed, on a full-time or part-time basis, approximately 3,500
employees. The Company has not experienced any work stoppages. There are no
collective bargaining agreements between the Company and any of its employees.
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ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing USTs to prevent future releases; (v) keeping appropriate
records; and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. A number of states in which the Company operates
also have adopted UST regulatory programs.
In the ordinary course of business, the Company periodically detects releases of
gasoline or other regulated substances from USTs it owns or operates. As part of
its program to manage USTs, the Company is involved in environmental assessment
and remediation activities with respect to releases of regulated substances from
its existing and previously operated retail gasoline facilities. The Company
accrues its estimates of all costs to be incurred for assessment and remediation
for known releases. These accruals are adjusted if and when new information
becomes known. Additionally, the Company records as receivables the estimated
reimbursements of a portion of the total costs from various state environmental
trust funds which have provisions for sharing or reimbursing certain costs
incurred by UST owners or operators based upon compliance with the terms and
conditions of such funds. Because of the nature of such releases, the actual
costs of assessment and remediation activities may vary significantly from year
to year. Under current federal and state regulatory programs, the Company also
will be obligated by December 22, 1998 to upgrade or replace most existing USTs
it owns or operates to meet certain corrosion, overfill- and spill-protection
and leak-detection requirements. The Company has evaluated each site on an
individual basis to determine the type of expenditures required to comply with
these and other requirements under the federal and state UST regulatory
programs.
In addition to ongoing assessment and remediation costs, the Company presently
estimates that it will make capital expenditures, including those requiring
upgrading or replacing of existing USTs, ranging from approximately $3.0 to $4.0
million in the aggregate over the next fiscal year to comply with current
federal and state UST regulations, which capital expenditures could be reduced
for locations (especially low volume locations) which may be closed in lieu of
the capital costs of compliance (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Environmental Responsibility").
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The Company's estimate of costs to be incurred for environmental assessment and
remediation and for UST upgrading and other regulatory compliance are based on
factors and assumptions that could change as a result of modifications of
regulatory requirements, detection of unanticipated environmental conditions, or
other unexpected circumstances. As a result, the actual costs incurred may vary
significantly from the estimate noted above.
ITEM 2. PROPERTIES
Of the 627 stores in operation as of January 31, 1998, 67 store locations were
owned by the Company and 560 were leased. In addition, the Company owns 23
locations and is the primary lessee for 97 locations not currently operated as
Dairy Mart stores. The Company's policy is to endeavor to lease or sublease such
locations to third parties. From time to time the Company enters into
sale-leaseback transactions whereby the Company sells retail locations and
leases such locations back from the purchasers.
In fiscal year 1998, the Company sold its former office and manufacturing
facility located in Cuyahoga Falls, Ohio (see Note 1 to the Consolidated
Financial Statements). The Company leases a 47,000 corporate headquarters
facility in Hudson, Ohio to which it relocated in March 1998. The Company
leases administrative offices for various regional operations.
The Company is in the process of marketing for sale or lease two facilities it
owns in Enfield, Connecticut: the Company's former corporate headquarters
facility with approximately 77,000 square feet located on eighty-eight acres of
land and the Company's former Northeast regional operating office building and
former manufacturing and processing plant located in a 33,000 square foot
building.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a nominal defendant, along with certain of those
persons who were directors of the Company in fiscal 1996, in two shareholder
derivative actions captioned KAHN V. NIRENBERG (C.A. No. 14893) and UNI-MARTS,
INC. V. STEIN (C.A. No. 14713), both of which are pending in the Delaware Court
of Chancery of New Castle County. The plaintiffs allege, among other things,
that in connection with the settlement of the dispute between Charles Nirenberg
and the Company's management with respect to control of the Company, the
directors violated their fiduciary duty to the Company and its stockholders,
violated provisions of the Delaware general corporation law and wasted corporate
assets. Mr. Nirenberg is a former shareholder, director and officer of the
Company. The plaintiffs seek, among other things, a declaration that the current
structure of the general partner of DM Associates Limited Partnership ("DM
Associates") is invalid and that certain voting rights with respect to the Class
B Common Stock held by DM Associates should be vested in the Company. On August
9, 1996, the Court granted in part and denied in part defendants' motions to
dismiss.
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The Court held that plaintiffs failed to state (1) a claim for waste, (2) a
claim that the defendants did not make adequate disclosure in connection with
the transaction with Mr. Nirenberg and (3) any claim under the Delaware General
Corporation Law. The Court, however, refused to dismiss at the pleading stage
certain claims for breach of fiduciary duty. Discovery is proceeding. 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.
The Company is also a defendant in an action brought by a former supplier of
certain dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled NEW ENGLAND DAIRIES, INC. V. DAIRY MART CONVENIENCE STORES, INC. AND
DAIRY MART, INC., Civil Action No. 97-0569873 (Conn. Super.). This action was
commenced on April 17, 1997 by New England Dairies, Inc. ("NED") alleging that
Dairy Mart committed an anticipatory breach of a supply agreement entered into
between NED and Dairy Mart on April 25, 1995 (the "Agreement"), when Dairy Mart
entered into a contract with a third party to sell all company-owned and
franchised convenience stores in New England, without requiring the third party
purchaser to assume the Agreement. NED's action seeks lost profits in the amount
of $3.7 million. Discovery is proceeding. 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.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 11, 1997 the Company held its 1997 Annual Meeting of stockholders.
The following matters were voted on at the Annual Meeting:
1. The election of Thomas W. Janes and Truby G. Proctor, Jr.,
as Class A Directors and Frank W. Barrett, J. Kermit Birchfield,
Jr., John W. Everets, Jr., Gregory G. Landry and Robert B. Stein,
Jr. as Class B Directors.
The following chart shows the number of votes cast for each matter voted on at
the Annual Meeting, the votes with respect to each constituting a majority of
the votes cast with respect to each matter:
<TABLE>
<CAPTION>
For Against
--------- -------
<S> <C> <C>
1. Election of Mr. Janes ...................223,893 19,070
2. Election of Mr. Proctor .................224,334 18,630
3. Election of Mr. Barrett ...............1,252,731 7,001
4. Election of Mr. Birchfield ............1,254,268 5,464
5. Election of Mr. Everts ................1,254,268 5,464
6. Election of Mr. Landry ................1,254,050 5,682
7. Election of Mr. Stein .................1,254,050 5,682
</TABLE>
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PART II
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ITEM 5. MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company has not paid any 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 any dividends
and from repurchasing its capital stock. On September 30, 1996, the Company's
Class A Common Stock and Class B Common Stock began trading on the American
Stock Exchange under the symbols DMC.A and DMC.B, respectively. The Company's
Class A Common Stock and Class B Common Stock were previously traded on the
NASDAQ Stock Market under the symbols DMCVA and DMCVB, respectively. The
following table sets forth the high and low sales prices per share of both
classes of the Company's Common Stock, as quoted on The American Stock Exchange
and The NASDAQ Stock Market, for the last two fiscal years.
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock
-------------------------------
High Low High Low
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Fiscal Year Ended January 31, 1998:
- ----------------------------------------------------------------------------------------------
First Quarter 6 3/16 3 3/4 6 1/4 4 1/8
Second Quarter 6 3/8 4 5/8 6 3/8 4 3/4
Third Quarter 6 1/4 4 3/8 6 1/8 4 1/2
Fourth Quarter 5 1/4 4 1/8 5 1/16 4 1/4
- ----------------------------------------------------------------------------------------------
Fiscal Year Ended February 3,1997:
- ----------------------------------------------------------------------------------------------
First Quarter 6 1/4 5 1/2 6 3/4 5 3/8
Second Quarter 6 3/8 5 1/8 6 1/2 5
Third Quarter 6 4 1/4 6 4 3/4
Fourth Quarter 5 7/8 4 5 13/16 3 7/8
- ----------------------------------------------------------------------------------------------
</TABLE>
There were approximately 3,000 holders of the Company's Class A and Class B
Common Stock as of April 24, 1998. Included in this number are shares held in
nominee or street names.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Five Years Ended January 31, 1998 1998 1997 1996 1995 1994
- ----------------------------------- -------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues ............................................ $ 501,359 $ 585,746 $ 571,311 $ 596,782 $ 591,500
-------------------------------------------------------------------------
Interest Expense .................................... 10,612 10,877 9,661 10,435 7,644
-------------------------------------------------------------------------
Income (Loss) Before Income Taxes, Extraordinary Item
and Cumulative Effect of Accounting Change ..... (2,406) (2,613) (9,220) (17,319) 3,102
-------------------------------------------------------------------------
Net Income (Loss) ................................... (1,710) (1,886) (6,000) (11,150) 866
-------------------------------------------------------------------------
Earnings (Loss) Per Share:
Before Extraordinary Item and Cumulative
Effect of Accounting Change .................... (0.37) (.42) (1.12) (1.94) .33
-------------------------------------------------------------------------
Net Earnings (Loss) Per Share - Basic .......... (0.37) (.42) (1.12) (2.01) .16
-------------------------------------------------------------------------
BALANCE SHEET DATA:
Net Property and Equipment .......................... $ 82,589 $ 89,448 $ 80,387 $ 70,578 $ 93,774
-------------------------------------------------------------------------
Total Assets ........................................ 165,104 175,505 164,938 172,228 169,442
-------------------------------------------------------------------------
Long-Term Obligations (a) ........................... 96,448 110,428 100,881 90,268 77,343
-------------------------------------------------------------------------
Stockholders' Equity ................................ 6,445 7,913 9,208 22,817 33,870
-------------------------------------------------------------------------
OTHER DATA:
Earnings Before Interest Expense, Income Taxes,
Depreciation and Amortization (EBITDA)(b) ...... $ 19,048 $ 20,138 $ 12,831 $ 5,593 $ 23,646
-------------------------------------------------------------------------
</TABLE>
(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 expenses. EBITDA should not be viewed as a
substitute for Generally Accepted Accounting Principles (GAAP) measurements
such as net income (loss) or cash flow from operations.
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Years Ended January 31, 1998, February 1, 1997 and February 3, 1996
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except number of locations, gross
profits per gallon and per share data)
<S> <C> <C> <C>
FINANCIAL DATA:
Revenues:
Merchandise Sales.............................................. $306,062 $335,661 $341,526
Gasoline Sales................................................. 191,956 245,718 226,505
Other.......................................................... 3,341 4,367 3,280
------------------------------------------
Total Revenues.......................... $501,359 $585,746 $571,311
-------------------------------------------
Net loss(1) ........................................................ $ (1,710) $ (1,886) $ (6,000)
-------------------------------------------
STORE DATA:
Company Operated:
Gross Profit................................................... $ 99,187 $106,182 $111,153
Average Sales Per Store (2).................................... $590 $562 $525
Average Gross Profit Per Store (2)............................. $199 $188 $181
Number of Stores at Year End................................... 469 543 587
Franchise Operated:
Franchise Fee.................................................. $ 12,481 $18,264 $ 18,805
Average Sales Per Store(2)..................................... $572 $577 $560
Average Franchise Fees Per Store(2)............................ $61 $65 $62
Number of Stores at Year End................................... 158 268 290
Total Stores:
Gross Profit.................................................... $111,668 $124,446 $129,958
Average Sales Per Store(2)...................................... $584 $567 $536
Average Combined Gross Profit and Franchise Fees Per Store(2)... $159 $147 $141
Number of Stores at Year End.................................... 627 811 877
Gasoline Data:
Gallons Sold.................................................. 171,269 209,478 212,832
Gross Profit.................................................. $21,418 $25,082 $24,525
Average Gallons Sold Per Location(2).......................... 535 571 544
Gross Profit Per Gallon....................................... $0.1251 $0.1138 $0.1152
Number of Gasoline Locations at Year End...................... 293 360 376
OTHER DATA:
Weighted Average Number of Shares................................ 4,605 4,441 5,374
Book Value Per Share (3) ........................................ $0.94 $1.20 $1.41
</TABLE>
(1) Net loss for fiscal year 1996 included special and/or unusual items. For a
discussion of these special and/or unusual charges, see Note 16 to the
Consolidated Financial Statements.
(2) The calculation of sales per store, gross profit per store, franchise fees
per store and gasoline gallons per store is based on a weighted average
number of stores open during fiscal years 1998, 1997 and 1996, respectively.
(3) The calculation utilizes total outstanding shares including the dilutive
effect of stock options, stock grants and stock warrants as of January 31,
1998, February 1, 1997 and February 3, 1996, respectively.
-16-
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
PRO FORMA FISCAL YEAR 1998 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1997
RESULTS
During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations based in the northeastern United States for $39.1 million.
The Company also sold a former office and manufacturing facility for $4.1
million. These transactions resulted in a pre-tax gain of $3.6 million which
has been excluded from the pro forma results shown below. The following
discussion and analysis of Results of Operations for fiscal year 1998 compared
to fiscal year 1997 is based on unaudited Pro Forma Consolidated Statements of
Operations for fiscal year 1998 compared to fiscal year 1997. The unaudited Pro
Forma Consolidated Statements of Operations as presented below reflect the
exclusion, for the two fiscal years shown, of the historical revenues, cost of
goods sold, operating expenses, and direct and indirect administrative expenses
associated with the assets sold. Additionally, the unaudited Pro Forma
Consolidated Statements of Operations reflect the elimination of historical
interest expense related to debt retired based on the assumption that proceeds
from the sale had been received as of the beginning of the prior fiscal year,
and also reflect the elimination of the estimated income tax effect of the
associated excluded results of operations for the assets sold.
Pro Forma Consolidated Statements of Operations
(unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31, 1998 AND FEBRUARY 1998 1997
1, 1997
----------------- ---------------
<S> <C> <C>
REVENUES ....................................... $459.3 $471.7
COST OF GOODS SOLD AND EXPENSES:
COST OF GOODS SOLD............................ 333.4 346.1
OPERATING & ADMINISTRATIVE EXPENSES........... 121.9 119.4
INTEREST EXPENSE.............................. 10.3 10.5
----------------- ---------------
465.6 476.0
LOSS BEFORE INCOME TAXES........................ (6.3) (4.3)
BENEFIT FROM INCOME TAXES....................... 1.8 1.2
----------------- ---------------
NET LOSS........................................ $(4.5) $(3.1)
LOSS PER SHARE.................................. $(0.98) $(0.70)
</TABLE>
-17-
<PAGE> 18
REVENUES
Revenues for fiscal year 1998 decreased $12.4 million compared to fiscal year
1997. A summary of revenues by functional area is shown below:
<TABLE>
<CAPTION>
PRO FORMA
1998 1997
----------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES.................. $285.7 $280.7
GASOLINE............................ 170.5 187.4
OTHER............................... 3.1 3.6
---------------------------
TOTAL............................... $459.3 $471.7
===========================
</TABLE>
Convenience store revenues increased $5.0 million, or 1.8%, in fiscal year 1998
compared to fiscal year 1997 as a result of a 3.4% increase in comparable
Company operated store sales partially offset by the closure and/or sale of 35
underperforming stores during fiscal year 1998. Although the reduction in
stores had a negative impact on revenues, it did not have a material adverse
effect on results of operations, because the majority of stores closed and/or
sold had been operating at a loss.
Gasoline revenues decreased $16.9 million in fiscal year 1998 compared to fiscal
year 1997 as a result of a decrease in total gallons sold of 11.1 million and a
decrease in the average selling price of gasoline of 3.2 cents per gallon. The
decrease in the average selling price and in gasoline gallons sold was a result
of a highly competitive retailing environment experienced by the Company
throughout fiscal year 1998, particularly in its Southeast market where the
Company's gasoline volumes historically have been strong.
GROSS PROFITS
Gross profits increased $0.3 million from fiscal year 1997 to fiscal year 1998.
A summary of gross profits by functional area is shown below:
<TABLE>
<CAPTION>
PRO FORMA
1998 1997
---------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES.................. $103.3 $101.9
GASOLINE............................ 19.5 20.1
OTHER............................... 3.1 3.6
---------------------------
TOTAL............................... $125.9 $125.6
===========================
</TABLE>
Convenience store gross profit increased by $1.4 million in fiscal year 1998
compared to fiscal year 1997. The increase was a result of the increase in
convenience store sales, as described above. Convenience store gross profit
margins remained constant in fiscal year 1998 compared to fiscal year 1997.
-18-
<PAGE> 19
Gasoline gross profits decreased $0.6 million in fiscal year 1998 compared to
fiscal year 1997. Gasoline gross profits in fiscal year 1997 included a $1.2
million gasoline excise tax rebate from the State of Kentucky because the
Kentucky Supreme Court ruled that these taxes were improperly assessed and
collected. Excluding the excise tax rebate discussed above, gasoline gross
profits for fiscal year 1998 would have increased $0.6 million compared to
fiscal year 1997. This increase is primarily attributable to an increase in
gasoline gross profit margins of 1.2 cents per gallon in fiscal year 1998
compared to fiscal year 1997 partially offset by the decline in gasoline gallons
described above.
Other revenues and gross profits decreased $0.5 million in fiscal year 1998
compared to fiscal year 1997 primarily as a result of lower foreign consulting
revenues. In fiscal year 1997 the Company recognized a $0.4 million one-time
license fee earned upon the start up of a foreign consulting agreement in
Malaysia.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $2.5 million in fiscal year 1998
compared to fiscal year 1997. A summary of operating and administrative expenses
by functional area is shown below:
<TABLE>
<CAPTION>
PRO FORMA
1998 1997
---------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES................... $82.9 $81.3
GASOLINE............................. 11.8 11.2
ADMINISTRATIVE & OTHER............... 27.2 26.9
---------------------------
TOTAL................................ $121.9 $119.4
===========================
</TABLE>
Convenience store operating expenses increased $1.6 million in fiscal year 1998
compared to fiscal year 1997 primarily as a result of higher store wages,
depreciation and repair and maintenance expenses. Gasoline expenses increased
$0.6 million as a result of higher depreciation expense.
INTEREST EXPENSE, INFLATION AND TAXES
Pro forma interest expense in fiscal year 1998 decreased $0.2 million compared
to fiscal year 1997 as a result of a reduction in average outstanding mortgage
and capital lease obligations.
Inflation did not have a material effect on the Company's pro forma revenues,
gross profits, operating and administrative expenses in fiscal years 1998 and
1997.
The effective tax rate for the Company was a benefit of 28.9% and 27.8% for
fiscal years 1998 and 1997, respectively.
-19-
<PAGE> 20
FISCAL YEAR 1997 RESULTS COMPARED TO FISCAL YEAR 1996 RESULTS
The Company's net loss for fiscal year 1997 was $1.9 million compared to a net
loss of $6.0 million for fiscal year 1996. Fiscal year 1996 results included
special and/or unusual items. For a discussion of these special and/or unusual
charges, see Note 16 to the Consolidated Financial Statements.
Revenues for fiscal year 1997 increased $14.4 million from fiscal year 1996.
Fiscal year 1997 included 52 weeks whereas fiscal year 1996 included 53 weeks. A
summary of revenues by functional area is shown below:
<TABLE>
<CAPTION>
FISCAL YEARS
1997 1996
------------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES................... $335.7 $341.5
GASOLINE............................. 245.7 226.5
OTHER................................ 4.3 3.3
------------------------------
TOTAL................................ $585.7 $571.3
==============================
</TABLE>
Convenience store revenues decreased $5.8 million, or 1.7%, in fiscal year 1997
compared to fiscal year 1996 as a result of the reduction of 75 underperforming
stores, partially offset by a 2.9% increase in comparable store sales. Although
the reduction in stores had a negative impact on revenues, it did not have a
material adverse effect on the results of operations, because the majority of
stores closed or sold had been operating at a loss.
Gasoline revenues increased $19.2 million in fiscal year 1997 compared to fiscal
year 1996 as a result of an increase in the average selling price of gasoline of
10.9 cents per gallon partially offset by a decrease in gasoline gallons sold of
3.4 million. The decrease in gasoline gallons sold was as a result of the
unfavorable impact of fiscal year 1997 having one less week of operating
activity in comparison to fiscal year 1996, as noted above. On a per location
basis, average gallons increased by approximately 4.9% in fiscal year 1997
compared to fiscal year 1996. The increase in average store gallons sold was a
result of further development of new stores having a major gasoline presence and
the remodeling and expansion of gasoline facilities at certain existing
locations.
-20-
<PAGE> 21
GROSS PROFITS
Gross profits for fiscal year 1997 decreased $3.9 million from fiscal year 1996.
A summary of gross profits by functional area is shown below:
<TABLE>
<CAPTION>
FISCAL YEARS
1997 1996
------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES.................. $124.5 $130.0
GASOLINE............................ 25.1 24.5
OTHER............................... 4.3 3.3
------------------------
TOTAL............................... $153.9 $157.8
========================
</TABLE>
Convenience store gross profit decreased by $5.5 million in fiscal year 1997
compared to fiscal year 1996. The decrease was primarily a result of lower
product gross margins and the overall reduction in the average number of stores,
as described above, partially offset by increased marketing allowances and an
increase in comparable store sales, as described above.
Gasoline gross profits increased by $0.6 million in fiscal year 1997 compared to
fiscal year 1996 because of a gasoline excise tax rebate due the Company of $1.2
million from the State of Kentucky. The Kentucky Supreme Court ruled that these
taxes were improperly assessed and collected and therefore should be refunded to
the Company. Excluding the excise tax rebate discussed above, gasoline gross
profits for fiscal year 1997 decreased by $0.6 million compared to fiscal year
1996 primarily as a result of a decrease in gasoline gallons sold, as described
above, combined with a decrease of 0.13 cents in gross profit per gallon.
Other revenues and gross profits increased by $1.0 million in fiscal year 1997
compared to fiscal year 1996 because of the recognition of a $0.4 million
one-time license fee earned upon the start up of a foreign consulting agreement
and approximately $0.8 million in interest income associated with the excise tax
rebate discussed above.
-21-
<PAGE> 22
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses for fiscal year 1997 increased $0.5
million over fiscal year 1996 as adjusted to exclude special and/or unusual
costs and expenses (see Note 16 to the Consolidated Financial Statements). A
summary of expenses by functional area is shown below:
<TABLE>
<CAPTION>
FISCAL YEARS
1997 1996
-------------------------
(IN MILLIONS)
<S> <C> <C>
CONVENIENCE STORES..................... $99.7 $100.2
GASOLINE............................... 14.0 13.3
ADMINISTRATIVE & OTHER (*)............. 31.9 31.6
-------------------------
TOTAL (*).............................. $145.6 $145.1
=========================
</TABLE>
(*) Adjusted to exclude special and/or unusual costs and expenses
(see Note 16 to the Consolidated Financial Statements).
Convenience store operating expenses decreased $0.5 million in fiscal year 1997
compared to fiscal year 1996 primarily as a result of the closure or sale of
underperforming stores as described above, partially offset by higher labor,
rent and depreciation costs on a per store basis. Gasoline operating expenses
increased $0.7 million in fiscal year 1997 compared to fiscal year 1996
primarily as a result of an increase in environmental expenses associated with
the remediation of gasoline locations after considering probable reimbursements
from various state environmental trust funds.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense, as adjusted to exclude special and/or unusual interest charges
(see Note 16 to the Consolidated Financial Statements), increased in fiscal year
1997 as compared to fiscal year 1996, as a result of increased borrowings
associated with the issuance of the Series B Notes in December 1995 (see Notes 7
and 16 to the Consolidated Financial Statements).
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administration expenses in fiscal years 1997 and 1996.
The effective tax rate for the Company was a benefit of 27.8% and 34.8% for
fiscal years 1997 and 1996, respectively. The effective tax rates vary from
statutory rates primarily due to the effect of the non-deductible amortization
of intangible assets. In fiscal 1996, the effect of the non-deductible
amortization was offset by the recording of certain income tax benefits.
-22-
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow because a majority of its
revenues are received in cash. For the fiscal year ended January 31, 1998, cash
flow from operations and cash generated from the sale of certain assets were
sufficient to fund capital expenditures.
The Company has a $30.0 million senior revolving credit facility available to
address the seasonality of operations and the timing of capital expenditures and
certain working capital disbursements. The Company can issue up to $15.0 million
of letters of credit under the facility. The facility is due and payable on
April 30, 1999 (see Note 7 to the Consolidated Financial Statements). As of
January 31, 1998, the Company had no outstanding revolving credit loans and $7.1
million outstanding in letters of credit under the facility. As discussed in
Note 7 to the Consolidated Financial Statements, this agreement was amended in
April 1998, effective January 1, 1998.
Management believes that cash flow from operations and the proceeds from the
sale of certain assets held for sale supplemented by the availability under
revolving credit facility or other forms of asset financing and/or leasing, if
necessary, will provide the Company with adequate liquidity and the capital
necessary to achieve its expansion initiatives in its retail operations (See
Capital Expenditures).
CASH PROVIDED BY OPERATING ACTIVITIES
During fiscal year 1998, net cash generated by operations was $1.7 million lower
than the prior fiscal year. This decrease was primarily a result of reduced
Results of Operations partially offset by the receipt in the current fiscal year
of the gasoline excise tax rebate discussed above.
CASH PROVIDED BY INVESTING ACTIVITIES
Net cash provided by investing activities increased by $23.5 million, primarily
as a result of proceeds generated from the sale of certain assets, offset in
part by increased capital expenditures with respect to new store construction,
store automation and remodeling of existing store locations.
CASH USED BY FINANCING ACTIVITIES
Net cash used by financing activities increased by $23.9 million from the prior
fiscal year. In fiscal year 1997 the Company borrowed $10.3 million under its
revolving credit facility which balance was paid in its entirety in fiscal year
1998.
-23-
<PAGE> 24
CAPITAL EXPENDITURES
The Company anticipates spending approximately $35.0 million for capital
expenditures in fiscal year 1999 by purchasing store and gasoline equipment for
new stores, remodeling a certain number of existing store and gasoline
locations, implementing and/or upgrading office and store technology and meeting
the Company's requirements to comply with federal and state underground gasoline
storage tank regulations (see "Environmental Responsibility"). These capital
expenditures will be funded primarily by cash generated from operations and the
proceeds from the sale of certain assets held for sale supplemented by the
availability of a senior revolving line of credit or other forms of equipment
financing and/or leasing, if necessary. The Company intends to lease the real
estate for the majority of new store locations.
ENVIRONMENTAL RESPONSIBILITY
During fiscal year 1998, the Company adopted the American Institute of Certified
Public Accountants' Statement of Position ("SOP") No. 96-1, "Environmental
Remediation Liabilities," which provides guidance on specific accounting issues
that are present in the recognition, measurement and disclosure of environmental
remediation liabilities. The Company accrues its estimate of all costs to be
incurred for assessment and remediation with respect to release of regulated
substances from existing and previously operated retail gasoline facilities. For
a related discussion on environmental liabilities, see Note 15 to the
Consolidated Financial Statements.
YEAR 2000 COMPUTER COSTS
During fiscal year 1998 the Company undertook the implementation of its store
automation program. The first phase of this program was completed in fiscal
year 1998 with the remaining two phases expected to be completed by the end of
fiscal year 2000. The store automation program, when fully implemented, is
expected to enhance accounting and management controls, improve retail margins
through centralized retail pricing, improve inventory management, and achieve
efficiencies. In conjunction with the development of this and other systems,
the Company has been addressing the functionality of all the Company's computer
systems for the year 2000. The systems implemented by the Company are designed
to be year 2000 compliant. The Company does not expect to incur significant
costs in the future that would have material impact on Company's operating
results. The Company is also in the process of reviewing the efforts being
undertaken by its vendors and customers to become year 2000 compliant to ensure
that no business interruption is experienced at the turn of the century. The
Company is not currently aware of vendor or customer circumstances that may
have a material adverse impact on the Company.
-24-
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
notes thereto, appear on pages 36 through 57 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-25-
<PAGE> 26
PART III
--------
Information required by Items 10, 11 and 12 (DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT, EXECUTIVE COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT) is incorporated herein by reference from the
sections entitled "ITEM 1 - ELECTION OF DIRECTORS - Nominees for Election as
Directors," "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "OUTSTANDING STOCK AND
VOTING RIGHTS" "PRINCIPAL SHAREHOLDERS," AND "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its 1998 fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under "CERTAIN TRANSACTIONS" in
the Company's definitive proxy statement, and is incorporated herein by
reference.
-26-
<PAGE> 27
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part
of this Form 10-K, see Page F-1.
(2) Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II - Valuation Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits:
Exhibit Number:
(3) Articles of Incorporation and Bylaws.
(3.1) The Company's Restated Certificate of Incorporation,
as amended, was filed as Exhibit 3.1 to the Company's
Form 10-K for the fiscal year ended February 1, 1992
and is filed herewith.
(3.2) A Certificate of Designation was filed as Exhibit 1 of
the Company's Form 8-K for the January 19, 1996 event
and is incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed
as Exhibit 3.2 to the Company's Form 10-Q for the
fiscal quarter ended November 2, 1996 and are
incorporated herein by reference.
(4) Instruments defining the rights of security holders,
including indentures.
-27-
<PAGE> 28
(4.1) The instruments defining the rights of the holders of
the Company's Common Stock include the Company's
Restated Certificate of Incorporation, Certificate of
Designation, Amended and Restated Bylaws and Rights
Agreement, filed as Exhibits 3.1, 3.2, 3.3 and 10.23
hereto, and those instruments filed as Exhibit 4.1 of
the Company's Registration Statement on Form S-1
(Registration No. 33-639) dated November 5, 1985,
which are incorporated herein by reference.
(4.2) Amended and Restated Indenture, dated as of December
1, 1995, by and among the Company, Certain
Subsidiaries of the Company, as Guarantors, and First
Bank National Association, as Trustee, was filed as
Exhibit 4.1 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated
herein by reference.
(4.3) The instruments defining the rights of the holder's of
the Company's Warrants include the Form of Stock
Purchase Warrants filed as Exhibits 10.13 and 10.14
thereto was filed as Exhibit 4.3 of the Company's Form
10-K for the fiscal year ended February 3, 1996 and is
incorporated herein by reference.
(10) Material Contracts.
(10.1) Credit Agreement dated as of April 24, 1996, among the
Company, Bank of Boston Connecticut as agent, and the
banks from time to time parties thereto was filed as
Exhibit 10.1 of the Company's Form 10-K for the fiscal
year ended February 3, 1996 and is incorporated herein
by reference.
(10.2) Amended Credit Agreement dated as of April 30, 1998,
among the Company, Bank of Boston Connecticut as
agent, and the banks from time to time parties thereto
is filed as Exhibit 10.2 attached hereto.
(10.3) 1985 Incentive Stock Option Plan, as amended, and form
of Incentive Stock Option Agreement, were filed as
Exhibit 10.4 to the Company's annual report on Form
10-K for the fiscal year ended January 30, 1988, and
are incorporated herein by reference.
(10.4) Asset purchase agreement dated March 6, 1997, among
Dairy Mart Convenience Stores, Inc. and DB Companies,
Inc. was filed as exhibit 2.1 of the Company's Form
8-K for the June 21, 1997 event and is incorporated
herein by reference.
(10.5) Closing agreement dated June 19, 1997, between Dairy
Mart Convenience Stores, Inc. and DB Companies, Inc.
was filed as exhibit 2.2 of the Company's Form 8-K for
the June 21, 1997 event and is incorporated herein by
reference.
-28-
<PAGE> 29
(10.6) 1990 Stock Option Plan and forms of qualified and non
qualified stock option agreements thereunder were
filed as Exhibit 10.4 to the Company's Form 10-K for
the fiscal year ended February 2, 1991, and are
incorporated herein by reference.
(10.7) 1995 Stock Option and Incentive Award Plan was filed
as Exhibit 10.1 of the Company's Form 10-Q for the
fiscal quarter ended July 29,1995 and is incorporated
herein by reference.
(10.8) 1995 Stock Option Plan for Outside Directors was filed
as Exhibit 10.6 of the Company's Form 10-K for the
fiscal year ended January 28, 1995 and is incorporated
herein by reference.
(10.9) Employment agreement between the Company and Robert B.
Stein, Jr. dated June 8, 1995 was filed as Exhibit
10.2 of the Company's Form 10-Q for the fiscal quarter
ended July 29, 1995 and is incorporated herein by
reference.
(10.10) Employment agreement between the Company and Gregory
G. Landry dated June 8, 1995 was filed as Exhibit 10.3
of the Company's Form 10-Q for the fiscal quarter
ended July 29, 1995 and is incorporated herein by
reference.
(10.11) Employment agreement between the Company and Gregg O.
Guy dated June 8, 1995 was filed as Exhibit 10.5 of
the Company's Form 10-Q for the fiscal quarter ended
July 29, 1995 and is incorporated herein by reference.
(10.12) Settlement agreement dated January 27, 1995 between
the Company and Frank Colaccino was filed as Exhibit
10.10 of the Company's January 28, 1995 Form 10-K and
is incorporated herein by reference.
(10.13) Note Purchase Agreement, dated as of December 1, 1995,
between the Company and the Purchasers Listed in the
Schedule of Purchasers therein, relating to 10-1/4%
Senior Subordinated Notes (Series B) due March 15,
2004, was filed as Exhibit 10.1 of the Company's Form
10-Q for the fiscal quarter ended October 28, 1995 and
is incorporated herein by reference.
-29-
<PAGE> 30
(10.14) Form of Stock Purchase Warrant to Subscribe for and
Purchase Shares of Class A Common Stock of the Company
(Initially Exercisable for an Aggregate of 1,215,000
Shares of Class A Common Stock) was filed as Exhibit
10.2 of the Company's Form 10-Q for the fiscal quarter
ended October 28, 1995 and is incorporated herein by
reference.
(10.15) Form of Stock Purchase Warrant to Subscribe for and
Purchase Shares of Class A Common Stock of the Company
(Initially Exercisable for an Aggregate of 500,000
Shares of Class A Common Stock) was filed as Exhibit
10.3 of the Company's Form 10-Q for the fiscal quarter
ended October 28, 1995 and is incorporated herein by
reference.
(10.16) Registration Rights Agreement, dated December 1, 1995,
by and among the Company and the Holders of (i)
10-1/4% Senior Subordinated Notes (Series B) of the
Company, due March 15, 2004, and (ii) Warrants to
Purchase 1,715,000 shares of Class A Common Stock, par
value $.01 per share, of the Company was filed as
Exhibit 10.4 of the Company's Form 10-Q for the fiscal
quarter ended October 28, 1995 and is incorporated
herein by reference.
(10.17) Agreement dated as of October 30, 1995 among the
Company, Charles Nirenberg, FCN Properties Corporation
and The Nirenberg Family Charitable Foundation, Inc.
was filed as Exhibit 10.1 of the Company's Form 8-K/A
Amendment No.1 for the October 30, 1995 event and is
incorporated herein by reference.
(10.18) Modification Agreement, dated as of December 1, 1995,
by and among the Company, Charles Nirenberg, FCN
Properties Corporation, The Nirenberg Foundation,
Inc., formerly known as the Nirenberg Family
Charitable Foundation, Inc., Robert B. Stein, Jr., and
Gregory G. Landry was filed as Exhibit 10.6 of the
Company's Form 10-Q for the fiscal quarter ended
October 28, 1995 and is incorporated herein by
reference.
(10.19) Amended and Restated Letter Agreement, dated December
1, 1995, to Mitchell J. Kupperman from the Company,
Robert B. Stein, Jr., and Gregory G. Landry was filed
as Exhibit 10.7 of the Company's Form 10-Q for the
fiscal quarter ended October 28, 1995 and is
incorporated herein by reference.
-30-
<PAGE> 31
(10.20) DM Associates Limited Partnership Agreement, dated
March 12, 1992, and filed herewith.
(10.21) First Amendment to Partnership Agreement of DM
Associates Limited Partnership, dated as of September
8, 1994. Incorporated herein by reference to Exhibit F
of the Schedule 13D, Amendment No. 4, dated January
27, 1995, filed by DM Associates Limited Partnership,
New DM Management Associates I, New DM Management
Associates II, Charles Nirenberg, Robert B. Stein,
Jr., Gregory G. Landry, Mitchell J. Kupperman and
Frank Colaccino.
(10.22) Partnership Agreement of New DM Management Associates
I, dated as of September 8, 1994. Incorporated herein
by reference to Exhibit G of the Schedule 13D,
Amendment No. 4, dated January 27, 1995, filed by DM
Associates Limited Partnership, New DM Management
Associates I, New DM Management Associates II, Charles
Nirenberg, Robert B. Stein, Jr., Gregory G. Landry,
Mitchell J. Kupperman and Frank Colaccino.
(10.23) First Amendment to Partnership Agreement of New DM
Management Associates I, dated as of December 1, 1995,
between Robert B. Stein, Jr., Gregory G. Landry and
Mitchell J. Kupperman was filed as Exhibit 10.10 of
the Company's Form 10-Q for the fiscal quarter ended
October 28, 1995 and is incorporated herein by
reference.
(10.24) Rights Agreement dated as of January 19, 1996 between
the Company and the First National Bank of Boston, as
Rights Agent, including form of Rights Certificate,
was filed as Exhibit 1 of the Company's Form 8-K for
the January 19, 1996 event and is incorporated herein
by reference.
(10.25) Third Amendment to Partnership Agreement of New DM
Management Associates I, dated as of December 12,
1997, was filed as exhibit 1 of the Company's Form 8-K
for the December 12, 1997 event and is incorporated
herein by reference.
(18) Preferability letter of Arthur Andersen LLP regarding
change in accounting policy relating to the
calculation of self insurance reserves was filed as
Exhibit 18 of the Company's Form 10-K for the fiscal
year ended February 3, 1996 and is incorporated herein
by reference.
(21) Subsidiaries of the Company was filed as Exhibit 21 of
the Company's Form 10-K for the fiscal year ended
February 3, 1996 and is incorporated herein by
reference.
-31-
<PAGE> 32
(23) Consent of Arthur Andersen LLP to the incorporation of
their reports included in this Form 10-K, for the
fiscal year ended January 31, 1998, into the Company's
previously filed Registration Statements on Forms S-8.
(27) Financial Data Schedule.
(99) Additional Exhibits.
(99.1) 9% secured promissory note dated March 12, 1992 issued
by DM Associates Limited Partnership in favor of the
Connecticut Development Authority (subsequently
assigned to FCN Properties Corporation and then to the
Company.)
(99.2) The Section entitled "Information regarding DM
Associates and the Nirenberg Transaction" on pages 19
through 21 of the Company's Proxy Statement dated
December 26, 1995 was filed as Exhibit 99 of the
Company's Form 10-K for the fiscal year ended February
3, 1996 and is incorporated herein by reference.
(b) Reports on Form 8-K
On December 22, 1997, the Company filed a Current Report on Form 8-K,
in which the Company reported that it had entered into a Third
Amendment (the "Amendment") to the Partnership Agreement of DM
Associates Limited Partnership, a Connecticut limited partnership ("DM
Associates"). The Amendment, made as of December 12, 1997, was executed
by New DM Management Associates I, the general partner of DM
Associates, HNB Investment Corp., the Class A limited partner of DM
Associates, and the Company, as the Class B limited partner of DM
Associates.
No Financial Statements were filed with any of the Current Reports.
(c) See (3) above.
(d) See (2) above.
-32-
<PAGE> 33
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 1, 1998
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Robert B. Stein, Jr.
----------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer
and Chairman of the Board of Directors
By /s/ Gregory G. Landry
----------------------------------------
Gregory G. Landry
Executive Vice President and
Chief Financial Officer
-33-
<PAGE> 34
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Dated: May 1, 1998 /s/ Robert B. Stein, Jr.
---------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: May 1, 1998 /s/ Gregory G. Landry
---------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: May 1, 1998 /s/ Frank W. Barrett
---------------------------------------
Frank W. Barrett
Director
Dated: May 1, 1998 /s/ J. Kermit Birchfield, Jr.
---------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: May 1, 1998 /s/ John W. Everets, Jr.
---------------------------------------
John W. Everets, Jr.
Director
Dated: May 1, 1998 /s/ Thomas W. Janes
---------------------------------------
Thomas W. Janes
Director
-34-
<PAGE> 35
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO FINANCIAL STATEMENTS
Form 10-K
Page
----
Report of Independent Public Accountants on 36
Consolidated Financial Statements
Consolidated Statements of Operations 37
and Stockholders' Equity for the
Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Consolidated Balance Sheets as of 38
January 31, 1998 and February 1, 1997
Consolidated Statements of Cash Flows for 39
the Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Notes to Consolidated Financial Statements 40 - 57
for the Fiscal Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996
Report of Independent Public Accountants 58
on Schedule II
59
Schedule II
-35-
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart
Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of January
31, 1998 and February 1, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dairy Mart Convenience Stores,
Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
Cleveland, Ohio, ARTHUR ANDERSEN LLP
April 30, 1998.
-36-
<PAGE> 37
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------
For The Years Ended January 31, 1998,
February 1, 1997 and February 3, 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues (including excise taxes of $29,641, $36,427, and $36,331) $ 501,359 $ 585,746 $ 571,311
-----------------------------------------
Cost of goods sold and expenses:
Cost of goods sold ............................................ 364,932 431,851 413,548
Operating and administrative expenses ......................... 128,221 145,631 157,322
Interest expense .............................................. 10,612 10,877 9,661
-----------------------------------------
503,765 588,359 580,531
-----------------------------------------
Loss before income taxes ...................................... (2,406) (2,613) (9,220)
Benefit from income taxes ..................................... 696 727 3,220
-----------------------------------------
Net Loss ...................................................... $ (1,710) $ (1,886) $ (6,000)
LOSS PER SHARE ................................................... $ (0.37) $ (0.42) $ (1.12)
</TABLE>
================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
- --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Common Stock Note
--------------------------- Retained Treasury Stock Receivable
Class A Class B Paid-in Earnings ---------------- from DM
Shares Shares Amount Capital (Deficit) Shares Amount Associates
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 28, 1995 ............... 3,290 2,962 $ 62 $ 27,581 $ 179 698 $ (5,005) -
ISSUANCE OF COMMON STOCK ................. 33 - - 110 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 3 (3) - - - - - -
ISSUANCE OF WARRANTS ..................... - - - 2,281 - - - -
NOTE RECEIVABLE FROM DM ASSOCIATES ....... - - - - - - - (10,000)
NET LOSS ................................. - - - - (6,000) - - -
==================================================================================================================================
BALANCE - FEBRUARY 3, 1996 ............... 3,326 2,959 62 29,972 (5,821) 698 (5,005) (10,000)
ISSUANCE OF COMMON STOCK ................. 184 - 2 589 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 34 (34) - - - - - -
NET LOSS ................................. - - - - (1,886) - -
==================================================================================================================================
BALANCE - FEBRUARY 1, 1997 ............... 3,544 2,925 64 30,561 (7,707) 698 (5,005) (10,000)
ISSUANCE OF COMMON STOCK ................. 78 - 1 241 - - - -
EXCHANGE OF CLASS B SHARES
FOR CLASS A SHARES ..................... 1 (1) - - - - - -
NOTE RECEIVABLE FROM DM ASSOCIATES ....... - - - - - - - 10,000
PURCHASE OF TREASURY STOCK ............... - - - - - 1,220 (10,000) -
NET LOSS ................................. - - - - (1,710) - - -
---------------------------------------------------------------------------------------
==================================================================================================================================
BALANCE JANUARY 31, 1998 ................. 3,623 2,924 $ 65 $ 30,802 $ (9,417) 1,918 $(15,005) $ -
</TABLE>
The accompanying notes are an integral part of these financial statements.
-37-
<PAGE> 38
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------
January 31, 1998 and February 1, 1997 1998 1997
====================================================================================================================
(dollars in thousands, except
per share in amounts)
<S> <C> <C>
ASSETS
Current Assets:
Cash ........................................................................... $ 3,806 $ 9,290
Short-term investments ......................................................... 3,629 1,533
Accounts and notes receivable .................................................. 14,970 13,588
Inventory ...................................................................... 16,808 20,184
Prepaid expenses and other current assets ...................................... 2,231 3,329
Deferred income taxes .......................................................... 1,048 1,811
---------------------------
Total current assets ........................................................... 42,492 49,735
Assets Held For Sale ........................................................... 10,715 9,543
Property and Equipment, net .................................................... 82,589 89,448
Intangible Assets, net ......................................................... 16,017 17,039
Other Assets, net .............................................................. 13,291 9,790
---------------------------
Total assets ................................................................... $ 165,104 $ 175,555
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ................................... $ 2,056 $ 1,383
Accounts payable ............................................................... 31,297 30,690
Accrued expenses ............................................................... 18,177 13,167
Accrued interest ............................................................... 3,567 3,635
---------------------------
Total current liabilities ...................................................... 55,097 48,875
---------------------------
Long-Term Obligations, less current portion above .............................. 94,392 109,045
---------------------------
Other Liabilities .............................................................. 9,170 9,722
---------------------------
Commitments and Contingencies (Notes 7, 8, 15)
Stockholders' Equity:
Preferred Stock (serial), par value $.01, 1,000,000 shares
authorized, no shares issued .................................................. - -
Class A Common Stock, par value $.01, 20,000,000 shares authorized 3,622,663 and
3,543,676 issued .............................................................. 36 35
Class B Common Stock, par value $.01, 10,000,000 shares
authorized, 2,924,016 and 2,924,917 issued .................................... 29 29
Paid-in capital ................................................................ 30,802 30,561
Retained deficit ............................................................... (9,417) (7,707)
Treasury stock, at cost ........................................................ (15,005) (5,005)
Note receivable from DM Associates ............................................. - (10,000)
---------------------------
Total stockholders' equity ..................................................... 6,445 7,913
---------------------------
Total liabilities and stockholders' equity ..................................... $ 165,104 $ 175,555
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-38-
<PAGE> 39
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Dairy Mart Convenience Stores, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
For The Years Ended January 31, 1998, February 1, 1997, February 3, 1996
==================================================================================================================
1998 1997 1996
--------------------------------------
(in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss.............................................................. $(1,710) $ (1,886) $ (6,000)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization ........................................ 10,842 11,874 12,390
Change in deferred income taxes ...................................... (1,454) (865) (2,873)
(Gain)loss on dispositions
of properties, net ................................................. (1,856) 958 (376)
Net changes in assets and liabilities:
Accounts and notes receivable ...................................... (4,562) (3,836) 2,646
Inventory .......................................................... 385 744 5,116
Accounts Payable ................................................... 607 (113) 1,861
Accrued interest ................................................... (68) 280 303
Other assets and liabilities ....................................... 5,692 2,454 (3,172)
--------------------------------------
Net cash provided by operating activities ............................ 7,876 9,610 9,895
--------------------------------------
Cash flows from investing activities:
Purchase of short-term investments ................................... (2,096) (1,533) -
Proceeds from sale of short-term investments ......................... - - 2,053
Purchase of property & equipment ..................................... (31,604) (23,782) (20,232)
Proceeds from sale of property, equipment, & assets
held for sale ................................................... 32,552 2,628 14,741
Increase in long-term notes receivable ............................... (653) (1,435) (1,579)
Proceeds from collection of long-term notes receivable ............... 998 1,513 1,706
Decrease(increase) in intangibles and other assets ................... 1,317 (372) 79
--------------------------------------
Net cash provided (used) by investing activities ..................... 514 (22,981) (3,232)
--------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations
and related warrants ........................................... - 10,930 13,500
Repayment of long-term obligations ............................... (14,116) (1,514) (2,131)
Note receivable from DM Associates ............................... - - (10,000)
Issuance of common stock ......................................... 242 591 110
--------------------------------------
Net cash (used) provided by financing activities ..................... (13,874) 10,007 1,479
--------------------------------------
(Decrease) increase in cash .......................................... (5,484) (3,364) 8,142
Cash at beginning of year ............................................ 9,290 12,654 4,512
--------------------------------------
Cash at end of year .................................................. $ 3,806 $ 9,290 $ 12,654
==================================================================================================================
Supplemental disclosures:
Cash paid during the year-
Interest ........................................................... $ 10,544 $ 10,466 $ 9,359
Income taxes refunded .............................................. (1,188) (97) (1,172)
Non - cash investing and financing activities-
Note receivable from DM Associates ................................. 10,000 - -
Purchase of treasury stock ......................................... (10,000) - -
Issuance of warrants ............................................... - - 665
Capital lease obligations .......................................... - - 828
</TABLE>
The accompanying notes are an integral part of these financial statements.
-39-
<PAGE> 40
Dairy Mart Convenience Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998, FEBRUARY 1, 1997, AND FEBRUARY 3, 1996
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. The stores offer
a wide range of products including groceries, dairy products, tobacco products,
beverages, general merchandise, health and beauty aids and deli products.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January
31. There were 52 weeks included in the fiscal years ended January 31, 1998 and
February 1, 1997 and 53 weeks included in the fiscal year ended February 3,
1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SHORT-TERM INVESTMENTS - As of January 31, 1998 and February 1, 1997, the
Company's short-term investments consisted of U.S. Treasury Bills having
original maturities of less than one year. The Company accounted for these
investments as being available for sale. As of January 31, 1998 and February 1,
1997, the fair market values of the U.S. Treasury Bills approximated cost.
INVENTORY - Midwest convenience store inventory is stated primarily at the lower
of last-in, first-out(LIFO) cost or market. Southeast convenience store
inventory and gasoline inventory are stated at the lower of first-in, first-out
(FIFO) cost or market.
ASSETS HELD FOR SALE - Assets held for sale represent operating and
non-operating assets which the Company intends to sell in the near term and are
carried at the lower of cost or estimated net realizable value. The Company
reduced the carrying value of certain of these assets to their estimated net
realizable value by taking a special charge to earnings in fiscal year 1996 (see
Note 16). The amounts the Company may ultimately realize could differ materially
from the amounts assumed in arriving at the carrying value.
Assets held for sale at the end of fiscal year 1997 included $4.2 million for
the Company's former headquarters and plant facility in Cuyahoga Falls, Ohio. In
fiscal year 1998, the Company recognized a $0.7 million loss on the sale of this
facility as a result of costs incurred to remove asbestos and to complete other
building repairs.
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 are amortized primarily over the lesser of 10 years or
the term of the lease.
During fiscal 1997, the Company changed its estimate of the useful lives of new
store and gasoline equipment placed in service in fiscal 1995 and thereafter.
The change was made in order to reflect the actual useful lives of such assets.
The change had the effect of decreasing net loss in fiscal year 1997 by $395,000
($.09 per share).
-40-
<PAGE> 41
LONG-LIVED ASSETS - Impairment of long-lived assets is recognized when events or
changes in circumstances indicate that the carrying amount of the asset, or
related group of assets, may not be recoverable. Measurement of the amount of
the impairment may be based on market values of similar assets or estimated
discounted future cash flows resulting from use and ultimate disposition of the
asset. Management has determined that there has been no material impairment to
any long-lived assets as of January 31, 1998, other than as provided for in
assets held for sale, as discussed above.
SELF INSURANCE RESERVES - The Company is self-insured for certain property,
liability, accident and health insurance risks, and establishes reserves for
estimated outstanding claims based on its historical claims experience and
reviews by third-party loss reserves specialists. The Company has purchased
insurance coverage for losses that may occur above certain levels. As of January
31, 1998, February 1, 1997, and February 3, 1996, the Company had established
reserves for these risks of $4,409,000, $5,350,000, and $7,305,000,
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. In fiscal year 1997, the Company changed its
estimate of incurred but not reported claims with respect to its property and
liability insurance reserve to reflect favorable claims experience and a
reduction in the Company's convenience store base. The change had the effect of
decreasing net loss in fiscal year 1997 by $470,000 ($.11 per share). At January
31, 1998, February 1, 1997 and February 3, 1996, the risk-free rate of returns
were 5.55%, 6.39% and 5.53%, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company has disclosed the fair value,
related carrying value and method of determining fair value for the following
financial instruments in the accompanying notes as referenced: short-term
investments (see Note 1), accounts and notes receivable (see Note 2) and
long-term obligations (see Note 7).
-41-
<PAGE> 42
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dairy Mart Convenience Stores, Inc. and Subsidiaries
January 31, 1998, February 1, 1997 and February 3, 1996
</TABLE>
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, for providing merchandising, advertising, store audits, 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 $12,481,000, $18,264,000, and $18,805,000 for the fiscal years
ended January 31, 1998, February 1, 1997, and February 3, 1996, 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. The Company utilizes a risk-free rate of return to discount
its future lease obligations and sub-rental income. As of January 31, 1998,
February 1, 1997 and February 3, 1996, the risk-free rate of return was 5.55%,
6.39% and 5.53%, respectively.
EARNINGS (LOSS) PER SHARE - In the fourth quarter of Fiscal 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share", for computing basic and diluted 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. As required, all previously reported earnings per share have
been restated using the computational requirements of SFAS No. 128. Additionally
during fiscal 1996, the Company acquired a $10,000,000 note receivable (Note)
from DM Associates Limited Partnership (DM Associates) collateralized by
1,220,000 shares of the Company's Class B Common Stock (Pledged Shares). In
fiscal 1998, DM Associates relinquished its right to the Pledged Shares in
satisfaction of the note principal and therefore these shares are reflected as
treasury stock for earnings (loss) per share purposes (See Note 16). The
weighted average number of shares used in the calculation of basic earnings
(loss) per share was 4,605,054, 4,440,997 and 5,373,784 for the fiscal years
ended January 31, 1998, February 1, 1997 and February 3, 1996, respectively. As
the Company had net losses in each of the fiscal years 1998, 1997, 1996, diluted
earnings (loss) per share has not been presented.
RECLASSIFICATIONS - Certain prior year amounts in the Consolidated Financial
Statements have been reclassified to conform to the presentation used for the
current year.
- --------------------------------------------------------------------------------
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of January 31, 1998 and February
1, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Franchise accounts receivable ............................. $ 8,901 $ 4,905
Franchise notes receivable ................................ 2,654 3,071
Marketing allowances ...................................... 2,390 3,100
Other receivable........................................... 8,391 6,346
--------------------
22,336 17,422
Less allowance for doubtful accounts and notes receivable 2,241 1,545
--------------------
Net accounts and notes receivable ......................... 20,095 15,877
Less noncurrent notes receivable (included in other assets) 5,125 2,289
--------------------
Current accounts and notes receivable ..................... $14,970 $13,588
</TABLE>
- --------------------------------------------------------------------------------
The carrying amount of current accounts and notes receivable approximates fair
value because of the short maturity of those receivables. The fair value of the
Company's noncurrent notes receivable is estimated by discounting the future
cash flows using the rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. As of January
31, 1998 and February 1, 1997, the fair values of the noncurrent notes
receivable approximate their carrying values.
-42-
<PAGE> 43
Dairy Mart Convenience Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
3. INVENTORY:
A summary of inventory as of January 31, 1998 and February 1, 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Inventory valued at FIFO cost................. $21,088 $ 24,775
LIFO reserve.................................. (4,280) (4,591)
------------------------
Inventory .................................... $16,808 $ 20,184
</TABLE>
- --------------------------------------------------------------------------------
Approximately 57.2% and 46.3% of inventories were valued under the LIFO method
at January 31, 1998 and February 1, 1997, respectively.
The LIFO reserve reflects the difference between stating the inventory at
historical LIFO cost and the more current FIFO cost. Had the FIFO method been
used, cost of goods sold would have been decreased by $407,000 and $84,000 in
1998 and 1997, respectively, and increased by $249,000 in 1996. Loss per share
would have been decreased by $.06 and $.01 in 1998 and 1997, respectively, and
increased by $.03 in 1996, had the FIFO method been used.
During 1998, 1997 and 1996, the Company liquidated certain LIFO inventory that
was carried at lower costs prevailing in prior years. The effect of the
liquidation was to decrease net loss by approximately $11,000 ($.00 per share),
$380,000 ($.09 per share) and $488,000 ($.09 per share) in 1998, 1997 and 1996,
respectively.
- --------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of January 31, 1998 and February 1, 1997
is as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements ........................ $ 5,697 $ 8,898
Building and leasehold improvements .......... 29,303 35,603
Equipment .................................... 95,365 85,785
Assets under capital leases .................. 2,815 3,397
---------------------------
133,180 133,683
Less accumulated depreciation and amortization (50,591) (44,235)
---------------------------
Property and equipment, net .................. $ 82,589 $ 89,448
</TABLE>
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $ 2,106,000 and
$2,244,000 as of January 31, 1998 and February 1, 1997, respectively.
- --------------------------------------------------------------------------------
5. INTANGIBLE ASSETS:
A summary of intangibles as of January 31, 1998 and February 1, 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill..................................... $ 13,890 $ 14,345
Franchise and operating rights............... 10,144 10,144
------------------------
24,034 24,489
Less accumulated amortization................ (8,017) (7,450)
------------------------
Intangible assets, net....................... $ 16,017 $ 17,039
</TABLE>
- --------------------------------------------------------------------------------
Goodwill represents the excess of cost over fair value of net assets purchased
and is being amortized on a straight-line basis over a period of 40 years.
Franchise and operating rights represent the value of franchise relationships
purchased in connection with past acquisitions and are being amortized on a
straight-line basis over 30 years. The Company assesses the recoverability of
these intangibles by determining whether the amortization of the goodwill and
franchise and operating rights over the remaining lives can be recovered through
projected future operating results on an undiscounted basis. The Company's
management anticipates a return to profitability in fiscal year 1999 and
therefore no provision for impairment was recorded in any period.
- --------------------------------------------------------------------------------
-43-
<PAGE> 44
Dairy Mart Convenience Stores, Inc. and Subsidiaries
6. ACCRUED EXPENSES:
A summary of accrued expenses as of January 31, 1998 and February 1, 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accrued salaries and wages ..................... $ 3,984 $ 4,089
Accrued environmental assessment and remediation 5,341 1,782
Other accrued expenses ......................... 8,852 7,296
----------------------
Total accrued expenses ............. $18,177 $13,167
</TABLE>
- --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS:
The company had the following long-term obligations as of January 31, 1998
and February 1, 1997:
<TABLE>
<CAPTION>
JANUARY 31, 1998 FEBRUARY 1, 1997
INTEREST MATURITY -------------------------- -----------------
RATE (FISCAL YEAR) CURRENT LONG-TERM TOTAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Senior Subordinated Notes (Series A Notes) ................ 10.25% 2005 $ - $75,000 $ 75,000 $ 75,000
Senior Subordinated Notes (Series B Notes), Net of
Original Issue Discount of $1,317 ..................... 10.25% 2005 - 12,183 12,183 12,046
Senior Revolving Credit Facility .......................... various 2000 - - - 10,280
Real Estate Mortgage Notes Payable ....................... 6.25%-12.0% 1999-2012 167 2,996 3,163 5,727
Small Business Administration Debentures .................. 6.9%-9.6% 1999-2006 1,100 3,130 4,230 4,230
Equipment Financing ....................................... various 1999-2000 486 269 755 1,513
Capital Leases, Net of Interest and Executory Costs of $292 various 1999-2009 303 814 1,117 1,632
---------------------------------------------
$2,056 $94,392 $ 96,448 $110,428
</TABLE>
- --------------------------------------------------------------------------------
In March 1994, the Company issued $75,000,000 principal amount of 10.25% senior
subordinated notes (the "Series A Notes") due March 15, 2004. The proceeds
received from the sale of the series a notes, net of offering costs of
$2,298,000, were used to repay the entire outstanding indebtedness under the
then existing bank term loan and bank revolving loan and to redeem in full the
Company's 14.25% subordinated debentures due November, 2000.
In December 1995, the Company issued an additional $13,500,000 principal amount
of 10.25% senior subordinated notes (the "Series B Notes") due March 15, 2004.
The proceeds received from the sale of the Series B Notes were used primarily to
purchase the interests of a former majority stockholder of the company and
certain of his affiliates in dm associates (See Note 16). The indenture pursuant
to which the Company issued the series a notes was amended and restated to apply
to the Series B Notes.
In conjunction with the issuance of the Series B Notes, the Company issued to
the purchasers of the Series B Notes warrants to purchase 1,215,000 shares of
Class A common stock of the Company. In addition, the Company issued to the
holders of the Series A Notes warrants to purchase 500,000 shares of the Class A
common stock of the Company. The warrants may be exercised any time during the
next five years. The initial exercise price of the warrants was $6.95 per share,
which was adjusted in December 1996, to $5.45 per share. The exercise price may
be adjusted further based upon the occurrence of various events, including stock
dividends and issuances of common stock by the company for a per share price
less than the exercise price of the warrants or less than the current market
value to the Company's Class A common stock.
The Series A and Series B Notes, (collectively, the "Notes") are redeemable, at
the option of the Company, after March 15, 1999 at rates starting at 104.75% of
principal amount reduced annually through March 15, 2002 at which time they
become redeemable at 100% of principal amount. the terms of the notes may
restrict, among other things, the payment of dividends and other distributions,
investments, the repurchase of capital stock and the making of certain other
restricted payments by the Company and its subsidiaries, the incurrence of
additional indebtedness and new operating lease obligations by the Company or
any of its subsidiaries, and certain mergers, consolidations and dispositions of
assets. Additionally, according to the terms of the Notes, if a change of
control occurs, as defined, each holder of the notes will have the right to
require the Company to repurchase such holder's notes at 101% of the principal
amount thereof.
The Company has a $30,000,000 senior revolving credit facility, of which up to
$15,000,000 is available for the issuance of letters of credit. The outstanding
balance is due and payable on April 30, 1999; However, the company may extend
such date for up to two additional one-year periods, with the consent of the
lenders. On April 30, 1998, certain provisions of the revolving credit facility
were amended effective January 1, 1998. Revolving credit loans under the amended
credit agreement bear interest at the Company's option, at an applicable margin
over the agent bank's base rate or the libor rate. the applicable margin, if
any, is based upon the ratio of consolidated indebtedness to consolidated
ebitda, as defined below. the adjusted credit agreement also provides for a
commitment fee of 1/2 % on any unused portion of the revolving credit facility.
Among other restrictions, the amended credit agreement contains financial
covenants relating to specified levels of: indebtedness (reduced by an amount
equal to cash) to earnings before interest expense, taxes, depreciation and
amortization (ebitda); ebitda to interest expense; ebitda plus rent, less taxes
paid in cash to interest expense, rent expense and principal payments required
to be made on indebtedness; and the maintenance of a minimum net worth. in
connection with the credit agreement, the Company granted a security interest in
substantially all of its non-real estate assets and pledged as collateral the
shares of capital stock of certain subsidiary corporations of the Company.
-44-
<PAGE> 45
The Company is limited in the amount of cash dividends that it may pay and the
amount of capital stock and subordinated indebtedness that it may repurchase by
applicable covenants contained in the senior revolving credit facility and
notes. As of January 31, 1998, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of January 31, 1998 and February 1, 1997, respectively, the fair values of
the real estate mortgage notes payable, small business administration
debentures, equipment financing and capital leases, approximated their
respective carrying amounts. Fair values of obligations is based on rates
available to the Company for debt with similar terms and maturities. As of
January 31, 1998, the fair value of the Series B Notes, net of original issue
discount, approximated the carrying amount. as of February 1, 1997, the fair
value of the Series B Notes, net of original issue discount, was $11,795,000. as
of January 31, 1998, the fair value of the Series A Notes approximated the
carrying amount. As of February 1, 1997, the fair value of the Series A Notes
was $73,605,000. The fair values of the notes were based on quoted market prices
as of January 31, 1998 and February 1, 1997, respectively. the revolving credit
facility is a variable rate loan, and thus, the fair value approximates the
carrying amount as of February 1, 1997.
As of January 31, 1998, maturities on long-term obligations for the next five
years, are as follows:
- --------------------------------------------------------------------------------
FISCAL YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999............................................................... $ 2,056
2000............................................................... 3,215
2001............................................................... 274
2002............................................................... 2,588
2003............................................................... 98
</TABLE>
- --------------------------------------------------------------------------------
8. Operating Leases
The Company leases operating properties, including store locations and office
space, under various lease agreements expiring through 2020. Certain of these
locations are sublet to the Company's franchisees. The future minimum lease
payments related to these properties are included in the following summary.
A summary of future minimum lease payments and sublease receipts as of January
31, 1998 is as follows:
<TABLE>
<CAPTION>
Operating Operating Net
Leases Subleases Operating
Payable/Receivable in Fiscal Year Ending Payable Receivable Leases
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
1999....................................................... $ 12,035 $1,737 $10,298
2000....................................................... 9,901 1,165 8,736
2001....................................................... 7,593 701 6,892
2002....................................................... 5,691 332 5,359
2003....................................................... 4,263 112 4,151
Thereafter................................................. 21,551 113 21,438
------------------------------------
Total...................................................... $ 61,034 $4,160 $56,874
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Rental expense for all operating leases was as follows:
=====================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Leases.......................................................... $13,038 $15,523 $15,297
Less subleases.................................................. 2,509 4,000 4,169
----------------------------------
Net............................................................. $10,529 $11,523 $11,128
=====================================================================================================
</TABLE>
-45-
<PAGE> 46
Dairy Mart Convenience Stores, Inc. and Subsidiaries
9. FEDERAL AND STATE INCOME TAXES:
The benefit from income taxes for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current benefit (provision)
Federal .......................... $ (286) $ 207 $ 495
State and Local .................. (472) (345) (148)
---------------------------------------
Total current benefit (provision) (758) (138) 347
---------------------------------------
Deferred benefit
Federal .......................... 949 547 2,101
State and Local .................. 505 318 772
---------------------------------------
Total deferred benefit .......... 1,454 865 2,873
---------------------------------------
Total benefit ....................... $ 696 $ 727 $ 3,220
======================================================================================
</TABLE>
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. These minimum taxes are
included in the current provision for state and local income taxes. In addition,
the Company records a reduction in the provision (increase in the benefit) for
income taxes for the benefit to be realized from targeted jobs credits in the
year in which they arise. A reconciliation of the difference between the
statutory federal income tax rate and the effective income tax rate follows:
<TABLE>
<CAPTION>
Percent of Pretax Loss
------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate ................................ 34% 34% 34%
Increase (decrease) from:
State income tax benefit (provision), net of federal tax effect 1 (1) 5
Nondeductible expenses and amortization of acquired assets .... (6) (5) (5)
Targeted jobs credit .......................................... - - 1
---------------------------
Effective income tax rate ........................................ 29% 28% 35%
========================================================================================================
</TABLE>
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Significant deferred tax assets (liabilities) as of January 31, 1998
and February 1, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Capitalized leases ............................... $ 158 $ 141
Depreciation and amortization .................... (12,504) (15,414)
Vacation accrual ................................. 269 310
Inventory (LIFO) ................................. (1,176) (1,236)
Reserve for asset valuations ..................... 910 606
Insurance reserves not deductible for tax purposes 1,508 1,654
Income deferred for financial statement purposes . 2,210 2,872
Reserve for closed stores and renovations ........ 1,358 476
Accrued restructuring and severance reserves ..... 357 585
Write-down of non-operating properties ........... 1,185 1,591
Tax credits and net operating loss carryforwards . 11,133 12,067
Other ............................................ 223 525
-------------------------
Net deferred tax asset ........................... $ 5,631 $ 4,177
</TABLE>
================================================================================
As of January 31, 1998, the Company had alternative minimum tax credits
aggregating $668,000 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 $1,900,000 of
targeted jobs credit carryforwards that expire, if unused, from fiscal 2007 to
2011 and $471,000 of foreign tax credit carryforwards that expire, if unused, in
fiscal 1999 to 2002. The Company and its subsidiaries file a consolidated
federal income tax return but generally file separate state income tax returns.
As of January 31, 1998, the Company had regular federal income tax net operating
loss carryforwards of $17,848,000 which expire, if unused, from fiscal 2009 to
2012 and net operating loss carryforwards for state income tax purposes of
$34,962,000 which expire, if unused from fiscal 1999 to 2012. Realization of the
net operating loss carryforwards is dependent on generating sufficient taxable
income prior to the expiration of the operating loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, would be reduced in the near term if
management's estimate of future taxable income during the carryforward period is
reduced. No valuation allowance for deferred tax assets was provided as of
January 31, 1998 and February 1, 1997.
10. CAPITAL STOCK:
In January 1996, a Stock Rights Plan ("SRP") was adopted by the Company. Under
the SRP, each holder of Class A and Class B Common Stock was declared a dividend
of one Preferred Stock Purchase Right (the "Rights"). The Rights are to purchase
one one-hundredth (1/100) of a share of Series A Junior Preferred Stock at a
price of $30 subject to certain adjustments. The Rights are exercisable under
certain circumstances, and expire on January 19, 2006.
Dividends may be declared and paid on Class A Common Stock without being paid on
Class B Common Stock. No dividend may be paid on Class B Common Stock without
equal amounts paid concurrently on Class A Common Stock (see Note 7). Holders of
Class A Common Stock have one-tenth vote per share and are entitled to elect 25%
of the Board of Directors so long as the number of outstanding shares of Class A
Common Stock is at least 10% of the total of all shares of Common Stock
outstanding. Holders of Class B Common Stock have one vote per share. Holders of
Class B Common Stock have the right to convert their shares at any time for an
equivalent number of shares of Class A Common Stock.
-46-
<PAGE> 47
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 Class A Common
Stock at 85% of the market value. Of the original 1,250,000 shares provided for
under this plan, 1,023,892 shares remained available for issuance as of January
31, 1998.
As of January 31, 1998, February 1, 1997 and February 3, 1996, the Company held
521,625 shares of Class A Common Stock as treasury stock. The Company held
1,395,957, 175,957 and 175,957 shares of Class B Common Stock as treasury shares
as of January 31, 1998, February 1, 1997, and February 3, 1996, respectively.
- --------------------------------------------------------------------------------
11. STOCK OPTION PLANS, GRANTS AND WARRANTS:
In general, the Company's stock option plans provide for the granting of options
to purchase Company 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.
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 Class B
Common Stock and 750,000 shares of Class A Common Stock. The Company granted
incentive stock options pursuant to these Plans totaling 177,887 in fiscal 1996.
No options were granted from these plans in either fiscal 1998 or fiscal 1997.
As of January 31, 1998, the Company had available for grant under the 1990 Plan
options to purchase 56,906 of Class A Common Stock, after considering the lapse
of options previously granted. In addition to the incentive stock options
granted under the above Plans the Company has granted 47,500, 25,125 and 97,500
non-qualified stock options in fiscal 1998, 1997 and 1996 respectively, which
are not part of a specific plan.
In January 1996, the Company adopted a Stock Option and Incentive Award Plan
(the "Award Plan") and a non-qualified Stock Option Plan for Outside Directors
("Outside Directors Plan"). The Award Plan provides for granting of stock awards
and options to employees up to a total of 650,000 shares of either Class A or
Class B Common Stock. In fiscal 1998, 1997 and 1996, the Company granted
incentive stock options of 125,000, 22,500 and 82,500, respectively. As of
January 31, 1998, the Company had available for grant under the Award plan
options to purchase 42,500 shares of Class A 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 Class A
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 is 50,000. The Company granted 17,500 nonqualified stock options to
Outside Directors in fiscal years 1997 and 1996, respectively. As of January 31,
1998, the Company had available for grant under the Outside Directors Plan
options to purchase 15,000 shares of Class A Common Stock.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations in accounting for
its employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, "Accounting for Stock-Based Compensation", and 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:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates..................... 6.19% 6.24% 5.66%
Expected dividend yield...................... 0.00% 0.00% 0.00%
Expected volatility.......................... 42.64% 39.00% 39.00%
Expected life in years....................... 9.50 6.72 7.51
</TABLE>
================================================================================
-47-
<PAGE> 48
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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss.................................. ($1,887) ($2,028) ($6,057)
Pro forma loss per share............................ ($0.41) ($0.46) ($1.13)
</TABLE>
================================================================================
The pro forma effect on net loss for fiscal years 1998, 1997 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal year 1996.
A summary of the Company's stock option activity and related information for the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, is
as follows:
<TABLE>
<CAPTION>
(options in thousands)
Weighted-Average
Options Exercise Price
------- --------------
<S> <C> <C>
Outstanding January 28, 1995 ......... 706 $3.71
Granted .............................. 375 3.98
Exercised ............................ (17) 2.80
Forfeited ............................ (121) 2.98
----------------------
Outstanding February 3, 1996 ......... 943 $3.92
Granted .............................. 65 4.58
Exercised ............................ (170) 3.17
Forfeited ............................ (197) 5.70
----------------------
Outstanding February 1, 1997 ......... 641 $3.64
Granted .............................. 172 4.49
Exercised ............................ (62) 2.84
Forfeited ............................ (84) 3.58
----------------------
Outstanding January 31, 1998 ......... 667 $3.95
</TABLE>
================================================================================
The weighted-average fair values of stock options granted during fiscal years
1998, 1997 and 1996 were $3.26, $3.12 and $3.07, respectively.
The following table summarizes information about the Company's stock options
outstanding as of January 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Weighed-
Weighted Average
Average Remaining
Grant Options Options Exercise Contractural
Price Range Outstanding Exercisable Price Life (Years)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.75 to $2.88............................ 261,738 239,397 $2.81 5.7
$3.63 to $4.60............................ 210,387 89,944 3.80 7.6
$5.00 to $6.00............................ 195,000 37,500 5.64 8.8
- ----------------------------------------------------------------------------------------------------------
Total 667,125 366,841
</TABLE>
================================================================================
During fiscal years 1998, 1997 and 1996, the Company awarded, pursuant to the
Award plan, restricted stock grants consisting of an aggregate of 137,500,
45,000 and 100,000 shares, respectively, of the Company's Class A Common Stock.
In addition, the Company awarded 137,500 shares of the Company's Class B Common
Stock in fiscal 1998. No compensation was recorded with respect to the shares
awarded under the Award Plan.
In December 1995, the Company issued warrants to purchase 1,715,000 shares of
Class A Common Stock, which may be exercised at any time during the next four
years (see Notes 7 and 16) at an initial exercise price of $6.95 per share,
which exercise price was subsequently adjusted to $5.45 per share as of February
1, 1997. The issuance of the warrants was recorded as an increase in paid-in
capital.
12. GASOLINE OPERATIONS:
A summary of gasoline operations for the years ended January 31, 1998, February
1, 1997 and February 3, 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gasoline gallons sold.................................................... 171,269 209,478 212,832
Gasoline revenues........................................................ $191,956 $245,718 $226,505
Cost of gasoline sold.................................................... 170,537 220,636 201,980
Depreciation............................................................. 2,798 2,651 2,461
Capital expenditures..................................................... 7,288 5,869 7,585
Net book value of gasoline equipment..................................... 21,122 21,801 19,054
</TABLE>
================================================================================
-48-
<PAGE> 49
13. 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 1998, 1997 or 1996.
Effective January 1, 1993, the profit sharing plan was amended pursuant to
section 401(k) of the Internal Revenue Code enabling eligible employees to
contribute up to 15% of their annual compensation to the plan, with the Company
matching 25% of such contributions up to 6% of the employees' annual
compensation. Matching contributions from the Company for fiscal years 1998,
1997 and 1996 were $103,000, $117,000 and $128,000, respectively. The Company
does not offer any additional postretirement and post-employment benefits to its
employees.
- --------------------------------------------------------------------------------
14. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS:
In fiscal year 1998, the Company completed the sale of assets relating to 156
convenience store and retail gasoline locations in Connecticut, Massachusetts,
Rhode Island and New York for $39.1 million. The principal assets sold by the
Company include inventories, convenience store and gasoline fixtures and
equipment, land, buildings, and building and leasehold improvements. In fiscal
1998, the Company also sold its former office and manufacturing facility in Ohio
for $4.1 million. The resulting net pre-tax gain of $3.6 million has been
excluded from the pro forma results. The following unaudited pro forma
information of the Company for the fiscal years ended January 31, 1998 and
February 1, 1997, has been prepared assuming that the asset sales had occurred
as of the beginning of the fiscal year ended February 1, 1997. The unaudited pro
forma information is not necessarily indicative of the results which would have
been reported if the transaction had occurred at the beginning of the fiscal
year ended February 1, 1997, or which may be reported in the future. The
unaudited pro forma information reflects the exclusion, for both fiscal periods
shown, of historical revenues, cost of goods sold, operating expenses, and
direct and indirect administrative expenses associated with the assets sold.
Additionally, the unaudited pro forma information reflects the elimination of
historical interest expense related to debt retired based on the assumption that
proceeds from the sale of the assets sold had been received at the beginning of
the fiscal year ended February 1, 1997, and also reflects the elimination of the
estimated income tax effect of the associated excluded results of operations for
the assets sold. The unaudited pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
(in thousands, except per share amounts)
<S> <C> <C>
Revenues ............................ $ 459,348 $ 471,668
--------------------------------------
Cost of goods sold and expenses:
Cost of goods sold .................. 333,419 346,085
Operating and administrative expenses 121,957 119,387
Interest expense .................... 10,330 10,518
--------------------------------------
$ 465,706 $ 475,990
--------------------------------------
Loss before income taxes ....... (6,358) (4,322)
Benefit from income taxes ........... 1,839 1,219
--------------------------------------
Net loss ........................ $ (4,519) $ (3,103)
Loss per share:
Loss per share ...................... $ (0.98) $ (0.70)
</TABLE>
================================================================================
15. COMMITMENTS AND CONTINGENCIES:
As of January 31, 1998, the Company was contingently liable for outstanding
letters of credit amounting to $7,100,000.
The Company has certain environmental contingencies related to the ongoing costs
to comply with federal, state and local environmental laws and regulations,
including costs for assessment, 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 January 31, 1998 and
February 1, 1997, the Company had recorded an accrual of $6,770,000 and
$1,782,000, respectively, for such costs. The Company is entitled to
reimbursement of a portion of the above costs from various state environmental
trust funds based upon compliance with the terms and conditions of such funds.
As of January 31, 1998 and February 1, 1997, the Company had recorded a
reimbursement receivable of $ 4,770,000 and $1,450,000, respectively. For the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996, the
Company recorded a provision for environmental expenses of $3,354,000,
$2,109,000 and $1,048,000, respectively. Additionally, under current federal and
state regulatory programs, the Company will be obligated by December 1998 to
upgrade or replace most of its existing underground storage tanks ("USTs"). The
Company presently estimates that it will be required to make capital
expenditures related to the upgrading or replacing of USTs of approximately $3.0
to $4.0 million in the aggregate through December 1998, which capital
expenditures could be reduced for locations which may be closed in lieu of the
capital costs of compliance. The Company's estimate of costs to be incurred for
environmental assessment and remediation and for UST upgrading and other
regulatory compliance are based on factors and assumptions that could change due
to modifications of regulatory requirements, detection of unanticipated
environmental conditions or other unexpected circumstances. Due to the nature of
such information, the actual costs incurred may vary from the Company's
estimates, and the ongoing costs of assessment and remediation activities may
vary significantly from year to year.
In fiscal 1997, the Company entered into a new agreement for the wholesale
supply of various grocery items to its Northeast, Midwest and Southeast region
stores. Under the supply agreement, the Company is obligated to purchase
annually a minimum amount of merchandise for a period of nine years. Management
believes that the level of purchase is readily achievable over the term of the
new agreement. Prices to be charged by the supplier must be competitive.
-49-
<PAGE> 50
The Company has been named as a nominal defendant, along with those persons who
were directors of the Company in fiscal 1996, in two shareholder derivative
actions. The plaintiffs allege, among other things, that in connection with the
settlement of the dispute between a former majority stockholder of the Company
and certain of his affiliates and the Company's board of directors and
management with respect to control of the Company, the directors violated their
fiduciary duty to the Company and its stockholders, violated provisions of
Delaware corporate law and wasted corporate assets. The plaintiffs seek, among
other things, a declaration that the current structure of the general partner of
DM Associates is invalid and that certain voting rights, with respect to the
Class B Common Stock held by DM Associates should be vested in the Company. DM
Associates owns approximately 35% of the total voting power of both classes of
the Company's Common Stock. The Company is contesting these claims and at this
time is not able to determine what the outcome of this litigation will be.
The Company is also a defendant in an action brought by a former supplier of
certain dairy products to convenience stores formerly owned by the Company in
Massachusetts, Rhode Island, Connecticut, and New York ("New England Stores")
entitled NEW ENGLAND DAIRIES, INC. V. DAIRY MART CONVENIENCE STORES, INC. AND
DAIRY MART, INC., Civil Action No. 97-0569873 (Conn. Super.). This action was
commenced on April 17, 1997 by New England Dairies, Inc. ("NED") alleging that
Dairy Mart committed an anticipatory breach of a supply agreement entered into
between NED and Dairy Mart on April 25, 1995 (the "Agreement"), when Dairy Mart
entered into a contract with a third party to sell all company-owned and
franchised convenience stores in New England, without requiring the third party
purchaser to assume the Agreement. NED's action seeks lost profits in the amount
of $3.7 million. Discovery is proceeding. 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.
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.
- --------------------------------------------------------------------------------
-50-
<PAGE> 51
16. CORPORATE GOVERNANCE ISSUES AND RESTRUCTURING INITIATIVES:
In fiscal year 1996, the Company incurred special and/or unusual costs and
expenses associated with corporate governance issues and corporate restructuring
initiatives and other operating costs which have been included in operating and
administrative expenses in the Consolidated Statement of Operations.
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C>
Costs and expenses associated with corporate governance issues............... $ 8,985
Corporate restructuring initiatives and other operating costs................ 3,215
</TABLE>
================================================================================
During fiscal 1996, the Company entered into an agreement with a former majority
stockholder of the Company and certain of his affiliates (Former Holder) for
purposes of settling a dispute between the Former Holder and the Company's board
of directors and management with respect to control of the Company. The dispute
arose due to philosophical differences with regards to the strategic direction
and management of the Company. The agreement provided for a cash payment of
$13,150,000 to the Former Holder comprised of $10,000,000 for the purchase of
certain interests of the Former Holder in DM Associates, which then owned
1,858,743 shares of the Company's Class B Common Stock, and $3,150,000 for
additional costs and expenses which consisted of $850,000, $800,000 and
$1,500,000 for the reimbursement of legal and other costs, for the execution of
a non-compete agreement, and for a release of claims against the Company, by or
with the Former Holder, respectively. The acquired interests included a 46%
limited partnership interest in DM Associates and a promissory note receivable
from DM Associates. The promissory note had a principal amount of $7,100,000,
and had accrued interest at an annual rate of 9% since its inception in 1992,
for a total accreted value as of February 3, 1996 of approximately $10,000,000.
The note was collateralized by the Pledged Shares and had a scheduled maturity
date of September 12, 1997.
The Company did not attribute value to its acquired limited partnership interest
in DM Associates because at the then current market price of the Company's Class
B Common Stock, the Company would not receive any distribution upon a
dissolution of DM Associates in respect of the interest since the other limited
partner of DM Associates is entitled to a preferential return according to the
terms and conditions of the partnership agreement. Based upon the market price
of the Company's Class B Common Stock as of January 31, 1998, the Company still
would not receive any distribution upon a liquidation of DM Associates. The
Company attributed a fair value of $10,000,000 to the acquired promissory note
and recorded the note as a reduction of stockholders' equity in the Consolidated
Balance Sheets. Although DM Associates retained its right to pay the full
accreted value of the note at or before maturity, the Company anticipated, based
upon the market price of the Company's Class B Common Stock and since DM
Associates primary asset was the Pledged Shares, that DM Associates would choose
to relinquish its right to the Pledged Shares in full satisfaction of the note.
Assuming that the Company received the Pledged Shares in satisfaction of the
note and received no value for its limited partnership interest, the Company
effectively paid $8.20 per share for the Pledged Shares at the time of the
agreement when the quoted market price of the Company's Class B Common Stock was
$6.38 per share. The Company's Board of Directors obtained a fairness opinion
from a nationally recognized valuation firm prior to consummating the agreement
to the effect that the price paid by the Company in the transaction was fair
from a financial point of view to the Company and its public stockholders. The
aforementioned opinion was based on, among other items: the market multiple
approach in which the Company was compared with other publicly traded companies
on the basis of operational and economic similarities; the comparable
transaction approach in which transactions involving the acquisition of a
control position in other convenience and grocery store operators were reviewed;
and the discounted cash flow approach in which management's financial
projections (which reflected improved profitability and cash flows for fiscal
years 1997 through 2001) were reviewed to develop a value indication for the
Company. These analyses resulted in a valuation range for the Company's Common
Stock of $6.85 to $9.45 per share. In addition, the Company elected to expense
the costs associated with the non-compete agreement rather than deferring such
costs over the term of the agreement as the future value was deemed to have
minimal economic impact on future years.
In September 1997, DM Associates relinquished its right to the Pledged Shares in
satisfaction of the note principal and paid $646,000 to the Company as interest
on the note. The interest income is included in revenues in the accompanying
Consolidated Statement of Operations for fiscal 1998.
During fiscal 1996, the Company incurred $5,835,000 of additional costs and
expenses in connection with the aforementioned transactions. These costs and
expenses included $2,672,000 for legal and other professional fees, $1,211,000
for the termination of an officer of the Company who was a party to the Former
Holder's claims against the Company, $1,287,000 for financing fees primarily
incurred to amend the Company's senior revolving credit facility with respect to
the purchase of the Former Holder's interest and issuance of Series B Notes (see
Note 7) and $665,000 for the issuance of warrants to purchase 500,000 shares of
the Company's Class A Common Stock to holders of the Company's Series A Notes as
fee for the consent of such holders for the Company to purchase the interests of
the Former Holder and for the waiver of certain alleged defaults under the terms
of the Series A Notes.
During fiscal 1996, the Company recorded additional operating and exit costs
totaling $3,215,000 related to the aforementioned restructuring initiatives
including $1,313,000 incurred during the wind-down of dairy and manufacturing
distribution operations since the eventual sales of such operations occurred at
later dates than initially anticipated by management and $1,000,000 for the
further write-down of the properties held for sale to their estimated net
realizable value based upon marketing efforts to dispose of these assets in the
fourth quarter of fiscal 1996. In addition, the Company incurred an additional
$902,000 of costs related to the sale or closing of the 143 retail convenience
stores and 81 retail gasoline facilities since such sales/closings occurred at
later dates than originally had been planned by management.
-51-
<PAGE> 52
Dairy Mart Convenience Stores, Inc. and Subsidiaries
17. 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 cash flow information 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.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
---------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $ 29,641) ........ $ 1,144 $ 499,737 $ 478 $ - $ 501,359
Cost of goods sold and expenses:
Cost of goods sold ............................... - 364,932 - - 364,932
Operating and administrative expenses ............ 269 127,919 33 - 128,221
Interest expense ................................. 9,776 485 351 - 10,612
---------------------------------------------------------------------
10,045 493,336 384 - 503,765
---------------------------------------------------------------------
Income (loss) before income taxes and equity in
income of consolidated subsidiaries .......... (8,901) 6,401 94 - (2,406)
Benefit from (provision for) income taxes ............ 2,573 (1,850) (27) - 696
---------------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries .................... (6,328) 4,551 67 - (1,710)
Equity in income of consolidated subsidiaries ........ 4,618 67 - (4,685) 0
---------------------------------------------------------------------
Net income (loss) ............................. $ (1,710) $ 4,618 $ 67 $ (4,685) $ (1,710)
</TABLE>
================================================================================
-52-
<PAGE> 53
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 31, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash ...................................................... $ - $ 3,572 $ 234 $ - $ 3,806
Short-term investments .................................... - 3 3,626 - 3,629
Accounts and notes receivable ............................. 1,254 13,040 676 - 14,970
Inventory ................................................. - 16,808 - - 16,808
Prepaid expenses and other current assets ................. 69 2,162 - - 2,231
Deferred income taxes ..................................... 852 196 - - 1,048
----------------------------------------------------------------
Total current assets ................................... 2,175 35,781 4,536 - 42,492
----------------------------------------------------------------
Assets Held for Sale ........................................ - 10,715 - - 10,715
Property and Equipment, net ................................. - 82,589 - - 82,589
Intangible Assets, net ...................................... - 16,017 - - 16,017
Investment in and Advances to Subsidiaries .................. 1,580 9,929 1,782 - 13,291
Other Assets, net ........................................... 118,672 1,948 137 (120,757) 0
----------------------------------------------------------------
Total assets .......................................... $ 122,427 $ 156,979 $ 6,455 $(120,757) $ 165,104
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations ................. $ 637 $ 319 $ 1,100 $ - $ 2,056
Accounts payable ............................................ 20,138 11,159 - - 31,297
Accrued expenses ............................................ 1,297 16,857 23 - 18,177
Accrued interest ............................................ 3,450 - 117 - 3,567
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities ............................... 25,522 28,335 1,240 - 55,097
- ---------------------------------------------------------------------------------------------------------------------------------
Long-Term Obligations, less current portion above ........... 90,460 802 3,130 - 94,392
Other Liabilities ........................................... - 9,170 - - 9,170
Stockholders' Equity ........................................ 6,445 118,672 2,085 (120,757) 6,445
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity .............. $ 122,427 $ 156,979 $ 6,455 $(120,757) $ 165,104
=================================================================================================================================
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............. $ 3,844 $ 3,993 $ 39 $ - $ 7,876
-----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments ........................... - (3) (2,093) - (2,096)
Purchase of property and equipment ........................... - (31,604) - - (31,604)
Proceeds from sale of property, equipment and assets
held for sale .............................................. - 32,552 - - 32,552
Investment in and advances to subsidiaries ................... 8,112 (8,818) 706 - -
Increase in long-term notes receivable ....................... - (92) (561) - (653)
Proceeds from collection of long-term notes receivable ....... - 35 963 - 998
Decrease in intangibles and other assets ..................... 28 1,281 8 - 1,317
-----------------------------------------------------------------
Net cash provided by (used in) investing activities ............. 8,140 (6,649) (977) - 514
-----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term obligations ........................... (12,326) (1,790) - - (14,116)
Issuance of common stock ..................................... 242 - - - 242
-----------------------------------------------------------------
Net cash used in financing activities ........................... (12,084) (1,790) - - (13,874)
-----------------------------------------------------------------
Decrease in cash ................................................ (100) (4,446) (938) - (5,484)
Cash at beginning of year ....................................... 100 8,018 1,172 - 9,290
-----------------------------------------------------------------
Cash at end of year ............................................. $ - $ 3,572 $ 234 $ - $ 3,806
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest .................................................. $ 9,710 $ 485 $ 349 $ - $ 10,544
Income taxes refunded ..................................... (1,188) - - - (1,188)
Non-cash investing and financing activities
Note receivable from DM Associates ........................ 10,000 - - - 10,000
Purchase of treasury stock ................................ (10,000) - - - (10,000)
====================================================================================================================================
</TABLE>
-53-
<PAGE> 54
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $36,427) .............. $ 253 $ 584,981 $ 512 $ - $ 585,746
Cost of goods sold and expenses:
Cost of goods sold ..................................... - 431,851 - - 431,851
Operating and administrative expenses .................. 277 145,326 28 - 145,631
Interest expense ....................................... 10,050 472 355 - 10,877
----------------------------------------------------------------
10,327 577,649 383 - 588,359
----------------------------------------------------------------
Income (loss) before income taxes and equity in income
of consolidated subsidiaries ......................... (10,074) 7,332 129 - (2,613)
Benefit from (provision for) income taxes ................. 2,802 (2,040) (35) - 727
----------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries ........................... (7,272) 5,292 94 - (1,886)
Equity in income of consolidated subsidiaries ............. 5,386 94 - (5,480) -
----------------------------------------------------------------
Net income (loss) .................................... $ (1,886) $ 5,386 $ 94 $ (5,480) $ (1,886)
================================================================================================================================
</TABLE>
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------------------------------------------------------------
(in thousands)
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash ......................................... $ 100 $ 8,018 $ 1,172 $ - $ 9,290
Short-term investments ....................... - - 1,533 - 1,533
Accounts and notes receivable ................ 20 12,897 671 - 13,588
Inventory .................................... - 20,184 - - 20,184
Prepaid expenses and other current assets .... 20 3,309 - - 3,329
Deferred income taxes ........................ 933 878 - - 1,811
--------------------------------------------------------------
Total current assets ....................... 1,073 45,286 3,376 - 49,735
--------------------------------------------------------------
Assets Held for Sale ............................ - 9,543 - - 9,543
Property and Equipment, net ..................... - 89,448 - - 89,448
Intangible Assets, net .......................... - 17,039 - - 17,039
Other Assets, net ............................... 1,389 6,209 2,192 - 9,790
Investment in and Advances to Subsidiaries ...... 126,784 1,175 843 (128,802) -
--------------------------------------------------------------
Total assets ................................. $ 129,246 $ 168,700 $ 6,411 $(128,802) $ 175,555
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations .. $ 929 $ 454 $ - $ - $ 1,383
Accounts payable ............................. 13,800 16,890 - - 30,690
Accrued expenses ............................. 726 12,432 9 - 13,167
Accrued interest ............................. 3,520 - 115 - 3,635
--------------------------------------------------------------
Total current liabilities ................. 18,975 29,776 124 - 48,875
--------------------------------------------------------------
Long-Term Obligations, less current portion above 102,358 2,457 4,230 - 109,045
Other Liabilities ............................... - 9,683 39 - 9,722
Stockholders' Equity ............................ 7,913 126,784 2,018 (128,802) 7,913
--------------------------------------------------------------
Total liabilities and stockholders' equity ...... $ 129,246 $ 168,700 $ 6,411 $(128,802) $ 175,555
===================================================================================================================
</TABLE>
-54-
<PAGE> 55
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .... $ (4,406) $ 13,925 $ 91 $ - $ 9,610
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Short-term Investments ................... - - (1,533) - (1,533)
Purchase of property and equipment ................... - (23,782) - - (23,782)
Proceeds from sale of property, equipment and
assets held for sale ............................... - 2,628 - - 2,628
Investment in and advances to subsidiaries ........... (7,475) 8,043 (568) - -
Increase in long-term notes receivable ............... - (128) (1,307) - (1,435)
Proceeds from collection of long-term notes receivable - 98 1,415 - 1,513
Decrease (increase) in intangibles and other assets .. (1) (409) 38 - (372)
------------------------------------------------------------
Net cash used in investing activities .................. (7,476) (13,550) (1,955) - (22,981)
------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term obligations and related warrants 10,580 350 - - 10,930
Repayment of long-term obligations ................... (928) (578) (8) - (1,514)
Issuance of common stock ............................. 591 - - - 591
------------------------------------------------------------
Net Cash provided by (used in) financing activities .... 10,243 (228) (8) - 10,007
------------------------------------------------------------
(Decrease) Increase in cash ............................ (1,639) 147 (1,872) - (3,364)
Cash at beginning of year .............................. 1,739 7,871 3,044 - 12,654
------------------------------------------------------------
Cash at end of year .................................... $ 100 $ 8,018 $ 1,172 $ - $ 9,290
========================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest ............................................. $ 9,635 $ 472 $ 359 $ - $ 10,466
Income taxes refunded ................................ (97) - - - (97)
</TABLE>
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $36,331) ........ $ 681 $ 570,099 $ 531 $ - $ 571,311
Cost of goods sold and expenses:
Cost of goods sold ................................ - 413,548 - - 413,548
Operating and administrative expenses ............. 9,288 148,016 18 - 157,322
Interest expense .................................. 8,723 594 344 - 9,661
------------------------------------------------------------------
18,011 562,158 362 - 580,531
------------------------------------------------------------------
Income (loss) before income taxes, equity in
income of consolidated subsidiaries .......... (17,330) 7,941 169 - (9,220)
Benefit from (provision for) income taxes ........... 6,052 (2,768) (64) - 3,220
------------------------------------------------------------------
Income (loss) before equity in income of
consolidated subsidiaries ..................... (11,278) 5,173 105 - (6,000)
Equity in income of consolidated subsidiaries ....... 5,278 105 - (5,383) -
------------------------------------------------------------------
Net income (loss) ............................... $ (6,000) $ 5,278 $ 105 $ (5,383) $ (6,000)
</TABLE>
-55-
<PAGE> 56
Dairy Mart Convenience Stores, Inc. and Subsidiaries
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 3, 1996
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .... $ (9,824) $ 19,624 $ 95 $ - $ 9,895
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments ......... - - 2,053 - 2,053
Purchase of property and equipment ................... - (20,232) - - (20,232)
Proceeds from sale of property, equipment and
assets held for sale ............................... - 14,741 - - 14,741
Investment in and advances to subsidiaries ........... 8,096 (7,831) (265) - -
Increase in long-term notes receivable ............... - - (1,579) - (1,579)
Proceeds from collection of long-term notes receivable - 69 1,637 - 1,706
Decrease (increase) in intangibles and other assets .. 183 (113) 9 - 79
------------------------------------------------------------
Net cash used by investing activities .................. 8,279 (13,366) 1,855 - (3,232)
------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and related warrants 13,500 - - - 13,500
Repayment of long-term obligations ................... (326) (1,805) - - (2,131)
Note Receivable from DM Associates ................... (10,000) - - - (10,000)
Issuance of common stock ............................. 110 - - - 110
-----------------------------------------------------------
Net cash provided by (used in) financing activities .... 3,284 (1,805) - - 1,479
------------------------------------------------------------
Increase in cash ....................................... 1,739 4,453 1,950 - 8,142
Cash at beginning of year .............................. - 3,418 1,094 - 4,512
------------------------------------------------------------
Cash at end of year .................................... $ 1,739 $ 7,871 $ 3,044 $ - $ 12,654
========================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year -
Interest ............................................. $ 8,512 $ 535 $ 312 $ - $ 9,359
Income taxes paid .................................... (1,172) - - - (1,172)
Noncash investing and financing activities -
Issuance of warrants ................................. 665 - - - 665
Capital lease obligations ............................ 768 60 - - 828
========================================================================================================================
</TABLE>
-56-
<PAGE> 57
Dairy Mart Convenience Stores, Inc. and Subsidiaries
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
Quarterly financial information is as follows:
- -------------------------------------------------------------------------------------------------------
Fiscal Quarter Ended
- -------------------------------------------------------------------------------------------------------
May 3, August 2, November 1, January 31,
Fiscal year ended January 31, 1998 1997 1997 1997 1998
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues ............................... $ 139,929 $ 136,164 $ 118,313 $ 106,953
Gross Profit ........................... 37,521 36,477 32,226 30,203
Net Income (loss) ...................... 17 1,122 (310) (2,539)
Basic earnings (loss) per share ........ 0.00 0.24 (0.07) (0.54)
Diluted earnings (loss) per share ...... 0.00 0.23 (0.07) (0.54)
- --------------------------------------------------------------------------------------------------------
May 4, August 3, November 2, February 1,
Fiscal year ended February 1, 1997 1996 1996 1996 1997
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues ............................... $ 141,328 $ 156,132 $ 147,344 $ 140,942
Gross profit ........................... 36,246 41,676 40,990 34,983
Net income (loss) ...................... (393) 2,234 193 (3,920)
Basic earnings (loss) per share ........ (0.09) 0.51 0.04 (0.85)
Diluted earnings (loss) per share ...... (0.09) 0.48 0.04 (0.85)
- --------------------------------------------------------------------------------------------------------
</TABLE>
-57-
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Dairy Mart Convenience Stores, Inc. and
subsidiaries (the Company) included in this Form 10-K and have issued our report
thereon dated April 30, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Cleveland, Ohio, ARTHUR ANDERSEN LLP
April 30, 1998.
58
<PAGE> 59
SCHEDULE II
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------------- ---------- ------------------------- ----------- -----------
Additions
-------------------------
Balance at Charged to Deductions: Balance at
Beginning Costs and Other and Accounts End of
Description of period Expenses Recoveries Written off Period
- -------------------------------- ---------- ------------------------- ----------- -----------
Reserve for Doubtful Accounts:
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended February 3, 1996 $1,728,242 $1,220,153 $ -- $(1,101,173) $1,847,222
Fiscal Year Ended February 1, 1997 1,847,222 1,210,771 -- (1,513,256) 1,544,737
Fiscal Year Ended January 31, 1998 1,544,737 986,907 -- (291,006) 2,240,638
</TABLE>
-59-
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
DAIRY MART CONVENIENCE STORES, INC.
under Sections 242 and 245
of the
Delaware General Corporation Law
Dairy Mart Convenience Stores, Inc., a corporation, organized
and existing under the laws of the State of Delaware, hereby certifies as
follows:
FIRST: The name of the Corporation is Dairy Mart Convenience
Stores, Inc.
SECOND: The Certificate of Incorporation of the Corporation
was filed with the Secretary of the State of Delaware
on the 8th day of February 1972, under the name Giant
Dairy Mart Corporation.
THIRD: This Restated certificate of Incorporation restates
and integrates and further amends the Certificate of
Incorporation of the Corporation by amending Article
IV to increase the number of shares of the
Corporation's authorized Common Stock par value $.01
per share, from 10,000,000 shares to 30,000,000
shares, which increase consists of an increase in the
number of shares of Class A Common Stock, par value
$.01 per share, from 7,000,000 shares to 20,000,000
shares, and an increase in the number of shares of
Class B Common Stock, par value $.01 per share, from
3,000,000 shares to 10,000,000 shares.
FOURTH: The test of the Restated Certificate of
Incorporation, as amended or supplemented heretofore,
is further amended hereby to read as herein set forth
in full:
<PAGE> 2
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FIFTH: This Restated Certificate of Incorporation was duly
adopted by the Stockholders of the Corporation in
accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Dairy Mart Convenience Stores, Inc. has
caused this certificate to be signed by Mitchell J. Kupperman, its Executive
Vice President, and attested by Gregory Wozniak, its Assistant Secretary, this
13th day of June, 1991.
DAIRY MART CONVENIENCE STORES, INC.
By /s/ Mitchell J. Kupperman
------------------------------------
Mitchell J. Kupperman
Its Executive Vice President
ATTEST:
By /s/ Gregory Wozniak
-------------------------------
Gregory Wozniak
Its Assistant Secretary
<PAGE> 3
RESTATED
CERTIFICATE OF INCORPORATION
OF
DAIRY MART CONVENIENCE STORES, INC.
ARTICLE I
The name of the corporation is Dairy Mart Convenience Stores,
Inc. (hereinafter the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street in the City of Wilmington, county of New
Castle. The name of its registered agent at the address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
A. AUTHORIZED CAPITAL STOCK. The aggregate number of shares
which the Corporation shall have authority to issue is 31,000,000 shares,
consisting of:
1. 1,000,000 shares of Serial Preferred Stock,
par value $.01 per share;
2. 30,000,000 shares of Common Stock, par value
$.01 per share.
B. SERIAL PREFERRED STOCK. The Board of Directors is
authorized at any time, and from time to time, to provide for the issuance of
shares of Serial Preferred Stock in one or more series, and to determine the
designations, preferences, limitations and relative or other rights of the
Serial Preferred Stock or any series thereof. For each series, the Board of
Directors shall determine, by resolution or resolutions adopted
<PAGE> 4
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prior to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including but not limited to
the following relative rights and preferences, as to which there may be
variations among different series:
1. The rate and manner of payment of dividends,
if any;
2. Whether shares may be redeemed and, if so,
the redemption price and the terms and
conditions of redemption;
3. The amount payable for shares in the event
of liquidation, dissolution or other winding
up of the Corporation;
4. Sinking fund provisions, if any, for the
redemption or purchase of shares;
5. The terms and conditions, if any, on which
shares may be converted or exchanged;
6. Voting rights, if any; and
7. Any other rights and preferences of such
shares, to the full extent now or hereafter
permitted by the laws of the State of
Delaware.
The Board of Directors shall have the authority to determine
the number of shares that will comprise each series.
Prior to the issuance of any shares of a series, but after
adoption by the Board of Directors of the resolution establishing such series,
the appropriate officers of the Corporation shall file such documents with the
State of Delaware as may be required by law.
C. COMMON STOCK. The total number of shares of Common Stock
the corporation has authority to issue is 30,000,000 shares, consisting of
20,000,000 shares of Class A Common Stock with a par value of $.01 per share and
10,000,000 shares of Class B Common Stock with a par of $.01 per share. Class A
Common Stock and Class B Common Stock shall be identical in all respects and
shall have equal rights and privileges, except as otherwise expressly provided
herein. The relative powers, preferences, rights, qualification, limitations and
restrictions of the shares of each of the classes of Common Stock are as
follows:
<PAGE> 5
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1. CASH OR PROPERTY DIVIDENDS. Subject to section 4(c)(2),
whenever a dividend is paid to the holders of Class B Common Stock, the
corporation shall also pay to the holders of Class A Common Stock a dividend per
share at least equal to the dividend per share paid to the holders of the Class
B Common Stock. The corporation may pay dividends to holders of Class A Common
Stock in excess of dividends paid, or without paying dividends, to holders of
Class B Common Stock.
2. STOCK DIVIDENDS. If at any time a dividend is to be paid in
Class B Common Stock or Class A Common Stock (a "stock dividend"), such stock
dividend may be declared and paid only as follows:
(i) So long as no Class A Common Stock has been
issued and is outstanding, Class A Common Stock may be paid to holders of Class
B Common Stock
(ii) So long as shares of both classes are issued and
outstanding, Class A Common Stock may be paid only to holders of Class A Common
Stock and Class B Common Stock may be paid only to holders of Class B Common
Stock, and whenever a stock dividend is paid, the same number of shares shall be
paid in respect of each outstanding share of Class A or Class B Common Stock.
3. STOCK SUBDIVISIONS AND COMBINATIONS. The Corporation shall
not subdivide or combine stock of any class without at the same time making a
proportionate subdivision or combination of the other class.
4. VOTING. Voting power shall be divided between classes of
stock as follows:
(a) With respect to the election of directors, holders of
Class A Common Stock voting as a separate class shall be entitled, subject to
paragraph 4(e), to elect that number of directors which constitutes 25% of the
authorized number of members of the Board of Directors and, if such 25% is not a
whole number, then the holders of Class A Common Stock shall be entitled to
elect the nearest higher whole number of directors that is at least 25% of such
membership. Holder of Class B Common Stock voting as a separate class shall be
entitled, subject to paragraph 4(f), to elect the remaining directors. Directors
elected by the holders of Class A Common Stock, voting as a separate class, and
directors elected by one or more other directors to fill vacancies created by
the death, resignation or removal of directors elected by such class, shall be
designated as "Class A Directors." Directors elected by the holders of
<PAGE> 6
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Class B Common Stock, voting as a separate class, and director selected by one
or more other directors to fill vacancies created by the death, resignation or
removal of directors elected by such class, shall be designated as "Class B
Directors." Directors elected by the holders of Class A and Class B Common Stock
voting together as a single class pursuant to paragraph 4(e) or paragraph 4(f),
and directors elected by one or more other directors to fill vacancies created
by death, resignation or removal of directors so elected, shall be designated as
"Joint Directors."
(b) Holders of Class A Common Stock shall be entitled to vote
as a separate class on the removal, with or without cause, of any Class A
Director. Holders of Class B Common Stock shall be entitled to vote as a
separate class on the removal, with or without cause, of any Class B Director.
Holders of Class A and Class B Common Stock shall be entitled to vote together
as a single class, as provided for in paragraph 4(g), on the removal, with or
without cause, of any Joint Director.
(c) The holders of the Class a Common Stock and the holders of
the Class B Common Stock shall be entitled to vote as separate classes only (A)
when required by law to do so irrespective of the limitations placed herein on
the voting rights of such stockholders, or (B) where a separate class vote is
required by specific provision therefor in this Certificate of Incorporation.
Holders of Class A Common Stock and Class B Common Stock shall vote as a single
class, as provided for in paragraph 4(g), in order to amend this Certificate of
Incorporation so as to increase or decrease the aggregate number of authorized
shares of any class or classes of stock, and no class vote of either class shall
be required for such amendment.
(d) Any vacancy in the office of a Class A Director may be
filled by a vote of holders of Class A Common Stock voting as a separate class.
Any vacancy in the office of a Class B Director may be filled by a vote of
holders of Class B Common Stock voting as a separate class. Any vacancy in the
office of a Joint Director may be filled by a vote of holders of Class A and
Class B Common Stock, voting together as a single class as provided for in
paragraph 4(g). Notwithstanding anything in this section 4 to the contrary, any
vacancy in the office of a director of any class may be filled by the vote of
the majority of the directors in such class, by the sole remaining director in
such class or, in the event that there are no remaining directors in such class,
by the vote of the majority of the other directors or by the sole remaining
director, regardless, in each instance, of any quorum requirements set out in
the By-laws. Any director
<PAGE> 7
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elected by some or all of the directors to fill a vacancy shall serve until the
next Annual Meeting of Stockholders and until his or her successor has been
elected and has qualified. If permitted by the By-laws, the Board of Directors
may increase the number of directors and any vacancy so created may be filled by
the Board of Directors; provided, that, so long as the holders of Class A Common
Stock have the rights provided in paragraphs 4(a) and this paragraph 4(d) in
respect of the last preceding Annual Meeting of Stockholders, the Board of
Directors may be so enlarged by the Board of Directors only to the extent that
at least 25% of the enlarged Board consists of Class A Directors.
(e) Holders of Class A Common Stock will not have the rights
to elect directors set forth in paragraphs 4(a) and 4(d) if, on the record date
for the stockholder meeting at which such directors are to be elected, or on the
record date for any written consent of stockholders pursuant to which directors
are elected, the number of issued and outstanding shares of Class A Common Stock
is less than 10% of the aggregate number of issued and outstanding shares of
Class A Common Stock and Class B Common Stock. In such case, all directors to be
elected shall be elected by holders of Class A Common Stock and Class B Common
Stock voting together as a single class, provided that, with respect to said
election, the holders of Class A Common Stock shall have one-tenth vote per
share and holders of Class B Common Stock shall have one vote per share.
(f) Holders of Class B Common Stock will not have the rights
to elect directors set forth in paragraphs 4(a) and 4(d) if, on the record date
for the stockholder meeting at which directors are elected, or on the record
date for any written consent of stockholders pursuant o which directors are
elected, the number of issued and outstanding shares of Class B Common Stock is
less than 12.5% of the aggregate number of issued and outstanding shares of
Class A Common Stock and Class B Common Stock. In such case, holders of Class A
Common Stock voting as a separate class, shall have the right to elect 25% of
the members of the Board of Directors as provided in paragraph 4(a), and holders
of Class A Common Stock and holders of Class B Common Stock voting together as a
single class shall be entitled to elect the remaining directors, provided that,
with respect to said election, the holders of Class A Common Stock shall have
one-tenth vote per share and holders of Class B Common Stock shall have one vote
per share.
(g) Holders of Class A and Class B Common Stock shall in all
matters not otherwise specified in this section 4 vote together as a single
class, provided that, with respect to all
<PAGE> 8
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such matters, the holders of Class A Common Stock shall have one-tenth vote per
share and the holders of Class B Common Stock shall have one vote per share.
(h) Notwithstanding anything in this section 4 to the
contrary, the holders of Class A Common Stock shall have exclusive voting power
on all matters at any time when no Class B Common Stock is issued and
outstanding, and the holders of Class B Common Stock shall have exclusive voting
power on all matters at any time when no Class A Common Stock is issued and
outstanding.
5. CONVERSION. All preexisting issued and outstanding Common Stock of
the Corporation shall automatically constitute, without any action on the part
of the holders of any such stock or on the part of the Corporation, Class B
Common Stock. As used herein, "preexisting Common Stock" means Common Stock
issued prior to September 15, 1985 or pursuant to the exercise of an option
granted prior to September 15, 1985 to the extent that the agreement evidencing
any such option does not provide otherwise. Each holder of record of Class B
Common Stock may at any time or from time t time, in such holder's sole
discretion and at such holder's option, convert any whole number or all of such
holder's shares of Class B Common Stock at the rate of one share of Class A
Common Stock for each share of Class B Common Stock surrendered for conversion.
Any such conversion may be effected by any holder of Class B Common Stock
surrendering such holder's certificate or certificates for the Class B Common
Stock to be converted, duly endorsed, at the office of the corporation or any
transfer agent for the Class B Common Stock, together with a written notice to
the corporation at such office that such holder elects to convert all or a
specified number of shares of Class B Common Stock and stating the name or names
in which such holder desires the certificate or certificates for such Class A
Common Stock to be issued. Promptly thereafter, the corporation shall issue and
deliver to such holder, or such holder's nominee or nominees, a certificate or
certificates for the number of shares of Class A Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed to have
been made at the close of business at the date of such surrender and the person
or person entitled to receive the Class A Common Stock issuable on such
conversion shall be treated for all purposes as the record holder or holders of
such Class A Common Stock on that date.
Authorized but unissued Class A Common Stock, to the extent that such
stock may be necessary to meet any exercise of the conversion privilege of
issued and outstanding Class B Common
<PAGE> 9
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Stock, shall be held by the Corporation, without the necessity of a declaration
by the Directors, in reserve, to be issued only in satisfaction of the
conversion privilege of the issued and outstanding Class B Common Stock. No
Class B Common Stock may be issued unless the authorized but unissued and
unreserved shares of Class A Common Stock are sufficient to satisfy the
conversion privilege which ill exist with respect to such Class B Common Stock
when issued.
(a) LIQUIDATION. In the event of any liquidation, dissolution
or winding up of the Corporation, the holders of the Class A Common Stock and
the holders or Class B Common Stock shall participate equally per share in any
distribution to stockholders, without distinction between classes.
ARTICLE V
The corporation is to have perpetual existence.
ARTICLE VI
The Board of Directors of the Corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the Corporation.
ARTICLE VII
The Corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo
<PAGE> 10
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contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
The Corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the Court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the first two paragraphs of this
Article VII, or in defense of any claim, issue or matter therein he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
by him in connection therewith.
Any indemnification under either the first or second paragraph of this
Article VII (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in the particular
paragraph. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum if disinterested directors
so
<PAGE> 11
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directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VII.
The indemnification and advancement of expenses provided by or granted
pursuant to the other provisions of this Article VII shall not be deemed
exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office. The indemnification and advancement of expenses provided by or granted
pursuant to this Article shall, unless otherwise provided, authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VII.
Notwithstanding any other provision of this Article VII, to the full
extent permitted by law, no director of the Corporation shall have any personal
liability to the Corporation or its stockholders for monetary damages for breach
of his fiduciary duty as a director, provided that this provision shall not
eliminate or limit the liability of a director (I) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of the General Corporation Law
of
<PAGE> 12
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Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit.
ARTICLE VIII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
To authorized and cause to be executed mortgages, security
agreements and other liens upon the real and personal property of the
Corporation;
To set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose
and to abolish any such reserve in the manner in which it was created;
By a majority of the whole board, to designate one or more
committees, each committee to consist of two or more of the directors
of the Corporation. The board may designate one or more directors as
alternate members of any committee and may replace any absent or
disqualified member at any meeting of the committee. Any such
committee, to the extent provided in the resolutions or in the By-laws
of the Corporation, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; provided, however, the
By-laws may provide that in the absence or disqualification of any
member committee or committees, the member or members thereof present
at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such
absent or disqualified member;
When and as authorized by the affirmative vote of the holders
of a majority of the stock issued and outstanding having voting power
given at a stockholders' meeting duly called upon such notice as is
required by statute, or when authorized by the written consent of the
holders of a majority of the voting stock issued and outstanding, to
sell, lease or exchange all or substantially all of the property and
assets of the Corporation, including its good will and its corporate
franchises upon such terms and conditions and for such consideration,
which my consist in whole or in part of money or property including
shares of
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stock, in and/or other securities of, any other corporation or
corporations, as its Board of Directors shall deem expedient and for
the best interests of the Corporation.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of the Corporation. Elections of Directors
need not be by written ballot unless the By-laws of the Corporation shall so
provide.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation in the manner now
or hereafter prescribed by law, and all rights and powers conferred herein on
stockholders and directors are subject to this reserved power.
ARTICLE XI
CERTAIN PROVISIONS RELATING TO BUSINESS COMBINATIONS,
BOARD OF DIRECTORS, AND OTHER MATTERS
11.1 Definitions and Related Matters.
--------------------------------
11.1(a) AFFILIATE. An "Affiliate" of, or a Person "affiliated with," a
specified Person, means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, the Person specified.
11.1(b) ASSOCIATE. The term "Associate" used to indicate a relationship
with any Person means:
(1) Any corporation or organization (other than the
Corporation or a Subsidiary of the Corporation),or any subsidiary or
parent thereof, of which such Person is an officer or partner or is,
directly or indirectly, the Beneficial Owner of ten percent or more of
any class of equity securities;
<PAGE> 14
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(2) Any trust or other estate in which such Person has a ten
percent or greater beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity;
(3) Any relative or spouse of such Person, or any relative of
such spouse, who has the same home as such Person; or
(4) Any investment company registered under the Investment
Company Act of 1940 for which such Person or any Affiliate or Associate
of such Person serves as investment adviser.
11.1(c) BENEFICIAL OWNER. A Person shall be considered the "Beneficial
Owner" of any shares of stock (whether or not owned of record):
(1) With respect to which such person or any Affiliate or
Associate of such Person directly or indirectly has or shares (i)
voting power, including the power to vote or to direct the voting of
such shares of stock and/or (ii) investment power, including the power
to dispose of or to direct the disposition of such shares of stock;
(2) Which such Person or any Affiliate or Associate of such
Person has (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
and/or (ii) the right to vote pursuant to any agreement, arrangement or
understanding (whether such right is exercisable immediately or only
after the passage of time; or
(3) Which are Beneficially Owned within the meaning of (1) or
(2) of this Section 11.1(c) by any other Person with which such
first-mentioned Person or any of its Affiliates or Associates has any
agreement, arrangement or understanding, written or oral, with respect
to acquiring, holding, voting or disposing of any shares of stock of
the Corporation or any Subsidiary of the Corporation or acquiring,
holding or disposing of all or substantially all, or any Substantial
Part, of the assets or businesses of the Corporation or a Subsidiary of
the Corporation.
<PAGE> 15
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For the purpose only of determining whether a Person is the Beneficial
Owner of a percentage specified in this Article XI of the outstanding Voting
Shares, such shares shall be deemed to include any Voting Shares which may be
issuable pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants, options or otherwise
and which are deemed to be Beneficially Owned by such Person pursuant to the
foregoing provisions of this Section 11.1(c).
11.1(d) BUSINESS COMBINATION. A "Business Combination" means:
(1) The sale, exchange, lease, transfer or other disposition
to or with a Related person or any Affiliate or Associate of such
Related Person by the Corporation or any of its Subsidiaries (in a
single transaction or a series of related transaction) of all or
substantially all, or any Substantial Part, of its or their assets or
businesses (including, without limitation, any securities issued by a
Subsidiary);
(2) The purchase, exchange, lease or other acquisition by the
Corporation or any of its Subsidiaries (in a single transaction or a
series of related transactions) of all or substantially all, or any
Substantial Part, of the assets or business of a Related Person or any
Affiliate or Associate of such Related Person;
(3) Any merger or consolidation of the Corporation or any
Subsidiary thereof into or with a Related person or any Affiliate or
Associate of such Related Person or into or with another Person which,
after such merger or consolidation, would be an Affiliate or an
Associate or a Related Person, in each case irrespective of which
Person is the surviving entity in such merger or consolidation;
(4) Any reclassification of securities, recapitalization or
other transaction (other than a redemption in accordance with the terms
of the security redeemed) which has the effect, directly or indirectly,
of increasing the proportionate amount of Voting Shares of the
Corporation or any Subsidiary thereof which are Beneficially Owned by a
Related Person, or any partial or complete liquidation, spin-off,
splitter or split-up of the Corporation or any Subsidiary thereof;
provided, however, that this Section 11.1(d)(4) shall not relate to any
transactions of the types specified herein that has been approved by a
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majority of the Whole Board of Directors and a majority (but in any
event not less than four) of the Continuing Directors; or
(5) The acquisition upon the issuance thereof of Beneficial
Ownership by a Related Person of Voting Shares or securities
convertible into Voting Shares or any voting securities or securities
convertible into voting securities of any Subsidiary of the
Corporation, or the acquisition upon the issuance thereof of Beneficial
Ownership by a Related Person of any rights, warrants or options to
acquire any of the foregoing or any combinations of the foregoing
Voting Shares or voting securities of a Subsidiary.
As used in this definition, a "series of related transaction" shall be
deemed to include not only a series of transactions with the same Related
Person, but also a series of separate transactions with a Related Person or any
Affiliate or Association of such Related Person.
Anything in this definition to the contrary notwithstanding, if there
are not less than four Continuing Directors, this definition shall not be deemed
to include (i) any transaction that has been approved on or prior to the Date of
Determination by 80% of the Continuing Directors and by 80% of the Whole Board
of Directors, or (ii) any transaction of the type set forth in Section
11.1(d)(1) through 11.1(d)(3) above, between or among any two or more
Subsidiaries of the Corporation or the Corporation and one or more Subsidiaries
of the Corporation if such transaction has been approved by the affirmative vote
of at least 67% of the Whole Board of Directors and a majority (but in any event
not less than four) of the Continuing Directors on or prior to the Date of
Determination.
11.1(e) CONTINUING DIRECTOR. A "Continuing Director" shall mean:
(1) An individual who was a member of the Board of Directors
of the Corporation on June 30, 1985, or who was a member of the Board
of Directors of the Corporation elected by the shareholders prior to
the time that a Related Person acquired in excess of five percent of
the stock of the Corporation entitled to vote in the election of
directors, or
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(2) If there are not less than six Continuing directors before
his designation, an individual designated (before his initial election
as a director) as a Continuing Director by a majority of the then
Continuing Directors.
11.1(f) DATE OF DETERMINATION. The term "Date of Determination" means:
(1) The date on which a binding agreement (except for the
fulfillment of conditions precedent, including without limitation,
votes of shareholders to approve such transaction) is entered into by
the Corporation, as authorized by its Board of Directors, and another
Person providing for any Business Combination; or,
(2) If such an agreement as referred to in Section 11.1(f)(1)
above is amended so as to make it less favorable to the Corporation and
its shareholders, the date on which such amendment is approved by the
Board of Directors of the Corporation; or,
(3) In cases where neither Section 11.1(f)(1) or (2) shall be
applicable, the record date for the determination of shareholders of
the Corporation entitled to notice of and to vote upon the transaction
in question.
A majority (but in any event not less than four) of the Continuing
Directors shall have the power and duty to determine the Date of
Determination as to any transaction under this Article 11. Any such
determination shall be conclusive and binding for all purposes of this
article.
11.1(g) INDEPENDENT MAJORITY OF SHAREHOLDERS. "Independent Majority of
Shareholders" shall mean the holders of a majority of the outstanding Voting
Shares that are not Beneficially Owned or controlled, directly or indirectly, by
a Related Person.
11.1(h) OFFER. The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer or request or invitation for
tender of, a security or interest in a security for value.
11.1(i) PERSON. The term "Person" shall mean any other person,
partnership, corporation, group or other entity (other than the Corporation, any
Subsidiary of the Corporation or a trustee holding stock for the benefit of
employees of the Corporation or its Subsidiaries, or any one of them, pursuant
to one or more employee benefit plans or arrangements). When two or more
<PAGE> 18
-16-
Persons act as a partnership, limited partnership, syndicate, association or
other group for the purpose of acquiring, holding or disposing of shares of
stock, such partnership, syndicate, association or group shall be deemed a
"Person."
11.1(j) RELATED PERSON. "Related Person" mean any Person which is the
Beneficial Owner as of the Date of Determination or immediately prior to the
consummation of a Business Combination, or both, of 5% or more of the Voting
Shares, or any Person who is an Affiliate of the Corporation and at any time
within five years preceding the Date of Determination was the Beneficial Owner
of five percent or more of the then outstanding Voting Shares, but does not
include any one or group of more than one Continuing Director.
11.1(k) SUBSTANTIAL PART. The term "Substantial Part" as used with
reference to the assets of the Corporation, of any Subsidiary or of any Related
Person means assets having a value of more than give percent of the total
consolidated assets of the Corporation and its Subsidiaries as of the end of the
Corporation's most recent fiscal year ending prior to the time the determination
is being made.
11.1(l) SUBSIDIARY. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or indirectly, by
the Corporation; provided, however, that for the purposes of the definition of
Person or Related Person set forth in Section 11.1(I) and 11.1(j) above, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned, directly or indirectly, by the Corporation.
11.1(m) VOTING SHARES. "Voting Shares" shall mean shares of the
Corporation entitled to vote generally in the election of directors.
11.1(n) WHOLE BOARD OF DIRECTORS. "Whole Board of directors" shall mean
the total number of directors which the Corporation would have if there were no
vacancies.
11.1(o) Certain Determinations with Respect to Article XI.
--------------------------------------------------
(1) A majority (but in any event not less than four) of the Continuing
Directors shall have the power to determine for the purpose of this
Article XI, on the basis of information known to them: (i) the number
of Voting Shares of which any Person is the Beneficial Owner, (ii)
whether a Person is an Affiliate or Associate of another,
<PAGE> 19
-17-
(iii) whether a Person has an agreement, arrangement or understanding
with another as to the matters referred to in the definition of
"Beneficial Owner" as hereinabove defined, (iv) whether the assets
subject to any Business Combination constitute a "Substantial Part" as
hereinabove defined, (v) whether two or more transactions constitute a
"series of related transactions" as hereinabove defined, (vi) any
matters referred to in Section 11.1(o)(2) below, and (vii) such other
matters with respect to which a determination is required under this
Article XI.
(2) A Related Person shall be deemed to have acquired a share
of the Corporation at the time when such Related Person became the
Beneficial Owner thereof. With respect to shares owned by Affiliates,
Associates or other Persons whose ownership is attributed to a Related
Person under the foregoing definition of Beneficial Owner, if the price
paid by such Related Person for such shares is not determinable, the
price paid upon acquisition thereof by the Affiliate or Associate or
other Person or (ii) the market price of the shares in question (as
determined by a majority (but in any event not less than four) of the
Continuing Directors) at the time when the Related Person became the
Beneficial Owner thereof.
11.1(p) FIDUCIARY OBLIGATIONS. Nothing contained in this Article 11
shall be construed to relieve any Related Person from any fiduciary obligation
imposed by law.
11.2 APPROVAL OF BUSINESS COMBINATIONS-MINIMUM VOTE. Whether or not a
vote of the shareholders is otherwise required in connection with the
transaction, neither the Corporation nor any of its Subsidiaries shall become
party to any Business Combination without the prior affirmative vote at a
meeting of the Corporation's shareholders as to all shares owned:
(1) By the holders of not less than 67% of the outstanding
Voting Shares, voting separately as a class, and
(2) By an Independent Majority of Shareholders;
provided, however, that the provisions of this Section 11.2 shall not apply to
any Business Combination approved by 67% of the Whole Board of Directors of the
Corporation either (a) at a time prior to the acquisition of 5% or more of the
outstanding Voting Shares of the Corporation by the Related Person, or (b) after
<PAGE> 20
-18-
such acquisition, but only so long as such Related Person sought and obtained
the approval, by the affirmative vote of at least 67% of the Whole Board of
Directors of the Corporation, of the acquisition of 5% or more of the
outstanding Voting Shares prior to such acquisition being consummated; and
provided further, that this Section 11.2 shall not apply to, and such vote shall
not be required for, any Business Combination recommended to shareholders by the
favorable vote of not less than a majority of the Whole Board of Directors and a
majority (but in any event not less than four) of the Continuing Directors and
any such Business Combination so recommended shall require only the vote, if
any, required under the applicable provisions of the Delaware Corporation Laws.
The affirmative vote required by this Section 11.2 is in addition to the vote of
the holders of any class or series of stock of the Corporation otherwise
required by law, this Certificate of Incorporation (including, without
limitation, any voting requirements in Section 11.3 hereof, if applicable), any
resolution which has been adopted by the Board of Directors providing for the
issuance of a class or series of stock, or any agreement between the Corporation
and any securities exchange.
11.3 Approval of Business Combinations-Maximum Vote.
----------------------------------------------
11.3(a) Except as provided in Section 11.3(b) or Section 11.3(d),
neither the Corporation nor any of its Subsidiaries shall become party to any
Business Combination without the prior affirmative vote at a meeting of the
Corporation's shareholders:
(1) By the holders of not less than 80% of the outstanding
Voting Shares, voting separately as a class, and
(2) By an Independent Majority of Shareholders.
Such favorable votes shall be in addition to any shareholder vote which
would be required without reference to this Section 11.3 and shall be required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified by law or elsewhere in this Certificate of
Incorporation (including, without limitation, the lesser vote required by
Section 11.2 hereof, if applicable) or the By-laws of the Corporation or
otherwise.
11.3(b) The provisions of Section 11.3(a) shall not apply to a
particular Business Combination, and such Business Combination shall require
only such shareholder vote (if any) as would be required without reference to
this Section 11.3, if all of the conditions set forth in Subparagraphs (1)
through (7) below are satisfied:
<PAGE> 21
-19-
(1) The ratio of (i) the aggregate amount of the cash and the
fair market value of the other consideration to be received per share
of Common Stock of the Corporation in such Business Combination by
holders of Common Stock other than the Related Person involved in such
Business Combination, to (ii) the market price per share of the Common
Stock immediately prior to the announcement of the proposed Business
Combination, is at least as great as the ratio of (x) the highest per
share price (including brokerage commissions, transfer taxes and
soliciting dealers' fees) which such Related Person has theretofore
paid in acquiring any Common Stock prior to such Business Combination,
to (y) the market price per share of Common Stock immediately prior to
the initial acquisition by such Related Person of any shares of Common
Stock; and
(2) The aggregate amount of the cash and the fair market value
of other consideration to be received per share of Common Stock in such
Business Combination, (i) is not less than the highest per share price
(including brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by such Related Person in acquiring any of its
holdings of Common Stock, and (ii) is not less than 150% of the book
value of a share of the Common Stock, as reflected in the balance sheet
of the Corporation as of the last day of the last fiscal quarter of the
Corporation preceding the Date of Determination; and
(3) If applicable, the ratio of (i) the aggregate amount of
the cash and the fair market value of other consideration to be
received per share of Preferred Stock of the Corporation in such
Business Combination by holders of Preferred Stock other than the
Related Person involved in such Business Combination, to (ii) the
market price per share of the Preferred Stock immediately prior to the
announcement of the proposed Business Combination, is at least as great
as the ratio of (x) the highest per share price (including brokerage
commissions, transfer taxes and soliciting dealers' fees) which such
Related Person has theretofore paid in acquiring any Preferred Stock
prior to such Business Combination to (y) the market price per share of
Preferred Stock immediately prior to the initial acquisition by such
Related Person of any shares of Preferred Stock; and
(4) If applicable, the aggregate amount of the cash and the
fair market value of other consideration to be received per share of
Preferred Stock in such Business
<PAGE> 22
-20-
Combination by holders of Preferred Stock, other than the Related
Person involved in such Business Combination, (i) is not less than the
highest per share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by such Related Person in
acquiring any of its holdings of Preferred Stock, and (ii) is not less
than the highest preferential amount per share to which the holders of
shares of such class of Preferred Stock would be entitled in the event
of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Corporation, regardless of whether the Business
Combination to be consummated constitutes such an event; and
(5) The consideration (if any) to be received in such Business
Combination by holders of stock other than the Related Person involved
shall, except to the extent that a shareholder agrees otherwise as to
all or part of the shares which he or she owns, be in the same form and
of the same kind as the consideration paid by the Related Person in
acquiring stock already owned by it; and
(6) After such Related Person became a Related Person and
prior to the consummation of such Business Combination:
(i) such Related Person shall have taken steps to
insure that the Board of Directors of the Corporation included
at all times representation by Continuing Directors
proportionate to the ratio that the number of Voting Shares of
the Corporation from time to time owned by shareholders who
are not Related Persons bears to all Voting Shares of the
Corporation outstanding at the time in question (with a
Continuing Director to occupy any resulting fractional
position among the directors);
(ii) such Related Person shall not have acquired from
the Corporation, directly or indirectly, any shares of the
Corporation (except (x) upon conversion of convertible
securities acquired by it prior to becoming a Related Person
or (y) as a result of a pro rata stock dividend, stock split
or division of shares or (z) in a transaction which satisfied
all applicable requirements of this Article XI);
(iii) such Related Person shall not have acquired any
additional Voting Shares of the Corporation or securities
convertible into or exchangeable for Voting Shares except as a
part of the transaction which
<PAGE> 23
-21-
resulted in such Related Person's becoming a Related Person;
(iv) such Related Person shall not have (x) received
the benefit, directly or indirectly (except proportionately as
a shareholder), of any loans, advances, guarantees, pledges or
other financial assistance or tax credits provided by the
Corporation or any Subsidiary, or (y) made any major change in
the Corporation's business or equity capital structure or
entered into any contract, arrangement or understanding with
the Corporation except any such change, contract, arrangement
or understanding as may have been approved by the favorable
vote of not less than a majority of the Whole Board of
Directors and a majority (but in any event not less than four)
of the Continuing Directors of the Corporation; and
(v) except as approved by a majority of the Whole
Board of Directors and a majority (but in any event not less
than four) of the Continuing Directors, there shall have been:
(x) no failure to declare and pay at the regular date therefor
any full quarterly dividends (whether or not cumulative) on
the outstanding Preferred Stock; (y) no reduction in the
annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock); and
(z) an increase in such annual rate of dividends as necessary
to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of
outstanding shares of the stock; and
(7) A proxy statement complying with the requirements of the
Securities Exchange Act of 1934, as amended, shall have been mailed to
all holders of Voting Shares for the purpose of soliciting shareholder
approval of such Business Combination. Such proxy statement shall
contain at the front thereof, in a prominent place, any recommendations
as to the advisability (or inadvisability) of the Business Combination
which the Continuing Directors, or any of them, may have furnished in
writing and, if deemed advisable by a majority (but in any event not
less than four) of the Continuing Directors, an opinion of a reputable
investment banking firm as to the fairness (or lack of fairness) of the
terms of such Business Combination from the point of view of the
holders of Voting Shares other than any Related Person (such
<PAGE> 24
-22-
investment banking firm to be selected by a majority (but in any event
not less than four) of the Continuing Directors, to be furnished with
all information it reasonably requests, and to be paid a reasonable fee
for its services upon receipt by the Corporation of such opinion).
11.3(c) For purposes of Sections 11.3(b)(1) through 11.3(b)(4) hereof,
in the event of a Business Combination upon consummation of which the
Corporation would be the surviving corporation or company or would continue to
exist (unless it is provided, contemplated or intended that as part of such
Business Combination or within one year after consummation thereof a plan of
liquidation or dissolution of the Corporation will be effected), the term "other
consideration to be received" shall include (without limitation) stock retained
by shareholders of the Corporation other than Related Persons who are parties to
such Business Combination.
11.3(d) The provisions of this Section 11.3 shall not apply to any
Business Combination approved by 67% of the Whole Board of Directors of the
Corporation either (i) at a time prior to the acquisition of 5% or more of the
outstanding Voting Shares of the Corporation by the Related Person, or (ii)
after such acquisition, but only so long as such Related Person sought and
obtained the approval, by the affirmative vote of at least 67% of the Whole
Board of Directors of the Corporation, of the acquisition of 5% or more of the
outstanding Voting Shares prior to such acquisition being consummated.
11.3(e) Any amendment, change or repeal of this Section 11.3 or any
other amendment of this Certificate of Incorporation which would have the effect
of modifying or permitting circumvention of this Section 11.3 shall require the
affirmative vote, at a meeting of shareholders of the Corporation, as to all
shares held:
(1) By the holders of at least 80% of the voting power of the
then outstanding Voting Shares; and
(2) By an Independent Majority of Shareholders;
provided, however, Th in the event that any such amendment, change or repeal is
recommended to shareholders by the favorable vote of not less than a majority of
the Whole Board of Directors and a majority (but in any event not less than
four) of the Continuing Directors, then such amendment, change or repeal so
recommended shall require only the vote of an Independent
<PAGE> 25
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Majority of Shareholders and the vote, if any, required under the applicable
provisions of the Delaware Corporation Laws.
11.4 Board of Directors.
-------------------
11.4(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. The number of directors of the
Corporation (exclusive of directors to be elected by the holders of any one or
more series of the Preferred Stock voting separately as a class or classes) that
shall constitute the initial Board of Directors shall be seven. A majority of
the Whole Board of Directors may by resolution increase or decrease the number
of directors constituting the Whole Board of Directors may be increased or
decreased by more than two members within any twelve-month period, from time to
time by resolution adopted by:
(1) The Board of Directors, by the affirmative vote of at
least 67% of the Whole Board of Directors and a majority (but in any
event not less than six) of the Continuing Directors; or
(2) The shareholders, by the affirmative vote of at least 80%
of the then outstanding Voting Shares and an Independent Majority of
Shareholders;
provided, however, that the minimum number of directors shall be five and the
maximum number of directors shall be eleven.
11.4(b) Notwithstanding any other provisions of this Certificate of
Incorporation or the By-laws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law, this Certificate of
Incorporation or the By-laws of the Corporation), any director or the entire
Board of Directors of the Corporation may be removed at any time with or without
cause only by the affirmative vote, at a meeting of the shareholders called for
that purpose, by the holders of 2/3 or more of the Voting Shares of the Class or
Classes that elected the director.
11.4(c) In addition to the right of the Board of Directors of the
Corporation to make nomination s for the election of directors, nominations for
the election of directors, nominations for the election of directors may be made
by any shareholder entitled to vote for the election of directors if that
shareholder complies with all of the provisions of this Section 11.4(c).
<PAGE> 26
-24-
(1) Advance notice of such proposed nomination shall be
received by the Chairman of the Nominating Committee of the Board of
Directors of the Corporation (which notice may be sent to such Chairman
in care of the Secretary of the Corporation) or, in the absence of
such a Nominating Committee, by the Secretary of the Corporation, not
less than 14 days nor more than 60 days prior to any meeting of the
shareholders called for the election of directors; provided, however,
that if fewer than 21 days' notice of the meeting is given to
shareholders, such written notice shall be received not later than the
close of the tenth day following the day on which notice of the meeting
was mailed to shareholders.
(2) Each notice under Section 11.4(c)(1) shall set forth (i)
the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominee, and (iii) the number of shares of
stock of the Corporation which are Beneficially Owned by each such
nominee. In addition, the shareholder making such nomination shall
promptly provide any other information reasonably requested by the
Corporation.
(3) The nomination made by the shareholder may only be made in
a meeting of the shareholder of the Corporation called for the election
of directors at which such shareholder is present in person or by
proxy, and can only be made by a shareholder who has theretofore
complied with the notice provisions of Section 11.4(c)(1) and (2)
above.
(4) The Chairman of the meeting may in his discretion
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
11.7 AMENDMENTS OF THIS ARTICLE XI. Notwithstanding any other
provisions of this Certificate of Incorporation or the By-laws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law, this Certificate of Incorporation or the Bylaws of the
Corporation), and in addition to such additional vote of any preferred stock as
may be required by the provisions of any series thereof or by applicable law,
this Article XI (except for Section 11.3 hereof) shall not be amended, altered,
changed or repealed without:
<PAGE> 27
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(1) The affirmative vote of 67% of the Whole Board of
Directors and of a majority of Continuing Directors, and
(2) The affirmative vote (i) by the holders of more than 50%
of the outstanding Voting Shares, voting separately as a class, and
(ii) by an Independent Majority of Shareholders.
11.8 AMENDMENTS OF BY-LAWS. The By-laws of the Corporation may be
adopted, altered, amended or repealed or new by-laws may be adopted by the Board
of Directors at any regular or special meeting upon the affirmative vote of both
67% of the Whole Board of Directors and a majority (but in any event not less
than four) of the Continuing Directors as defined in the Certificate of
Incorporation of the Corporation. The By-laws of the Corporation may also be
adopted, altered, amended or repealed or new bylaws may be adopted by the
shareholders only upon the affirmative vote as to all stock held (i) by the
holders of not less than 67% of the Outstanding Voting Shares and (ii) by an
Independent Majority of Shareholders, as defined in the Certificate of
Incorporation of the Corporation.
<PAGE> 1
AGREEMENT OF AMENDMENT
This AGREEMENT OF AMENDMENT (this "Agreement") dated as of January 1,
1998, among DAIRY MART CONVENIENCE STORES, INC. (the "Company"), BANK OF BOSTON
CONNECTICUT, individually and as Agent under the Credit Agreement (as
hereinafter defined), HELLER FINANCIAL, INC. ("Heller") and STATE STREET BANK
AND TRUST COMPANY ("State Street").
WHEREAS, the Company, the banks and other financial institutions
listed on Schedule 1 thereto (collectively, with any banks or financial
institutions from time to time parties thereto, the "Banks"), and Bank of
Boston Connecticut ("BOBC"), as agent of the Banks thereunder (in such
capacity, the "Agent") entered into a certain Credit Agreement dated as of
April 24, 1996 (as amended the "Credit Agreement"); and
WHEREAS, the Company, the Banks and the Agent wish to amend the Credit
Agreement as more fully set forth below.
NOW THEREFORE, the parties hereto agree as follows:
I. AGREEMENT OF THE PARTIES
1. Unless the context shall otherwise require, all capitalized terms
used herein without definition shall have the meanings assigned to them in the
Credit Agreement.
2. Section 1.1 of the Credit Agreement shall be, and hereby is, amended
by deleting the definitions of "Adjusted Consolidated Indebtedness" and
"Minimum Consolidated Net Worth" in their entirety and substituting in lieu
thereof the following:
"ADJUSTED CONSOLIDATED INDEBTEDNESS" that amount which is equal to
Consolidated Indebtedness reduced by an amount equal to the sum of
(i) Cash and Cash Equivalents, and (ii) that portion of the
Company's assets (as shown on its balance sheet) which represents
real property owned by the Company and used for stores with respect
to which the Company is party to a fully binding commitment to
enter into a sale-leaseback arrangement within sixty days following
the date of such calculation.
<PAGE> 2
"MINIMUM CONSOLIDATED NET WORTH" (i) as at the FQED to occur on or
about February 1, 1997: $7,500,000; (ii) as at the FQED to occur on
or about April 30, 1997: $6,750,000; (iii) as at the FQED to occur
on or about July 31, 1997: $7,900,000; (iv) as at the FQED to occur
on or about October 31, 1997: $8,700,000; (v) as at the FQED to
occur on or about January 31, 1998: $6,300,000; (vi) as at the FQED
to occur on or about April 30, 1998: $4,800,000; (vii) as at the
FQED to occur on or about July 31, 1998: $5,400,000; (viii) as at
the FQED to occur on or about October 30, 1998: $5,850,000; and
(ix) as at the FQED to occur on or about January 31, 1999:
$5,600,000 and thereafter, $5,600,000 plus 50% of Cumulative
<PAGE> 3
Consolidated Net Income earned after the FQED ending approximately
January 31, 1999.
3. Section 7.1(a) of the Credit Agreement shall be, and hereby is,
amended by deleting such Section 7.1(a) in its entirety and substituting in lieu
thereof the following:
(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 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 February 1, 1997 4.50 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about April 30, 1997 5.25 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about July 31, 1997 3.80 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about October 31, 1997 4.60 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about January 31, 1998 5.00 to 1.00
-------------------------------------------------------------------------------
The FQED ending on or about April 30, 1998 5.85 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about July 31, 1998 5.65 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about October 30, 1998 5.25 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about January 31, 1999 and thereafter 4.65 to 1.00
- -------------------------------------------------------------------------------
4. Section 7.1(b) of the Credit Agreement shall be, and hereby is,
amended by deleting Section 7.1(b) in its entirety and substituting in lieu
thereof the following:
(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:
2
<PAGE> 4
- -------------------------------------------------------------------------------
FQED Ratio
- -------------------------------------------------------------------------------
The FQED ending on or about February 1, 1997 2.00 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about April 30, 1997, July 30, 1.60 to 1.00
1997 and October 31, 1997
- -------------------------------------------------------------------------------
The FQED ending on or about January 31, 1998 1.60 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about April 30, 1998 1.40 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about July 31, 1998 1.45 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about October 30, 1998 1.60 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about January 31, 1999 2.00 to 1.00
- -------------------------------------------------------------------------------
5. Section 7.1(c) of the Credit Agreement shall be, and hereby is,
amended by deleting Section 7.1(c) in its entirety and substituting in lieu
thereof the following:
(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 EDITDAR minus the amount of any federal,
state and local income taxes levied by a Governmental Authority on
the revenues of the Company which are actually paid by the Company
or its consolidated Subsidiaries in cash during such period, to
(ii) Consolidated Interest Expense, plus all principal payments
required to be made during the period on account of any Consolidated
Indebtedness, plus the amount of any Consolidated Rent Expense
during the period, to be less than the ratio set forth opposite such
FQED:
- -------------------------------------------------------------------------------
FQED Ratio
- -------------------------------------------------------------------------------
The FQED ending on or about February 1, 1997 1.20 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about April 30, 1997, July 31, 1.25 to 1.00
1997 and October 31, 1997
- -------------------------------------------------------------------------------
The FQED ending on or about January 1, 1998 1.25 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about April 30, 1998 1.05 to 1.00
- -------------------------------------------------------------------------------
The FQED ending on or about July 31, 1998 1.15 to 1.00
-------------------------------------------------------------------------------
3
<PAGE> 5
- --------------------------------------------------------------------------------
The FQED ending on or about October 30, 1998 1.20 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about January 31, 1999 and 1.25 to 1.00
thereafter
- --------------------------------------------------------------------------------
6. Except as specifically amended or modified by this Agreement, all
terms and conditions set forth in the Credit Agreement and the Security
Document remain in full force and effect.
7. This Agreement shall be governed by and construed in accordance with
the laws of the State of Connecticut.
8. The Company shall reimburse the Agent for the fees and expenses of its
counsel in connection with this Agreement.
9. This Agreement may be executed in two or more counterparts, each of
which shall constitute an original but all of which when taken together shall
constitute but one agreement.
II. REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants as follows:
1. The representations and warranties set forth in the Credit Agreement
are true and correct in all material respects on the date hereof as if made on
the date hereof.
2. After giving effect to this Agreement, no Event of Default has occurred
and is continuing, and no event or condition has occurred or exists which would
constitute an Event of Default but for the giving of notice or passage of time
or both.
III. CONDITIONS TO EFFECTIVENESS
This Agreement shall be effective upon satisfaction of the following
conditions:
1. The Agent shall have received counterparts of this Agreement which,
when taken together, bear the signatures of all parties hereto.
2. The representations and warranties of the Company set forth in
Section II of this Agreement shall be true and correct in all respects.
4
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this agreement to be executed
and delivered as of the date first above written.
DAIRY MART CONVENIENCE STORES, INC.
By: /s/ Susan D. Adams
---------------------
Name: Susan Adams
Title: Vice President
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By: /s/ Scott S. Barnett
----------------------
Name: Scott S. Barnett
Title: Vice President
HELLER FINANCIAL, INC.
By: /s/ William P. Watkins
------------------------
Name: William P. Watkins
Title: Vice President
STATE STREET BANK AND TRUST COMPANY
By: /s/ Karen F. Booth
------------------------
Name: Karen Booth
Title: Vice President
5
<PAGE> 1
Exhibit 10.20
EXHIBIT E
LIMITED PARTNERSHIP AGREEMENT
of
DM Associates Limited Partnership
March 12, 1992
<PAGE> 2
TABLE OF CONTENTS
-----------------
ARTICLE I - Definitions and Parties.............................................
- -----------------------------------
Section 1.1 - Definitions..................................................
ARTICLE II - Formation .........................................................
- ----------------------
Section 2.1 - Formation ...................................................
Section 2.2 - Name ........................................................
Section 2.3 - Office and Agent for Service.................................
Section 2.4 - Documents to Be Filed........................................
ARTICLE III - Purposes and Powers ..............................................
- ---------------------------------
Section 3.1 - Purposes and Powers..........................................
ARTICLE IV - Term...............................................................
- -----------------
Section 4.1 - Term.........................................................
ARTICLE V - Partners and Capital................................................
- --------------------------------
Section 5.1 - Capital Contributions........................................
Section 5.2 - Additional Limited Partners..................................
Section 5.3 - Capital Accounts.............................................
Section 5.4 - Non-Assessability............................................
Section 5.5 - Limitation of Liability of
Limited Partners.............................................
Section 5.6 - withdrawal; Interest.........................................
ARTICLE VI - Distributions of Cash; Allocations of
- --------------------------------------------------
Income and Loss ...........................................................
---------------
Section 6.1 - General .....................................................
Section 6.2 - Distributions of Cash Flow...................................
Section 6.3 - Distributions of Cash from
Interim Capital Transactions.................................
Section 6.4 - Distributions on Liquidation.................................
Section 6.5 - Allocation of Net Profits and Net
Loss.........................................................
Section 6.6 - Allocation of Gain and Loss
from Capital Transactions....................................
Section 6.7 - Allocation of Net Profit and Net
Loss from Capital Transaction Upon
a Liquidation of the Partnership.............................
Section 6.8 - Minimum Gain Chargeback;
Qualified Income Offset......................................
Section 6.9 - Monthly Segments; Allocations
Among Partners ..............................................
<PAGE> 3
Section 6.10 - No Negative Restoration.....................................
Section 6.11 - Accounting .................................................
Section 6.12 - Book-up Provisions..........................................
Section 6.13 - Section 704(c) Allocations..................................
Section 6.14 - Special 35% Profits Limitation..............................
ARTICLE VII - Tax Matters Partner...............................................
- ---------------------------------
Section 7.1 - Tax Matters Partner..........................................
ARTICLE VIII - Rights. Obligations and Representations
- ------------------------------------------------------
of the General Partner .................................................
----------------------
Section 8.1 - Power and Authority of the General
Partner......................................................
Section 8.2 - Actions Requiring a Super Majority...........................
Section 8.3 - Notification of Approval Required............................
Section 8.3A - Actions Requiring a Majority ...............................
Section 8.4 - Reimbursement ...............................................
Section 8.5 - Representations by General Partner...........................
Section 8.6 - Other Activities.............................................
Section 8.7 - Periodic Reporting...........................................
ARTICLE IX - Other Partner Provisions...........................................
- -------------------------------------
Section 9.1 - Actions of the General Partner...............................
Section 9.2 - Third Party Reliance.........................................
ARTICLE X - Rights and Obligations of Limited Partners..........................
- ------------------------------------------------------
Section 10.1 - Authority of Limited Partners...............................
Section 10.2 - Rights of Limited Partners..................................
Section l0.3 - Assignment by Partners......................................
Section 10.4 - Right of First Refusal......................................
Section 10.5 - Right to Gift Interest......................................
ARTICLE XI - Special Transfer Provisions
- ----------------------------------------
ARTICLE XII - Power of Attorney.................................................
- -------------------------------
Section 12.1 - Power of Attorney...........................................
Section 12.2 - Assignment..................................................
Section 12.3 - Admission of Limited Partner................................
Section 12.4 - Irrevocable.................................................
Section 12.5 - Amendments by General Partner...............................
-ii-
<PAGE> 4
ARTICLE XIII - Indemnification..................................................
- ------------------------------
Section 13.1 - Indemnification of General Partner..........................
Section 13.2 - Indemnification of Partnership..............................
ARTICLE XIV - Restriction Against Transfers By General
- ------------------------------------------------------
Partner; Removal of General Partner..............................
-----------------------------------
Section 14.1 - Removal of General Partner..................................
Section 14.2 - Effect of Removal...........................................
Section 14.3 - Successor General Partner ..................................
Section 14.4 - Transfer of General Partner's
Interest
ARTICLE XV - Dissolution and Termination........................................
- ----------------------------------------
Section 15.1 - Events of Dissolution ......................................
Section 15.2 - Priority of Distribution....................................
Section 15.3 - Period of Dissolution.......................................
Section 15.4 - Statement ..................................................
Section 11.5 - Liability for Capital
Contributions ..............................................
ARTICLE XVI - Concluding Provisions.............................................
- -----------------------------------
Section l6.l - Entire Agreement............................................
Section 16.2 - Amendments .................................................
Section 16.3 - Successors .................................................
Section 16.4 - Captions ...................................................
Section 16.5 - Notice .....................................................
Section 16.6 - Arbitration ................................................
Section 16.7 - Counterparts ...............................................
Section 16.8 - Partial Invalidity..........................................
Section 16.9 - Counsel ....................................................
Section 16.10 - Applicable Law.............................................
Section 16.11 - Exhibits ..................................................
Section 16.12 - Genders ...................................................
-iii-
<PAGE> 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 Parties
-----------------------
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 context .
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
<PAGE> 6
-2-
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 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,
<PAGE> 7
-3-
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.
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
<PAGE> 8
-4-
Irrevocable Special Proxy granted by the Partnership to the CDA, 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 B Common Stock, Par value $.0l
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;
<PAGE> 9
-5-
(c) the liquidation of the Partnership within the meaning of
Regulations Section 1.704-l(b)(2)(ii)(g);
(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 l.704-l(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)(l) shall be included in taxable income or
loss), with the following adjustments:
(a) My income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in compu-
<PAGE> 10
-6-
ting 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)(B) or treated as I.R.C. Section 705(A)(2)(b) expenditures pursuant to
Regulations Section l.704-l(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 reference to the Gross Asset Value of the property
disposed 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 B 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 B 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.
<PAGE> 11
-7-
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 Partner, all amounts
previously distributed to the Class A Limited Partner under Section 6.3(a) and
with respect to the Class B Limited Partner all amounts previously distributed
to the Class B Limited Partner under Section 6.3(c).
<PAGE> 12
-8-
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, Enficid, 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 f or 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 Partnership 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, agree-
<PAGE> 13
-9-
ments, mortgages, leases, notes and other documents and perform all acts
contemplated by this Agreement in furtherance of, or incidental to, such
purpose.
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 B
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 B Limited Partners to the
Partnership so long as (i) such
<PAGE> 14
-10-
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 B Limited Partner, (iii) such additional Class B 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 B 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 partners taken together, shall
constitute a single instrument.
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 any 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.
<PAGE> 15
-11-
(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 l.704-l(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
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
<PAGE> 16
-12-
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
deems 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 estab-
<PAGE> 17
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lishment 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;
(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;
<PAGE> 18
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(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.
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:
<PAGE> 19
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(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
<PAGE> 20
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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;
(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
<PAGE> 21
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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 l.704-l(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 Account(s) 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 l.704-l(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
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)(B) 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
<PAGE> 22
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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 B
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
<PAGE> 23
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begin on the date of commencement or end on the date of such termination,
as the case may be.
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-l(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 35%. In the
event that the Individual Class B Limited Partner's profits interest in the
Partnership were to exceed 35% (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
<PAGE> 24
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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.
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 8.1(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.
<PAGE> 25
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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.
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
<PAGE> 26
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(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)
<PAGE> 27
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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 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
<PAGE> 28
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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 .
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.
<PAGE> 29
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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
<PAGE> 30
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(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
(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 terms 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
<PAGE> 31
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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 re-subjected 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:
(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.
<PAGE> 32
-28-
(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.
<PAGE> 33
-29-
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,
<PAGE> 34
-30-
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, 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
<PAGE> 35
-31-
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 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
<PAGE> 36
-32-
Statutes ("Event of Withdrawal") by, of, or 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 following 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 l1.l(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
<PAGE> 37
-33-
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.
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
<PAGE> 38
-34-
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 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
<PAGE> 39
-35-
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
<PAGE> 40
-36-
name of the arbitrator; and, thereupon, the other party hereto, shall 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
<PAGE> 41
-37-
include the plural, and vice versa, unless the context otherwise requires.
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 [Illegible Signature]
---------------------------------
Its Vice President
Class B Limited Partners
/s/ Charles Nirenberg
------------------------------------
Charles Nirenberg
THE NIRENBERG FAMILY CHARITABLE
FOUNDATION, INC.
By /s/ Charles Nirenberg
---------------------------------
Its President
<PAGE> 42
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/ [ILLEGIBLE SIGNATURE]
----------------------------------------
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 of
HNB INVESTMENT CORP., 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/ [ILLEGIBLE SIGNATURE]
----------------------------------------
Notary Public
My Commission Expires: March 31, 1995
Commissioner of the Superior Court
<PAGE> 43
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/ [ILLEGIBLE SIGNATURE]
----------------------------------------
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 of THE
NIRENBERG FAMILY CHARITABLE FOUNDATION, INC., 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/ [ILLEGIBLE SIGNATURE]
----------------------------------------
Notary Public
My Commission Expires: March 31, 1995
Commissioner of the Superior Court
<PAGE> 44
EXHIBIT A
---------
<TABLE>
<CAPTION>
Capital Percentage
Partner Contribution Interest
------------ --------
General Partner
- ---------------
<S> <C> <C>
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%
</TABLE>
<PAGE> 45
EXHIBIT F
---------
Agreement relating to the Joint Filing of this
Schedule 13D as required by Rule 13d-1(f)
<PAGE> 46
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Statements of Operations and Consolidated Balance Sheets and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 3,806
<SECURITIES> 3,629
<RECEIVABLES> 17,211
<ALLOWANCES> 2,241
<INVENTORY> 16,808
<CURRENT-ASSETS> 42,492
<PP&E> 133,180
<DEPRECIATION> 50,591
<TOTAL-ASSETS> 165,104
<CURRENT-LIABILITIES> 55,097
<BONDS> 94,392
0
0
<COMMON> 65
<OTHER-SE> 6,380
<TOTAL-LIABILITY-AND-EQUITY> 165,104
<SALES> 0
<TOTAL-REVENUES> 501,359
<CGS> 364,932
<TOTAL-COSTS> 130,077
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,856)
<INTEREST-EXPENSE> 10,612
<INCOME-PRETAX> (2,406)
<INCOME-TAX> 696
<INCOME-CONTINUING> (1,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,710)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
