<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 30, 1999
[ ] 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
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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 26, 1999, 3,222,598 shares of Class A Common Stock and 1,485,199
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 $13,937,741.
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DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's 1999 definitive proxy statement to be filed pursuant to
Registration 14A within 120 days after the end of the Registrant's fiscal year
are incorporated by reference in Part III.
PART I
------
ITEM 1. BUSINESS
BUSINESS OUTLOOK
This Form 10-K contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include statements relating to the
Company's plans and objectives to upgrade and remodel store locations, to build
new stores and increase gasoline sales, 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.
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 618 stores under the
"Dairy Mart" name in seven states located in the Midwest and Southeast United
States. 282 stores sell gasoline and 141 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
care aids, tobacco products, select highly consumable general merchandise,
lottery tickets, money orders and select customer focused services. The stores
are typically located in densely populated, suburban areas on sites which are
easily accessible to customers and provide ample parking. Dairy Mart stores are
generally free standing structures which are well-lit and are designed to
encourage customers to purchase high profit margin products, such as deli items,
coffee, fountain drinks and other fast food items.
The Company is incorporated in Delaware and maintains its principal executive
offices at One Dairy Mart Way, 300 Executive Parkway West, Hudson, Ohio 44236.
The Company's telephone number is (330) 342-6600.
STORES
The Company's stores are generally located in suburban areas, and are situated
close to single-family homes and apartments to attract neighborhood shoppers.
Store location, design, lighting and layout are intended to cater to customers'
desire for fast and convenient access. 282 locations also sell gasoline, which
the Company believes is an important convenience for customers. Shelving and
displays, including refrigeration units, deli and other fast food counters and
displays, are designed to encourage customers to purchase high profit margin
products including impulse purchase items such as candy, fountain drinks and
ice cream novelties. All of the Company's stores also offer extended hours for
additional convenience, with over one-half of the stores open 24 hours per day.
A typical Dairy Mart store ranges between 2,400 and 3,800 square feet and is a
free standing structure.
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As of January 30, 1999, the Company operated and franchised retail convenience
stores in the following states:
<TABLE>
<CAPTION>
Number of
Stores
---------
<S> <C>
Ohio 388
Kentucky 129
Michigan 32
Pennsylvania 30
Indiana 20
Tennessee 13
North Carolina 6
---
Total Stores 618
---
</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 30, 1999 January 31, 1998 February 1, 1997
------------------------------ ------------------------------ ------------------------------
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 469 158 627 543 268 811 587 290 877
Opened or acquired 25 - 25 7 - 7 9 - 9
Closed or sold (16) (18) (34) (89) (102) (191) (55) (20) (75)
Transferred (net) (1) 1 0 8 (8) - 2 (2) -
----- ------ ------ ----- ------ ------ ------ ------ ------
At end of period 477 141 618 469 158 627 543 268 811
===== ====== ====== ===== ====== ====== ====== ====== ======
</TABLE>
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 1999, the Company closed 21 of its
retail facilities because of their inability to meet the Company's economic and
non-economic criteria for long-term stability and growth. An additional 13
stores were sold to independent operators in fiscal year 1999.
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NEW STORES
A major component of the Company's growth strategy is to continue to build new
stores and increase gasoline sales. During fiscal year 1999, the Company opened
twenty-five new 3,800 square-foot-stores, all which offer gasoline through
modern facilities which include credit card readers in the gasoline dispensers.
The Company plans to accelerate the pace of new store development during fiscal
year 2000, with a target of up to 40 new stores by the end of fiscal year 2000.
The Company believes adequate sources of financing will continue to be
available to support new store development.
TECHNOLOGICAL UPGRADE
During fiscal year 1999, the Company entered the final 18-month phase of its
chain-wide, reengineering project that included installation of a new Unix-based
host accounting system, new point-of-sale (POS) devices, new fueling automation
systems, new laptop computers for managers, and computers for store-based
customer service managers.
RETAIL AUTOMATION IMPLEMENTATION
<TABLE>
<CAPTION>
ACTUAL/PROJECTED COMPLETION
---------------------------------------------
PHASE/INITIATIVE FY'98 FY'99 FY'00 FY'01
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Phase I: POS Rollout 100%
Phase II: Implement Host Accounting System 100%
Phase III: Implement Store-Level Computer
Systems 100%
Phase IV: Implement Centralized Automated
Pricebook 25% 75%
Phase V: Implement Evolution Initiatives
* Payroll Time & Attendance 100%
* Process Payroll from Money Order
Device 50% 50%
* Computer Assisted Ordering 30% 70%
</TABLE>
Phases one, two and three provided a new foundation for store accounting and
management reporting. The new host system is driven by the concept of
centralized store control. This allows for the collection and distribution of
more detailed and timely information from store operations and provides the
basis for the formation and implementation of improved merchandising strategies.
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Phase four, the implementation of a centralized automated pricebook, allows the
definition of market zones and the management of a retail pricing strategy from
the corporate office. The implementation of a centralized automated pricebook is
expected to improve retail margins through increased accuracy of retail pricing
and verification of agreed upon vendor costs. Additionally, the pricebook is
expected to save data entry time, reduce data entry errors, and provide greater
control over store merchandise inventory.
GASOLINE OPERATIONS
Gasoline sales accounted for approximately 34% of total revenue in fiscal year
1999, 38% for fiscal year 1998 and 42% in fiscal year 1997. As of January 30,
1999, 282 stores sold gasoline.
The Company's gasoline pricing strategy has historically been designed, in part,
to provide value to customers by offering the same quality gasoline offered by
major oil companies at prices which are generally below nationally advertised
brands and comparable to other convenience store chains. The Company obtains its
gasoline from major oil company suppliers, primarily through spot market
purchases, and believes that there are adequate supplies of fuel available from
a number of sources at competitive prices.
In an effort to provide name-brand recognition, the Company entered into a long
term agreement with Chevron U.S.A. Products Company in August 1998, to sell
branded gasoline at approximately fifty eight of its locations in Kentucky and
Southern Indiana. The Company finished conversion of these stores during the
fourth quarter of fiscal year 1999. During fiscal year 2000, the Company expects
to finalize the appropriate major-oil brand affiliation for most of its gasoline
dispensing stores in Ohio and Michigan. Branding the Company's gasoline assets
has improved the overall quality of these assets and is considered important in
attracting new customers who prefer to purchase major-oil branded gasoline.
Branding also offers the Company access to the credit card base of the branding
partner, whose branded customers tend to purchase higher octane fuels that
carry a higher gross margin.
Gasoline profit margins have a significant impact on the Company's income. Such
profit margins could be adversely influenced by factors beyond the Company's
control, such as volatility in the wholesale gasoline market due to supply
interruptions. In addition, gasoline profit margins are continually influenced
by competition in each local market area.
PRODUCT SELECTION
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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 282 stores), cigarettes, health and beauty aids,
publications, lottery tickets and money orders.
The Company has installed branded food service which carries a
relatively higher gross profit margin, at 29 store locations, including 19 Taco
Bells(R), 1 Pizza Hut(R) and 8 Subways(R). The Company opened five branded
food service locations, during fiscal year 1999. The Company has entered into
an exclusive agreement with Restaurants Developers Corporation to develop Mr.
Hero quick-serve restaurants in selected stores in most of Ohio and all of
Kentucky. The Company also has an agreement to install Arabica(R) Coffee houses
in selected stores. Mr. Hero(R) sandwiches and Arabica(R) Coffee houses are
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.
The Company has signed a five year agreement with Millstone, a subsidiary of
Proctor & Gamble, to exclusively sell Millstone brand coffee blends in Dairy
Mart stores. Dairy Mart will be the only convenience store chain in its markets
selling Millstone coffee.
The Company has also entered into a five year agreement with Coca-Cola Fountain,
U.S.A., to exclusively sell Coca-Cola fountain products in the store's fountain
centers.
In March 1999, the Company entered into an agreement to provide no-fee ATM
services at all of its locations. The contract term is for one year and is
renewable for an additional seven year term. The Company believes this service
should be a significant traffic builder.
FRANCHISE OPERATIONS
The Company franchises 141 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.
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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 30, 1999, there were 56 full franchise
locations and 85 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 1999, there were 236 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 most stores to complement its marketing strategy, which is
derived, in part, from market history and research. In-store, newspaper,
direct-mail advertising, special promotions, outdoor billboard and radio and
television advertising usually feature certain specially priced items designed
to attract today's time-constrained consumers in search of convenience related
items, and typically include national brand items for which advertising costs
are often supplemented by the national brand vendor partners. Sales promotions
are generally established and maintained on a bi-weekly or monthly basis.
COMPETITION
The convenience store and retail gasoline industries are highly competitive. The
number and type of competitors vary by location. The Company presently competes
with other convenience stores, large integrated gasoline service station
operators, supermarket chains, neighborhood grocery stores, independent gasoline
service stations, fast food operations and other similar retail outlets, some of
which are well recognized national or regional retail chains. Some of the
Company's competitors have greater financial resources than the Company. Key
competitive factors include, among others, location, ease of access, store
management, product selection, pricing, hours of operation, store safety,
cleanliness, product promotions and marketing.
SEASONALITY
Weather conditions have a significant effect on the Company's sales, as
convenience store customers are more likely to go to stores to purchase
convenience goods and services, particularly higher profit margin items such as
fast food items, fountain drinks and other beverages, when weather conditions
are favorable. Accordingly, the
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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 30, 1999, exclusive of franchisees and franchisees' employees, the
Company employed, on a full-time or part-time basis, approximately 3,600
employees. The Company has not experienced any work stoppages. There are no
collective bargaining agreements between the Company and any of its employees.
ENVIRONMENTAL COMPLIANCE
The Company incurs ongoing costs to comply with federal, state and local
environmental laws and regulations, including costs for assessment, compliance,
remediation and certain capital expenditures relating to its gasoline
operations. These laws and regulations relate primarily to underground storage
tanks ("USTs"). The United States Environmental Protection Agency has
established standards for, among other things: (i) maintaining leak detection;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing USTs to prevent future releases; (v) keeping appropriate
records; and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. A number of states in which the Company operates
also have adopted UST regulatory programs. The Company has retained an outside
third party to perform testing and remediation services.
In the ordinary course of business, the Company periodically detects releases of
gasoline or other regulated substances from USTs it owns or operates. As part of
its program to manage USTs, the Company is involved in environmental assessment
and remediation activities with respect to releases of regulated substances from
its existing and previously operated retail gasoline facilities. The Company
accrues its estimate of all costs to be incurred for assessment and remediation
for known releases. These accruals are adjusted if and when new information
becomes known. Additionally, the Company records receivables based upon the
estimated reimbursement 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 was obligated to either upgrade or replace most existing USTs it owned
or operated or close them by December 22, 1998 to meet certain corrosion,
overfill- and spill-protection and leak-detection requirements. The Company met
this obligation prior to December 22, 1998 for all operating locations. Gasoline
operations at 14 locations were closed on or prior to December 22, 1998. The
Company is in the process of negotiating for the sale of these locations. There
can be no assurance that the Company will be able to sell these locations.
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ITEM 2. PROPERTIES
Of the 618 stores in operation as of January 30, 1999, 61 store locations were
owned by the Company and 557 were leased. In addition, the Company owns 21
locations and is the primary lessee for 36 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 building and
manufacturing facility located in Cuyahoga Falls, Ohio (see Note 1 to the
Consolidated Financial Statements). The Company relocated its corporate
headquarters to a 47,000 square foot facility in Hudson, Ohio which is leased
from a third party. In addition, 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. In October 1998, the Company entered into a long term lease for the
former corporate headquarters. Effective April 1999, the Company entered into
an agreement to sell the former corporate headquarters.
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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 year 1996, in two
shareholder derivative actions. The two cases have been consolidated as Dairy
Mart Convenience Stores, Inc. Derivative Litigation, and the case is currently
pending in the Delaware Court of Chancery of New Castle County as Consolidated
C.A. No. 14713. 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, that
certain interests in the general partner of DM Associates should be vested in
the Company, and that the voting rights associated with the Class B Common Stock
held by DM Associates should be neutralized. On August 9, 1996, the Court
granted in part and denied in part defendants' motions to dismiss. The Court
held the 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 now closed and both sides have moved for
summary judgment and are awaiting the Court's decision. 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 complaint alleges lost profits in the
amount of $3.7 million. Both sides have moved for summary judgment which was
subsequently denied on March 12, 1999 for both parties. 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 has recognized no
provision for any possible loss in the accompanying financial statements.
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
None
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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. The Company's Class A Common Stock and
Class B Common Stock trade on the American Stock Exchange under the symbols DMCa
and DMCb, 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 for the last two fiscal years.
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock
--------- --------
High Low High Low
------------------------------------------------------------------------
Fiscal Year Ended January 30, 1999:
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 4 5/8 3 9/16 4 3/4 3 7/8
Second Quarter 4 1/2 3 9/16 4 3/8 3 5/8
Third Quarter 4 2 7/8 4 3/8 3
Fourth Quarter 4 3/8 3 1/4 4 1/4 2 3/4
------------------------------------------------------------------------
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
------------------------------------------------------------------------
</TABLE>
There were approximately 948 holders of the Company's Class A and Class B Common
Stock as of April 26, 1999. Included in this number are shares held in nominee
or street names.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEARS ENDED JANUARY 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- --------- ---------- ----------- -----------
OPERATING RESULTS:
<S> <C> <C> <C> <C> <C>
Revenues $477,047 $501,359 $585,746 $ 571,311 $ 596,782
----------------------------------------------------------
Interest Expense 10,806 10,612 10,877 9,661 10,435
----------------------------------------------------------
Income (Loss) Before Income Taxes,
Extraordinary Item and Cumulative Effect
of Account Change(a) 175 (1,999) (2,529) (9,492) (17,192)
----------------------------------------------------------
Net Income (Loss)(a) 25 (1,468) (1,836) (6,162) (11,075)
----------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Before Extraordinary Item and Cumulative
Effect of Accounting Change(a) .01 (.32) (.41) (1.15) (1.93)
----------------------------------------------------------
Net Earnings (Loss) Per Share-Basic
and Diluted(a) .01 (.32) (.41) (1.15) (2.00)
----------------------------------------------------------
BALANCE SHEET DATA:
Net Property and Equipment $ 98,829 $ 82,589 $ 89,448 $ 80,387 $ 70,578
----------------------------------------------------------
Total assets(a) 181,331 167,647 177,805 167,188 174,640
----------------------------------------------------------
Long-term obligations (b) 108,507 96,448 110,428 100,881 90,268
----------------------------------------------------------
Stockholders' Equity(a) 9,257 8,988 10,214 11,459 25,230
----------------------------------------------------------
OTHER DATA:
Earnings Before Interest Expense, Income
Taxes, Depreciation and Amortization
(EBITDA) (a)(c) $ 21,233 $ 19,455 $ 20,222 $12,559 $ 5,720
----------------------------------------------------------
</TABLE>
(a) As restated from previously reported for the change from the LIFO inventory
valuation method.
(b) Long-term obligations include the current portion of long-term obligations.
(c) 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
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998
AND FEBRUARY 1, 1997
(in thousands, except number of locations, gross
profits per gallon and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
FINANCIAL DATA:
Revenues:
Merchandise Sales $313,076 $306,062 $335,661
Gasoline Sales 159,815 191,956 245,718
Other 4,156 3,341 4,367
------------ ------------ -------------
Total Revenues $477,047 $501,359 $585,746
------------ ------------ -------------
Net income (loss) (1) $ 25 $ (1,468) $ (1,836)
------------ ------------ -------------
STORE DATA:
Company Operated:
Gross profit(1) $103,229 $ 99,594 $106,283
Average sales per store (2) $651 $ 590 $ 562
Average gross profit per store (2) $219 $ 200 $ 188
Number of stores at year end 477 469 543
Franchise Operated:
Franchise fee $ 10,255 $ 12,481 $ 18,264
Average sales per store (2) $ 612 $ 572 $ 577
Average franchise fees per store (2) $ 68 $ 61 $ 65
Number of stores at year end 141 158 268
Total Stores:
Gross profit(1) $113,484 112,075 124,547
Average sales per store (2) $ 641 $ 584 $ 567
Average Combined Gross Profit
and Franchise Fees per $ 182 $ 160 $ 148
Store (2)
Number of stores at year end 618 627 811
GASOLINE DATA:
Gallons Sold 169,916 171,269 209,478
Gross profit $ 20,085 $ 21,418 $ 25,082
Average gallons sold per 590 535 571
location
Gross profit per gallon $ 0.1182 $ 0.1251 $ 0.1138
Number of gasoline locations
at year end 282 293 360
OTHER DATA:
Weighted average number of 4,679 4,605 4,441
shares
Book value per share (3)(1) $ 1.32 $ 1.31 $ 1.63
</TABLE>
(1) As restated from previously reported for the change from the LIFO inventory
valuation method.
(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 1999, 1998 and 1997, respectively.
(3) The calculation utilizes total outstanding shares including the dilutive
effect of stock options, stock grants and stock warrants as of January 30,
1999, January 31, 1998 and February 1, 1997, respectively.
-15-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
During fiscal year 1998, the Company sold 156 convenience store and retail
gasoline locations in the northeastern United States for $39.1 million. The
Company also sold a former office and 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 1999 compared to fiscal year
1998 and fiscal year 1998 compared to fiscal year 1997 is based on unaudited Pro
Forma Consolidated Statements of Operations for fiscal years 1998 and 1997. The
unaudited Pro Forma Consolidated Statements of Operations as presented below
reflect the exclusion, for fiscal years 1998 and 1997, 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 asset sales had been received as of the
beginning of fiscal year 1997, and also reflect the elimination of the estimated
income tax effect of the associated excluded results of operations for the
assets sold. The unaudited Pro Forma Consolidated Statements of Operations also
reflect the change from the LIFO inventory valuation method retroactively
applied.
FISCAL YEAR 1999 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1998 RESULTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
For the Years Ended January 30, 1999, January 31, 1998 and February 1, 1997
<TABLE>
<CAPTION>
Pro Forma Pro forma
1999 1998 1997
------ ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues $ 477.0 $459.3 $471.7
Cost of goods sold and expenses:
Cost of goods sold 339.3 333.0 346.1
Operating & administrative expenses 126.7 121.9 119.4
Interest expense 10.8 10.3 10.5
------- ------ -------
476.8 465.2 476.0
Income (loss) before income taxes 0.2 (5.9) (4.3)
(Provision) benefit from income taxes (0.2) 1.6 1.2
------- ------ -------
Net income (loss) $ 0.0 $ (4.3) $ (3.1)
Income (loss) per share $ 0.01 $(0.93) $(0.70)
</TABLE>
-16-
<PAGE> 17
REVENUES
Revenues for fiscal year 1999 increased $17.7 million compared to fiscal year
1998. A summary of revenues by functional area is shown below:
<TABLE>
<CAPTION>
Pro
Forma
1999 1998
------ ------
(in millions)
<S> <C> <C>
Convenience Stores $313.0 $285.7
Gasoline 159.8 170.5
Other 4.2 3.1
====== ======
Total $477.0 $459.3
====== ======
</TABLE>
Convenience store revenues increased $27.3 million, or 9.6%, in fiscal year 1999
compared to fiscal year 1998 as a result of a 9.2% increase in comparable
Company operated store sales and the opening of twenty-five new stores during
fiscal year 1999, partially offset by the closure and/or sale of thirty-four
underperforming stores during the last twelve months. Although the reduction in
stores had a negative impact on revenues, it did not have a material adverse
effect on results of operations, because the majority of stores closed and/or
sold had been operating at a loss.
Gasoline revenues decreased $10.7 million in fiscal year 1999 compared to fiscal
year 1998 as a result of a decrease in the average selling price of gasoline of
16.0 cents per gallon primarily due to a general market decline in retail
gasoline prices during fiscal year 1999. This decline in gasoline revenues was
partially offset by an increase in gallons sold of 14.4 million primarily as a
result of opening of new stores.
GROSS PROFITS
Gross profits increased $11.4 million from fiscal year 1998 to fiscal year 1999.
A summary of gross profits by functional area is shown below:
<TABLE>
<CAPTION>
Pro
Forma
1999 1998
------ ------
(in millions)
<S> <C> <C>
Convenience Stores $113.4 $103.7
Gasoline 20.1 19.5
Other 4.2 3.1
====== ======
Total $137.7 $126.3
====== ======
</TABLE>
-17-
<PAGE> 18
Convenience store gross profit increased by $9.7 million in fiscal year 1999
compared to fiscal year 1998. The increase was a result of the increase in
convenience store sales, as described above. Convenience store gross profit
margins remained constant in fiscal year 1999 compared to fiscal year 1998.
Gasoline gross profits increased $0.6 million in fiscal year 1999 compared to
fiscal year 1998. This increase is primarily attributable to the increase in
gallons sold in fiscal year 1999 compared to fiscal year 1998, offset partially
by a decrease in gross profit per gallon of $.007.
Other revenues and gross profits increased $1.1 million in fiscal year 1999
compared to fiscal year 1998. In fiscal year 1999, the Company recognized a $3.0
million one-time pre-tax fee earned through the termination of a long-term ATM
(automatic teller machine) agreement. The Company's former partner in the
agreement agreed to the termination fee in lieu of its ongoing payment
obligations under the agreement which were approximately $130,000 per month.
This fee was partially offset by a decrease in interest income. In fiscal year
1998, proceeds received from the sale of certain assets were invested resulting
in higher interest income.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses increased $4.8 million in fiscal year 1999
compared to fiscal year 1998. A summary of operating and administrative expenses
is shown below:
<TABLE>
<CAPTION>
Pro
Forma
1999 1998
--------- ---------
(in millions)
<S> <C> <C>
Operating Expenses $ 99.8 $ 94.7
General & Administrative 26.9 27.2
Expenses
========= =========
Total $126.7 $121.9
========= =========
</TABLE>
The increase was primarily due to higher store wages, depreciation expense,
repair and maintenance expenses, and certain expenses related to the relocation
of the Company's information processing center from Connecticut to Ohio. These
increases were partially offset by lower environmental remediation expenses.
INTEREST EXPENSE, INFLATION AND TAXES
Interest expense in fiscal year 1999 increased $0.5 million compared to fiscal
year 1998 as a result of increased borrowings under the Company's revolving line
of credit.
Inflation did not have a material effect on the Company's revenues, gross
profits, operating and administrative expenses in fiscal years 1999 and 1998.
The effective tax rate for the Company was a provision of 85.7% and a benefit of
26.6% for fiscal years 1999 and 1998, respectively. The higher effective tax
rate in
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<PAGE> 19
the current year is a result of nondeductible expenses related to the
amortization of acquired assets. (See "Notes to Consolidated Financial
Statements", Note 9).
PRO FORMA FISCAL YEAR 1998 RESULTS COMPARED TO PRO FORMA FISCAL YEAR 1997
RESULTS
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
decreases in the average selling price and in gasoline gallons sold were 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 $0.7 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 $103.7 $101.9
Gasoline 19.5 20.1
Other 3.1 3.6
====== ======
Total $126.3 $125.6
====== ======
</TABLE>
-19-
<PAGE> 20
Convenience store gross profit increased by $1.8 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.
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 primarily as a result of higher store wages,
depreciation and repair and maintenance expenses.
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 26.6% and 27.4% for
fiscal years 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates substantial operating cash flow since a majority of its
revenues are received in cash. The amount of cash generated from operations
significantly exceeded the current debt service requirements of the Company's
long-term obligations.
The Company is pursuing expansion initiatives in its retail operations (see
"Capital Expenditures"). The capital expenditures of the Company are generally
funded by the excess operating cash flow available after debt service, the
proceeds from the sale of property, equipment and assets held for sale and other
forms of long-term asset financing and/or leasing. Additionally, the Company has
a $30.0 million senior
-20-
<PAGE> 21
revolving credit facility available to address the seasonality of operations and
the timing of capital expenditures and certain working capital disbursements.
The Company can issue up to $15.0 million of letters of credit under the
facility. The facility is due and payable on April 30, 2003 (see Note 7 to the
Consolidated Financial Statements). As of January 30,1999, the Company had $10.2
million in outstanding revolving credit loans and had $7.0 million in
outstanding letters of credit under the facility.
In May 1998, the Company received a $53.7 million forward commitment that
provides real estate sale/leaseback or mortgage financing on a long-term basis
to fund the real estate acquisitions associated with its new store development
program. At the end of fiscal year 1999, the Company had $25 million available
under this agreement. The Company accounts for these real estate sale/leaseback
transactions as operating leases. In January 1999, the Company entered into a
$3.8 million sale/leaseback arrangement for equipment financing which was fully
utilized at the end of the year. The term of this lease is for 48 months with
principal and interest due on a monthly basis. The Company accounted for this
transaction as a capital lease.
The Company has a real estate mortgage loan on its former corporate headquarters
which is due and payable in June 1999. The Company has entered into an agreement
to sell this property and has elected not to refinance the mortgage pending
completion of the sale prior to June, 1999. Proceeds from the sale will be used,
in part, to retire this mortgage.
Management believes that the cash flow from operations, the proceeds from the
sale of certain assets held for sale and other forms of asset financing and/or
leasing, supplemented by the availability under the revolving credit facility,
will provide the Company with adequate liquidity and the capital necessary to
achieve its expansion initiatives.
CASH PROVIDED BY OPERATING ACTIVITIES
During fiscal year 1999, net cash generated by operations increased $3.0 million
compared to fiscal year 1998. The increase in fiscal year 1999 was primarily a
result of the Company's improved profitability and improved working capital
position, offset partially by a net decrease in other assets and liabilities.
The improvement in working capital was primarily a result of an increase in
trade and excise tax payables, partially offset by a related increase in store
merchandise inventory required to support increased store sales, as described
above. The net decrease in other assets and liabilities is primarily a result of
a decrease in the Company's environmental remediation liabilities resulting from
increased remediation expenditures during fiscal year 1999. (See Note 14).
CASH USED BY INVESTING ACTIVITIES
Net cash used by investing activities was $19.7 million in fiscal year 1999
compared to net cash provided by investing activities of $0.5 million in fiscal
year 1998. The increase in cash used by investing activities during fiscal year
1999 compared to fiscal year 1998 was primarily a result of increased capital
expenditures in fiscal year 1999 required to support the Company's growth
initiatives. The Company opened 25 new stores in fiscal year
-21-
<PAGE> 22
1999 compared to 7 new stores in fiscal year 1998. See "Capital Expenditure"
section below for further discussion of the Company's capital spending plan.
CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $8.4 in fiscal year 1999 compared
to a net use of cash of $13.9 million in fiscal year 1998. In fiscal year 1999
the Company borrowed $10.2 million under its revolving credit facility compared
to a net repayment of $10.3 million in fiscal year 1998.
CAPITAL EXPENDITURES
The Company anticipates spending approximately $25 million, net of
sale/leaseback transactions, for capital expenditures in fiscal year 2000 by
purchasing store and gasoline equipment for new stores, remodeling a certain
number of existing store and gasoline locations and implementing and/or
upgrading office and store technology.
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 14 to the
Consolidated Financial Statements.
YEAR 2000
The Year 2000 issue ("Y2K") is the result of computer software programs being
coded to use two digits rather than four to define the applicable year. Some of
the Company's older computer programs that have date-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions in
operations.
The Company's process toward resolution of its Y2K issue has been ongoing for
the past three years and the project includes a phased approach: (1) awareness;
(2) assessment and replacement; (3) contingency planning; (4) renovation; (5)
testing and certification; and, (6) production release. Phases one and two are
complete. Phases three through six are in various stages of completion, with all
remaining phases expected to be complete by September, 1999.
As a part of the Company's broader initiatives with respect to retail store
automation , the Company purchased and implemented a Y2K compliant,
commercial-off-the-shelf retail accounting system to replace the existing legacy
accounting system and related sub-systems. In conjunction with the
implementation of this system, the Company migrated its remaining financial,
human resources and other systems from an existing mainframe environment to a
new Unix-based client/server architecture
-22-
<PAGE> 23
certified to be Y2K compliant. The Company is in various stages of testing,
renovating and implementing system changes. The Company expects to complete
these internal Y2K initiatives by September, 1999.
The Company is also reviewing the efforts being undertaken by its third party
suppliers and vendors to become Y2K compliant. The Company sent questionnaires
during the fourth quarter of fiscal 1999 to all of its significant vendors and
suppliers to ascertain their state of Y2K readiness and is evaluating their
responses. The Company expects to complete assessment and testing of its
supplier and vendor Y2K compliance by June, 1999. Contingency planning efforts
will escalate following completion of third party assessments and testing and
such contingency planning efforts are expected to be complete by September,
1999.
Because the Company's scheduled replacements of mainframe systems and retail
store automation and accounting systems are considered by management to be a
planned capital expenditure and incidental to the Y2K issue, the Company does
not consider these expenditures to be specifically related to Y2K compliance and
upgrades. The Company has used internal resources to assess and address internal
and third party Y2K readiness. These internal costs are included as general and
administrative expenses in the Company's financial statements and are not
tracked separately for purposes of determining costs of Y2K readiness.
The Company's estimates regarding the expected completion dates involved in the
Company's Y2K project are based on various assumptions regarding future events,
including the availability of resources, the success of third parties in
addressing their own Y2K issues, and other factors. There are significant risks
to the Company if actual completion dates or costs differ materially from
expected completion dates and costs. These risks include the need to process
transactions manually at significant costs to the Company, significant delays in
obtaining key operational data for analysis, the inability to pay vendors,
settle receivables or procure merchandise for resale on a timely basis and to
perform other critical business functions which could have a material adverse
effect on the Company's financial position and the results of its operations.
Further, the Company cannot reasonably estimate the impact on the Company of key
third parties not successfully addressing their own Year 2000 issues, although
the Company believes that it will generally have alternative sources for
comparable products and does not expect to experience any material business
disruptions. Due to the uncertainty of these factors, the Company is unable to
quantify a worst-case scenario at this time.
-23-
<PAGE> 24
ITEM 7A. QUANTITATIVE AND QUALITIVE MARKET RISK
The Company does not have any instruments that it believes would be materially
affected by any future interest rate changes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiaries and
notes thereto, appear on pages 34 through 59 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-24-
<PAGE> 25
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 1999 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.
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<PAGE> 26
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 January 31, 1998
and is incorporated herein by reference.
(3.2) A Certificate of Designation was filed as Exhibit 1 of
the Company's Form 8-K for the January 19, 1996 event
and is incorporated herein by reference.
(3.3) The Company's Amended and Restated Bylaws were filed
as Exhibit 3.2 to the Company's Form 10-Q for the
fiscal quarter ended November 2, 1996 and are
incorporated herein by reference.
(4) Instruments defining the rights of security holders,
including indentures.
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<PAGE> 27
(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 November 27,
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.
(10.4) 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.
(10.6) 1990 Stock Option Plan is filed herewith.
(10.7) Amended and Restated 1995 Stock Option and Incentive
Award Plan was filed as Exhibit A to the Company's
1998 Annual Proxy Statement filed on Schedule 14A on
May 29, 1998 and is incorporated herein by reference.
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<PAGE> 28
(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.
(10.12) 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.
(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.
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<PAGE> 29
(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.
(10.20) DM Associates Limited Partnership Agreement, dated
March 12, 1992, was filed as Exhibit E of the
Company's Schedule 13D dated March 12, 1992, filed by
DM Associates Limited Partnership, DM Management
Associates and Frank Colaccino and is incorporated
herein by reference.
(10.21) 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.
-29-
<PAGE> 30
(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 Associate I, dated as of December 12, 1997,
was filed as Exhibit 1 of the Company's Form 8-K for
the December 12, 1997 event and is incorporated herein
by reference.
(10.26) Dairy Mart Convenience Stores, Inc. Supplemental
Executive Retirement Plan is filed herewith.
(10.27) Directors Deferred Compensation Plan is filed
herewith.
(18.1) Preferability letter of Arthur Andersen LLP regarding
change in accounting policy relating to the change in
inventory valuation methods, and filed herewith.
(21) Subsidiaries of the Company was filed as Exhibit 21 of
the Company's Form 10-K for the fiscal year ended
February 3, 1996 and is incorporated herein by
reference.
(23) Consent of Arthur Andersen LLP to the incorporation of
their reports included in this Form 10-K, for the
fiscal year ended January 30, 1999, 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
NONE.
No Financial Statements were filed with any of the Current Reports.
(c) See (3) above.
(d) See (2) above.
-30-
<PAGE> 31
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: 4/30/99
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
-31-
<PAGE> 32
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Dated: 4/30/99 /s/ Robert B. Stein, Jr.
------------- -------------------------------------
Robert B. Stein, Jr.
President, Chief Executive Officer,
Chairman of the Board (Principal
Executive Officer) and Director
Dated: 4/30/99 /s/ Gregory G. Landry
------------- -------------------------------------
Gregory G. Landry
Executive Vice President,
Chief Financial Officer, (Principal
Financial and Accounting Officer) and
Director
Dated: 4/30/99 /s/ Frank W. Barrett
------------- -------------------------------------
Frank W. Barrett
Director
Dated: 4/30/99 /s/ J. Kermit Birchfield, Jr.
------------- -------------------------------------
J. Kermit Birchfield, Jr.
Director
Dated: 4/30/99 /s/ John W. Everets, Jr.
------------- -------------------------------------
John W. Everets, Jr.
Director
Dated: 4/30/99 /s/ Thomas W. Janes
------------- -------------------------------------
Thomas W. Janes
Director
Dated: 4/30/99 /s/ Albert T. Adams
------------- -------------------------------------
Albert T. Adams
Director
-32-
<PAGE> 33
DAIRY MART CONVENIENCE STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page
------------------
Report of Independent Public Accountants on
Consolidated Financial Statements 34
Consolidated Statements of Operations
and Stockholders' Equity for the
Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 35
Consolidated Balance Sheets as of
January 30, 1999 and January 31, 1998 36
Consolidated Statements of Cash Flows for
the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 37
Notes to Consolidated Financial Statements
for the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997 38-57
Report of Independent Public Accountants
on Schedule II 58
Schedule II 59
-33-
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Dairy Mart Convenience Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Dairy Mart
Convenience Stores, Inc. (a Delaware corporation) and subsidiaries as of January
30, 1999 and January 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dairy Mart Convenience Stores,
Inc. and subsidiaries as of January 30, 1999, and January 31, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 1999, in conformity with generally accepted
accounting principles.
As explained in Note 3 to the consolidated financial statements, the Company has
given retroactive effect to a change in method of inventory valuation from the
LIFO to the FIFO method.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
April 23, 1999.
-34-
<PAGE> 35
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
===========================================================================================================
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
---------------------------------------------------------------------------------
(in thousands, except per share amounts)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues (including excise taxes of $31,265, $29,641
and $36,427) $477,047 $501,359 $585,746
Cost of goods sold and expenses:
Cost of goods sold 339,308 364,525 431,767
Operating and administrative expenses 126,758 128,221 145,631
Interest expense
10,806 10,612 10,877
---------- ---------- ---------
476,872 503,358 588,275
---------- ---------- ---------
Income (loss) before income taxes 175 (1,999) (2,529)
(Provision) Benefit from income taxes (150) 531 693
---------- ---------- ---------
Net Income (loss) $ 25 $ (1,468) $ (1,836)
Earnings (loss) per share $ .01 $ (0.32) $ (0.41)
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===========================================================================================================
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
---------------------------------------------------------------------------
(in thousands)
<CAPTION>
Common Stock
---------------------------
Class Class Retained
A B Paid-in Earnings
Shares Shares Amount Capital (Deficit)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance - February 3, 1996 as
previously stated 3,326 2,959 $ 62 $ 29,972 $ (5,821)
Adjustment for the cumulative effect on
prior years of applying retroactively
the change in the method of accounting
for inventories (See Note 3) -- -- -- -- 2,251
-------- -------- -------- -------- --------
Balance - February 3, 1996 as restated 3,326 2,959 62 29,972 (3,570)
Issuance of common stock 184 -- 2 589 --
Exchange of Class B Shares for
Class A Shares 34 (34) -- -- --
Net loss -- -- -- -- (1,836)
-------- -------- -------- -------- --------
Balance - February 1, 1997 3,544 2,925 64 30,561 (5,406)
Issuance of common stock 78 -- 1 241 --
Exchange of Class B Shares for
Class A Shares 1 (1) -- -- --
Note Receivable from DM Associates -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Net loss -- -- -- -- (1,468)
-------- -------- -------- -------- --------
BALANCE JANUARY 31, 1998 3,623 2,924 65 30,802 (6,874)
Issuance of Common Stock 78 -- 1 243 --
Exchange of Class B Shares For
Class A Shares 43 (43) -- -- --
Net Income -- -- -- -- 25
-------- -------- -------- -------- --------
Balance January 30, 1999 3,744 2,881 $ 66 $ 31,045 $ (6,849)
=====================================================================================================================
<CAPTION>
Note
Treasury Stock Receivable
--------------------- from DM
Shares Amount Associates
-------- -------- --------
<S> <C> <C> <C>
Balance - February 3, 1996 as
previously stated 698 $ (5,005) $(10,000)
Adjustment for the cumulative effect on
prior years of applying retroactively
the change in the method of accounting
for inventories (See Note 3) -- -- --
-------- -------- --------
Balance - February 3, 1996 as restated 698 (5,005) (10,000)
Issuance of common stock -- -- --
Exchange of Class B Shares for
Class A Shares -- -- --
Net loss -- -- --
-------- -------- --------
Balance - February 1, 1997 698 (5,005) (10,000)
Issuance of common stock -- -- --
Exchange of Class B Shares for
Class A Shares -- -- --
Note Receivable from DM Associates -- -- 10,000
Purchase of treasury stock 1,220 (10,000) --
Net loss -- -- --
-------- -------- --------
BALANCE JANUARY 31, 1998 1,918 (15,005) --
Issuance of Common Stock -- -- --
Exchange of Class B Shares For
Class A Shares -- -- --
Net Incomes -- -- --
-------- -------- ------
Balance January 30, 1999 1,918 $(15,005) $ --
======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-35-
<PAGE> 36
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 30, 1999 AND JANUARY 31, 1998
-------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 3,367 $ 3,806
Short-term investments 2,724 3,629
Accounts and notes receivable 15,541 14,970
Inventory 24,293 21,088
Prepaid expenses and other current assets 2,324 2,231
Deferred income taxes 1,520 1,048
--------- ---------
Total current assets 49,769 46,772
--------- ---------
Assets Held For Sale 6,327 10,715
Property and Equipment, net 98,829 82,589
Intangible Assets, net 15,452 16,017
Other Assets, net 10,954 11,554
--------- ---------
Total Assets $ 181,331 $ 167,647
</TABLE>
===============================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current maturities of long-term obligations $ 4,056 $ 2,056
Accounts payable 35,685 31,297
Accrued expenses 15,378 18,177
Accrued interest 3,713 3,567
--------- ---------
Total current liabilities 58,832 55,097
--------- ---------
Long-Term Obligations, less current portion above 104,451 94,392
Other Liabilities 8,791 9,170
Commitments and Contingencies (Notes 7, 8, 14)
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 3,744,223 and
3,622,663 issued 37 36
Class B Common Stock, par value $.01,
10,000,000 shares authorized, 2,881,156 and
2,924,016 issued 29 29
Paid-in capital 31,045 30,802
Retained deficit (6,849) (6,874)
Treasury stock, at cost (15,005) (15,005)
--------- ---------
Total stockholders' equity 9,257 8,988
--------- ---------
Total liabilities and stockholders'
equity $ 181,331 $ 167,647
</TABLE>
===============================================================================
The accompanying notes are an integral part of these balance sheets.
-36-
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS DAIRY MART CONVENIENCE STORES, INC.
AND SUBSIDIARIES
===============================================================================
For the Years ended January 30, 1999, January 31, 1998 and February 1, 1997
---------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 25 $ (1,468) $ (1,836)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 10,252 10,842 11,874
Change in deferred income taxes 127 (1,289) (814)
Loss (gain) on dispositions of
properties, net 710 (1,856) 958
Net changes in assets and liabilities:
Accounts and notes receivable 1,138 (4,562) (3,836)
Inventory (3,205) (22) 643
Accounts Payable 4,388 607 (113)
Accrued interest 146 (68) 280
Other assets and liabilities (2,690) 5,692 2,454
-------- -------- --------
Net cash provided by 10,891 7,876 9,610
operating activities
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (2,096) (1,533)
Proceeds from sale of short-term
investments 905 -- --
Purchase of property & equipment (52,398) (31,604) (23,782)
Proceeds from sale of property,
equipment, & assets held for sale 30,760 32,552 2,628
Increase in long-term notes receivable (1,176) (653) (1,435)
Proceeds from collection of long-term
notes receivable 1,544 998 1,513
(Increase) decrease in intangibles and
other assets 642 1,317 (372)
-------- -------- --------
Net cash (used for) provided by investing
activities (19,723) 514 (22,981)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term obligations and
related warrants -- -- 10,930
Repayment of long-term obligations (2,051) (3,836) (1,514)
Borrowings on revolving loan, net 10,200 (10,280) --
Issuance of common stock 244 242 591
-------- -------- --------
Net cash provided by (used for) by
financing activities 8,393 (13,874) 10,007
-------- -------- --------
Decrease in cash (439) (5,484) (3,364)
Cash at beginning of year 3,806 9,290 12,654
-------- -------- --------
Cash at end of year $ 3,367 $ 3,806 $ 9,290
</TABLE>
===============================================================================
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES:
<S> <C> <C> <C>
Cash paid during the year -
Interest $ 10,661 $ 10,544 $ 10,466
Income taxes refunded (381) (1,188) (97)
Non-cash investing and financing activities-
Note receivable from DM Associates -- 10,000 --
Purchase of treasury stock -- (10,000) --
Capital lease obligations 3,756 -- --
</TABLE>
===============================================================================
The accompanying notes are an integral part of these financial statements.
-37-
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DAIRY MART CONVENIENCE STORES,
INC. AND SUBSIDIARIES
JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
1. SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND CONSOLIDATION - The accompanying financial statements
include the accounts of Dairy Mart Convenience Stores, Inc. and its subsidiaries
(the Company). All intercompany transactions have been eliminated.
NATURE OF THE BUSINESS - The Company owns, operates and franchises convenience
retail stores, a number of which also sell gasoline. The convenience stores are
primarily located in 7 states in the Midwest and the Southeast United States.
The stores offer a wide range of products including groceries, dairy products,
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 30, 1999,
January 31, 1998 and February 1, 1997.
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 30, 1999 and January 31, 1998, 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 30, 1999 and January 31,
1998, the fair market values of the U.S. Treasury Bills approximated cost.
INVENTORY - The Company's inventory is stated at the lower of first-in,
first-out (FIFO) cost or market (see Note 3).
ASSETS HELD FOR SALE - Assets held for sale represent operating and
non-operating assets which the Company intends to sell in the near term and are
carried at the lower of cost or estimated net realizable value. The amounts the
Company may ultimately realize could differ materially from the amounts assumed
in arriving at the carrying value.
Assets held for sale at the end of fiscal year 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
<S> <C>
Buildings 30-40 years
- ----------------------------------------------------------------------------
Equipment 5-30 years
- ----------------------------------------------------------------------------
</TABLE>
Leasehold improvements are amortized primarily over the lesser of 10 years or
the term of the lease.
During fiscal year 1997, the Company changed its estimate of the useful lives
of new store and gasoline equipment placed in service in fiscal year 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).
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 30, 1999.
-38-
<PAGE> 39
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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
30, 1999, January 31, 1998 and February 1, 1997, the Company had established
reserves for these risks of $2,878,000, $4,409,000 and $5,350,000, 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 30, 1999,
January 31, 1998 and February 1, 1997, the risk-free rate of returns were 4.8%,
5.55% and 6.39%, 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).
REVENUE RECOGNITION - The Company recognizes revenues as earned, including
franchise revenues and interest income. Franchise revenues represent a
percentage of franchise store sales remitted to the Company on a weekly or
monthly basis in exchange for the Company providing merchandising,
advertising, store audit, and other operating and administrative support
services, as well as revenues derived from initial fees and the gain on sale of
store assets to franchisees. Franchise revenues were $10,255,000, $12,481,000
and $18,264,000 for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997, respectively.
STORE PREOPENING AND CLOSING COSTS Consistent with the requirements of the
American Institute of Certified Public Accountants' Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities", expenditures of a
non-capital nature associated with opening a new store are expensed as incurred.
At the time the decision is made to close a store, estimated unrecoverable costs
are charged to expense. Such costs include the net book value of abandoned
fixtures, equipment, leasehold improvements and a provision for the present
value of future lease obligations, less the present value of estimated future
sub-rental income.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share have been calculated based
on the weighted average number of shares of common stock outstanding and the
effect of stock options, if dilutive, during each year. During fiscal 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 year 1998, DM Associates
relinquished its right to the Pledged Shares in satisfaction of the note
principal and therefore these shares are reflected as treasury stock for
earnings (loss) per share purposes (See Note 15). The weighted average number of
shares used in the calculation of basic earnings (loss) per share was 4,679,186,
4,605,054 and 4,440,997 for the fiscal years ended January 30, 1999, January 31,
1998 and February 1, 1997, respectively. Dilutive earnings per share has not
been presented as the Company's basic and dilutive earnings per share are equal
for fiscal years 1999, 1998 and 1997.
NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS Effective February 1, 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which requires disclosure of comprehensive
income and its components in a full set of general purpose financial statements.
Comprehensive income is defined as changes in stockholders' equity from
non-owner sources. The adoption of this Statement had no impact on the Company
for any of the fiscal years presented.
RECLASSIFICATIONS - Certain amounts in the prior periods' Consolidated
Financial Statements have been reclassified to conform to the presentation used
for the current period.
- -------------------------------------------------------------------------------
-39-
<PAGE> 40
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
2. ACCOUNTS AND NOTES RECEIVABLE:
A summary of accounts and notes receivable as of January 30, 1999 and
January 31, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(in thousands)
<S> <C> <C>
Franchise accounts receivable $4,293 $ 8,901
Franchise notes receivable 2,894 2,654
Marketing allowances 4,665 2,390
Other receivable 8,810 8,391
----------- ----------
20,662 22,336
Less allowance for doubtful accounts and
notes receivable 2,074 2,241
----------- ----------
Net accounts and notes receivable 18,588 20,095
Less noncurrent notes receivable (included 3,047 5,125
in other assets)
----------- ----------
Current accounts and notes receivable $15,541 $14,970
</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 30, 1999 and January 31, 1998, the
fair values of the noncurrent notes receivable approximate their carrying
values.
===============================================================================
3. CHANGE IN METHOD OF INVENTORY VALUATION:
The Company has changed its method for valuing inventory and cost of
goods sold from LIFO to FIFO method in fiscal year 1999. Prior to fiscal
year 1999, approximately 57% of the stores had used the LIFO method of
valuing inventory. The change in the inventory valuation method for these
stores was made in order to more appropriately cost inventory in light of
continuing price volatility in the prices of its inventory, particularly
as it relates to price volatility in the category of cigarettes, thus
eliminating the confusion to financial statement users and to provide a
more uniform system for valuing all inventories company-wide. The
financial statements of prior years have been retroactively restated to
apply the new method. The effect of the accounting change, net of the tax
effect of 40.6%, on net loss, and earnings per share, as previously
reported for fiscal years, 1998, 1997 and prior years is:
<TABLE>
<CAPTION>
INCREASE
------------------------------------
EFFECT ON: 1998 1997 PRIOR
-----------------------------------
<S> <C> <C> <C>
Net Income $ 242 $ 50 $ 2,251
Earnings Per Share
Basic & Diluted $ .05 $.01
</TABLE>
-40-
<PAGE> 41
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
===============================================================================
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment as of January 30, 1999 and January 31,
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
(in thousands)
<S> <C> <C>
Land and improvements $ 5,779 $ 5,697
Building and leasehold
improvements 32,156 29,303
Equipment 108,517 95,365
Assets under capital leases 6,259 2,815
--------- ---------
152,711 133,180
Less accumulated depreciation
and amortization (53,882) (50,591)
--------- ---------
Property and equipment, net $ 98,829 $ 82,589
</TABLE>
================================================================================
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $2,329,000 and $
2,106,000 as of January 30, 1999 and January 31, 1998, respectively.
================================================================================
5. INTANGIBLE ASSETS:
A summary of intangibles as of January 30, 1999 and January 31, 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ------------
(in thousands)
<S> <C> <C>
Goodwill $ 14,091 $ 13,890
Franchise and operating rights 10,144 10,144
--------- ---------
24,235 24,034
Less accumulated amortization (8,783) (8,017)
--------- ---------
Intangible assets, net $ 15,452 $ 16,017
================================================================================
</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.
Management has determined that there has been no material impairment to
goodwill or franchise and operating rights as of January 30, 1999.
================================================================================
-41-
<PAGE> 42
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
6. ACCRUED EXPENSES:
A summary of accrued expenses as of January 30, 1999 and January 31, 1998
is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Accrued salaries and wages $ 4,286 $ 3,984
Accrued environmental assessment and
remediation 2,797 5,341
Other accrued expenses 8,295 8,852
------- -------
Total accrued expenses $15,378 $18,177
================================================================================
</TABLE>
7. LONG-TERM OBLIGATIONS:
The Company had the following long-term obligations as of January 30, 1999
and January 31, 1998
<TABLE>
<CAPTION>
Jan. 31,
January 30, 1999 1998
--------------------------------------
Interest Maturity
Rate (Fiscal Yr.) 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 - 12,337 12,337 12,183
Senior revolving credit facility Various 2003 - 10,200 10,200 -
Real estate mortgage notes payable 6.25%-12.0% 2000-2012 2,652 341 2,993 3,163
Small Business Administration debentures 6.9%-9.6% 2001-2006 - 3,130 3,130 4,230
Equipment financing Various 2000-2009 1,404 3,443 4,847 1,872
--------------------------------------
$4,056 $104,451 $108,507 $ 96,448
- -------------------------------------------------------------------------------------------------------------
</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 15). 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 four 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.
-42-
<PAGE> 43
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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
the principal amount reduced annually through March 15, 2002, at which time they
become redeemable at 100% of the principal amount. The terms of the Notes may
restrict, among other things, the payment of dividends and other distributions,
investments, the repurchase of capital stock and the making of certain other
restricted payments by the Company and its subsidiaries, the incurrence of
additional indebtedness and new operating lease obligations by the Company or
any of its subsidiaries, and certain mergers, consolidations and dispositions of
assets. Additionally, according to the terms of the Notes, if a change of
control occurs, as defined, each holder of the Notes will have the right to
require the Company to repurchase such holder's Notes at 101% of the principal
amount thereof.
The 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, 2003; however, the Company may extend
such date for up to two additional one-year periods with the consent of the
lenders. Certain provisions of the revolving credit facility were amended
effective November 27, 1998. Interest on revolving credit loans is computed at
an applicable margin over the agent bank's base rate or the LIBOR rate, at the
option of the Company. The applicable margin, if any, is based upon the ratio
of consolidated indebtedness to consolidated EBITDA, as defined below. The
credit agreement also provides for a commitment fee of 1/2 % on any unused
portion of the revolving credit facility. Among other restrictions, the credit
agreement contains financial covenants relating to specified levels of:
indebtedness (reduced by an amount equal to cash), to earnings before interest
expense, taxes, depreciation and amortization (EBITDA); EBITDA to interest
expense; EBITDA plus rent, less taxes paid in cash to interest expense, rent
expense and principal payments required to be made on indebtedness; and the
maintenance of a minimum net worth. At January 30, 1999, the Company was in
compliance with all covenants. In connection with the credit agreement, the
Company granted a security interest in substantially all of its non-real estate
assets and pledged as collateral the shares of capital stock of certain
subsidiary corporations of the Company.
In January 1999, the Company entered into a capital lease agreement of
approximately $3.8 million for the lease of certain equipment. The lease term
is 48 months with monthly installments of principal and interest with interest
at 10.05%. The Company intends to fund payments out of working capital.
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 30, 1999, taking into account such limitations, the Company
would not have been able to pay cash dividends.
As of January 30, 1999 and January 31, 1998, 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 30, 1999 and January 31, 1998, the fair value of the Series A and Series
B Notes, net of original issue discount, approximated the carrying amount. The
fair values of the Notes were based on quoted market prices as of January 30,
1999 and January 31, 1998, respectively. The revolving credit facility is a
variable rate loan, and thus, the fair value approximates the carrying amount as
of January 30, 1999.
As of January 30, 1999, maturities on long-term obligations for the next five
years, are as follows:
- -------------------------------------------------------------------------------
Fiscal Year
-------------
(in thousands)
2000 $ 4,056
2001 1,189
2002 3,589
2003 11,313
2004 219
- -------------------------------------------------------------------------------
-43-
<PAGE> 44
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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 30, 1999 is as follows:
<TABLE>
<CAPTION>
Operating Net
Fiscal Year Ending Leases Operating Operating
Payable Subleases Leases
-------------------------------------- -------------------------
(in thousands)
<S> <C> <C> <C> <C>
2000 $13,177 $ 994 $12,183
2001 10,761 804 9,957
2002 8,600 641 7,959
2003 6,914 539 6,375
2004 5,785 519 5,266
Thereafter 41,189 2,169 39,020
----------- -------------------------
Total $86,426 $5,666 $80,760
=================================================================
</TABLE>
===============================================================================
Rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Leases $13,516 $13,038 $15,523
Less subleases 1,999 2,509 4,000
--------- --------- ---------
Net $11,517 $10,529 $11,523
</TABLE>
===============================================================================
9. FEDERAL AND STATE INCOME TAXES:
The (provision) benefit from income taxes for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current (provision) benefit
Federal $ (23) $ (286) $ 207
State and Local -- (472) (345)
------- ------- -------
Total current provision (23) (758) (138)
------- ------- -------
Deferred (provision) benefit
Federal (103) 811 518
State and Local (24) 478 313
------- ------- -------
Total deferred (127) 1,289 831
(provision) benefit
------- ------- -------
Total (provision) benefit $ (150) $ 531 $ 693
</TABLE>
================================================================================
-44-
<PAGE> 45
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
The Company is subject to minimum state taxes in excess of statutory state
income taxes in many of the states in which it operates. A reconciliation of the
difference between the statutory federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
Percent of Pretax Income
(Loss)
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Statutory federal income 34% (34%) (34%)
tax rate
Increase (decrease) from:
State income tax
net of federal tax 14 (1) 2
effect
Nondeductible expenses
and amortization of 38 8 5
acquired assets
-------- -------- -------
Effective income tax rate 86% (27%) (27%)
</TABLE>
===============================================================================
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Significant deferred tax assets (liabilities) as of January 30, 1999
and January 31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Capitalized leases $ 161 $ 158
Depreciation and amortization (13,624) (12,504)
Vacation accrual 277 269
Reserve for asset valuations 842 910
Insurance reserves not deductible 1,082 1,508
for tax purposes
Income deferred for financial 3,341 2,210
statement purposes
Reserve for closed stores and 455 1,358
renovations
Accrued restructuring and 27 357
severance reserves
Write-down of non-operating 1,185 1,185
properties
Tax credits and net operating 9,650 8,223
loss carryforwards
Other (54) 223
-------- --------
Net deferred tax asset $ 3,342 $ 3,897
</TABLE>
As of January 30, 1999, the Company had alternative minimum tax credits
aggregating $435,000 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 years
2007 to 2011 and $332,000 of foreign tax credit carryforwards that expire, if
unused, in fiscal years 2000 to 2004. The Company and its subsidiaries file a
consolidated federal income tax return but generally file separate state income
tax returns. As of January 30, 1999, the Company had a capital loss
carryforward of $1,728,000 that will expire in fiscal year 2003. As of January
30, 1999, the Company had regular federal income tax net operating loss
carryforwards of $15,374,000 which expire, if unused, from fiscal years 2010 to
2019 and net operating loss carryforwards for state income tax purposes of
$18,903,000 which expire, if unused, from fiscal years 2000 to 2013. Realization
of the net operating loss carryforwards and tax credits are 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 30, 1999 and January 31, 1998.
================================================================================
Additionally, the Company changed its method of inventory valuation from the
LIFO method during fiscal year 1999 (see Note 3). As a result of this change,
the Company will recognize $7.4 million of income for tax purposes.
The Company expects to offset a significant portion of this taxable income with
its available net operating loss carryforwards.
================================================================================
-45-
<PAGE> 46
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
================================================================================
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.
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, 1,002,307 shares remained available for issuance as of January
30, 1999.
As of January 30, 1999, January 31, 1998 and February 1, 1997, the Company held
521,625 shares of Class A Common Stock as treasury stock. The Company held
1,395,957, 1,395,957 and 175,957 shares of Class B Common Stock as treasury
shares as of January 30, 1999, January 31, 1998 and February 1, 1997,
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 for the purchase of 61,906 Class A Common Shares
pursuant to these Plans in fiscal year 1999. No options were granted from these
plans in either fiscal year 1998 or fiscal year 1997. As of January 30, 1999,
the Company had no Class A or Class B Common Stock available for grant under the
1990 Plan. In addition to the incentive stock options granted under the above
Plans, the Company has granted 0, 47,500 and 25,125, non-qualified stock options
in fiscal years 1999, 1998 and 1997 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"). Both plans were amended in June, 1998. The Award
Plan provides for granting of stock awards and options to employees up to a
total of 1,150,000 shares of either Class A or Class B Common Stock. In fiscal
1999, 1998 and 1997, the Company granted incentive stock options for the
purchase of 120,594, 125,000 and 22,500 Class A Shares, respectively. In fiscal
year 1999, the Company granted incentive stock options for the purchase of
137,500 shares of Class B Common Stock. As of January 30, 1999, the Company had
available for grant under the Award Plan options to purchase 341,906 shares of
Class A and Class B 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, as amended,
is 150,000 shares of Class A and Class B Common Stock. The Company granted
40,000, 17,500 and 17,500 nonqualified Class A Common Stock options to Outside
Directors in fiscal years 1999, 1998 and 1997, respectively. In fiscal year
1999, the Company granted nonqualified stock options for the purchase of 25,000
shares of Class B Common Stock. As of January 30, 1999, the Company had
available for grant under the Outside Directors Plan options to purchase 60,000
shares of Class A and Class B Common Stock, after considering lapses.
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:
-46-
<PAGE> 47
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rates 5.73% 6.19% 6.24%
Expected dividend yield - % - % - %
Expected volatility Class A 40.12% 42.64% 39.00%
Expected volatility Class B 46.58% N/A N/A
Expected life in years 9.50 9.50 6.72
</TABLE>
===============================================================================
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>
1999 1998 1997
-------- ---------- ------------
<S> <C> <C> <C>
Pro forma net loss $(243) $(1,645) $(1,978)
Pro forma loss per share $(0.05) $(0.35) $(0.45)
</TABLE>
===============================================================================
The pro forma effect on net loss for fiscal years 1999, 1998 and 1997 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 30, 1999, January 31, 1998 and February 1, 1997, is
as follows:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price
--------- ----------------
(in thousands)
<S> <C> <C>
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
Granted 385 4.20
Exercised (53) 2.80
Forfeited (75) 5.03
------- --------
Outstanding January 30, 1999 924 $4.03
===============================================================================
</TABLE>
The weighted-average fair values of stock options granted during fiscal years
1999, 1998 and 1997 were $4.20, $3.26 and $3.12, respectively.
-47-
<PAGE> 48
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
The following table summarizes information about the Company's stock options
outstanding as of January 30, 1999:
<TABLE>
<CAPTION>
Weighted Weighted-Average
Average Remaining
Grant Options Options Exercise Contractural
Price Range Outstanding Exercisable Price Life (Years)
--------------- -------------- -------------- ----------------------------
<S> <C> <C> <C> <C>
$2.75 to $2.88 206,488 206,488 $2.80 4.0
$3.63 to $4.60 562,387 136,415 4.05 8.4
$5.00 to $6.00 155,500 76,875 5.58 7.8
-----------------------------------------------------------------------
Total 924,375 419,778
=========================================================================================
</TABLE>
During fiscal years 1998 and 1997, the Company awarded, pursuant to the Award
plan, restricted stock grants consisting of an aggregate of 137,500 and 45,000
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
year 1998. No shares were awarded in fiscal year 1999. 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 15) 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. 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 1999, 1998 and
1997.
Effective January 1, 1993, the profit sharing plan was amended pursuant to
section 401(k) of the Internal Revenue Code enabling eligible employees to
contribute up to 15% of their annual compensation to the plan, with the Company
matching 50% of such contributions during fiscal year 1999 and 25% during
fiscal year 1998 and 1997, up to 6% of the employees' annual compensation.
Matching contributions from the Company for fiscal years 1999, 1998 and
1997 were $252,000, $103,000 and $117,000, respectively. The Company does not
offer any additional post retirement and post-employment benefits to its
employees.
===============================================================================
13. 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
included inventories, convenience store and gasoline fixtures and equipment,
land, buildings, and building and leasehold improvements. In fiscal year 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 year January 31, 1998 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 all 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:
-48-
<PAGE> 49
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands, except
per share amounts)
<S> <C> <C>
Revenues $ 477,047 $ 459,348
Cost of goods sold and expenses:
Cost of goods sold 339,308 333,012
Operating and administrative
expenses 126,758 121,957
Interest expense 10,806 10,330
--------- ---------
476,872 465,299
--------- ---------
Income (loss) before income taxes 175 (5,951)
(Provision) benefit from
income taxes (150) 1,674
--------- ---------
Net income (loss) $ 25 $ (4,277)
Income (loss) per share $ .01 $ (0.93)
</TABLE>
================================================================================
14. COMMITMENTS AND CONTINGENCIES:
As of January 30, 1999, the Company was contingently liable for outstanding
letters of credit amounting to $7,000,000.
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 30, 1999 and
January 31, 1998, the Company had recorded an accrual of $4,589,000 and
$6,770,000, 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 30, 1999 and January 31, 1998, the Company had recorded a
reimbursement receivable of $4,522,000 and $ 4,770,000, respectively. For the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, the
Company recorded a provision for environmental expenses of $98,000, $3,354,000
and $2,109,000, respectively. Additionally, under current federal and state
regulatory programs, the Company was obligated by December 1998 to upgrade or
replace most of its existing underground storage tanks ("USTs"). The Company met
this obligation prior to December 22, 1998 for all locations but 14. These 14
locations were closed prior to December 22, 1998. The Company is in the process
of selling these locations.
In fiscal year 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 eight 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.
In fiscal year 1999, the Company entered into a long-term supply and branding
agreement with Chevron Products Company to brand certain high-volume retail
gasoline locations. The agreement obligates the Company to purchase a minimum
volume of gasoline over a ten year period. Management believes that the purchase
volume is readily achievable over the term of the agreement. In addition, the
agreement provides for the Company to be reimbursed for costs incurred in
the conversion of equipment and display facilities.
In fiscal year 1999, the Company entered into an agreement with Coca-Cola U.S.A.
Fountain to exclusively sell Coca-Cola fountain products in the Company's
fountain centers. The agreement calls for the purchase of a minimum quantity of
fountain syrups over the next five years. Management believes that the level of
purchases is easily attainable.
-49-
<PAGE> 50
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
In fiscal year 1999, the Company entered into an agreement with Millstone
Coffee. The agreement calls for the Company to exclusively sell Millstone brand
coffee blends over the next five years.
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. The two cases have been consolidated as DAIRY MART
CONVENIENCE STORES, INC. DERIVATIVE LITIGATION, and the case is currently
pending in the Delaware Court of Chancery of New Castle County as Consolidated
C.A. No. 14713. 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, that
certain interests in the general partner of DM Associates should be vested in
the company, and that the voting rights associated with the Class B Common Stock
held by DM Associates should be neutralized. On August 9, 1996, the Court
granted in part and denied in part defendants' motions to dismiss. The Court
held the plaintiffs failed to state (1) a claim of 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 now closed and both sides have moved for
summary judgment and are awaiting the Court's decision. 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. Both sides have moved for summary judgment and are awaiting the
court's decision. 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 has recognized no provision for any possible loss in the
accompanying consolidated financial statements.
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.
===============================================================================
15. RESTRUCTURING INITIATIVE
During fiscal year 1996, the Company entered into an agreement with a former
majority stockholder of the Company and certain of his affiliates (Former
Holder) for purposes of settling a dispute between the Former Holder and
the Company's board of directors and management with respect to control of
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.
-50-
<PAGE> 51
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
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 30, 1999, 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.
16. 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.
-51-
<PAGE> 52
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues (including excise taxes of $31,265) $ 155 $ 476,470 $ 422 $ - $ 477,047
Cost of goods sold and expenses:
Cost of goods sold - 339,308 - - 339,308
Operating and administrative expenses 276 126,460 22 - 126,758
Interest expense 9,749 752 305 - 10,806
--------- --------- --------- --------- ---------
10,025 466,520 327 - 476,872
--------- --------- --------- --------- ---------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries (9,870) 9,950 95 - 175
Benefit from (provision for)
income taxes 4,342 (4,454) (38) - (150)
--------- --------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries (5,528) 5,496 57 - 25
Equity in income of
consolidated subsidiaries 5,553 57 - (5,610) -
--------- --------- --------- --------- ---------
Net income $ 25 $ 5,553 $ 57 $ (5,610) $ 25
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
---------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash $ 519 $ 2,848 $ - $ - $ 3,367
Short-term investments 138 3 2,583 - 2,724
Accounts and notes receivable 1,327 13,093 1,121 - 15,541
Inventory - 24,293 - - 24,293
Prepaid expenses and other current assets - 2,324 - - 2,324
Deferred income taxes - 1,520 - - 1,520
--------- --------- --------- --------- ---------
Total current assets 1,984 44,081 3,704 - 49,769
--------- --------- --------- --------- ---------
Assets Held for Sale - 6,327 - - 6,327
Property and Equipment, net - 98,829 - - 98,829
Intangible Assets, net - 15,452 - - 15,452
Other Assets, net 1,689 11,271 1,134 (3,140) 10,954
Investment in and Advances to Subsidiaries 140,880 1,602 290 (142,772) -
--------- --------- --------- --------- ---------
Total assets $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations $ 3,807 $ 249 $ - $ - $ 4,056
Accounts payable 23,776 11,885 24 - 35,685
Accrued expenses 183 15,186 9 - 15,378
Accrued income taxes 2,593 - - (2,593) -
Accrued interest 3,641 (1) 73 - 3,713
--------- --------- --------- --------- ---------
Total current liabilities 34,000 27,319 106 (2,593) 58,832
--------- --------- --------- --------- ---------
Long-Term Obligations, less current portion above 100,749 572 3,130 - 104,451
Other Liabilities 547 8,791 - (547) 8,791
Stockholders' Equity 9,257 140,880 1,892 (142,772) 9,257
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 144,553 $ 177,562 $ 5,128 $(145,912) $ 181,331
</TABLE>
- --------------------------------------------------------------------------------
-52-
<PAGE> 53
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities $ 7,221 $ 4,129 $ (459) $ - $ 10,891
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of and change in short-term investments (138) - 1,043 - 905
Purchase of property and equipment - (52,398) - - (52,398)
Proceeds from sale of property,
equipment and assets held for sale - 30,760 - - 30,760
Investment in and advances to subsidiaries (15,909) 15,909 - - -
Increase in long-term notes receivable - (1,816) 640 - (1,176)
Proceeds from collection of long-term
notes receivable - 1,544 - - 1,544
Increase in intangibles and other assets (448) 1,198 (108) - 642
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities (16,495) (4,803) 1,575 - (19,723)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in revolving loan, net 10,200 - - - 10,200
Repayment of long-term obligations (651) (300) (1,100) (2,051)
Payment of dividend - 250 (250) - -
Issuance of common stock 244 - - - 244
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 9,793 (50) (1,350) - 8,393
-------- -------- -------- -------- --------
Increase (decrease) in cash 519 (724) (234) - (439)
Cash at beginning of year - 3,572 234 - 3,806
-------- -------- -------- -------- --------
Cash at end of year $ 519 $ 2,848 $ - $ - $ 3,367
</TABLE>
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
------- ------------ ----- ------------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid during the year -
Interest $ 9,876 $ 435 $ 350 - $ 10,661
Income taxes refunded (381) - - - (381)
Non-cash inventory and financing activities -
Capital lease obligation 3,756 - - - 3,756
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ ----- ------------ ------------
<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 - 364,525 - - 364,525
Operating and administrative expenses 269 127,919 33 - 128,221
Interest expense 9,776 485 351 - 10,612
--------- --------- --------- --------- ---------
10,045 492,929 384 - 503,358
--------- --------- --------- --------- ---------
Income (loss) before income taxes and equity
in income of consolidated subsidiaries (8,901) 6,808 94 - (1,999)
Benefit from (provision for) income taxes 2,573 (2,015) (27) - 531
--------- --------- --------- --------- ---------
Income (loss) before equity in income of
consolidated subsidiaries (6,328) 4,793 67 - (1,468)
Equity in income of consolidated subsidiaries 4,860 67 - (4,927) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1,468) $ 4,860 $ 67 $ (4,927) $ (1,468)
</TABLE>
- --------------------------------------------------------------------------------
-53-
<PAGE> 54
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
--------- ------------ ----- ------------ ------------
<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 - 21,088 - - 21,088
Prepaid expenses and other current assets 69 2,162 - - 2,231
Deferred income taxes 852 196 - - 1,048
--------- --------- --------- --------- ---------
Total current assets 2,175 40,061 4,536 - 46,772
--------- --------- --------- --------- ---------
Assets Held for Sale - 10,715 - - 10,715
Property and Equipment, net - 82,589 - - 82,589
Intangible Assets, net - 16,017 - - 16,017
Other Assets, net 1,580 8,192 1,782 - 11,554
Investment in and Advances to Subsidiaries 121,215 1,948 137 (123,300) -
--------- --------- --------- --------- ---------
Total assets $ 124,970 $ 159,522 $ 6,455 $(123,300) $ 167,647
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations $ 637 $ 319 $ 1,100 $ - $ 2,056
Accounts payable 20,138 11,159 - - 31,297
Accrued expenses 1,297 16,857 23 - 18,177
Accrued interest 3,450 - 117 - 3,567
--------- --------- --------- --------- ---------
Total current liabilities 25,522 28,335 1,240 - 55,097
--------- --------- --------- --------- ---------
Long-Term Obligations, less current 90,460 802 3,130 - 94,392
portion above
Other Liabilities - 9,170 - - 9,170
Stockholders' Equity 8,988 121,215 2,085 (123,300) 8,988
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 124,970 $ 159,522 $ 6,455 $(123,300) $ 167,647
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ------- ------------ ------------
<S> <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 and change in short-term investments - (3) (2,093) - (2,096)
Purchase of property and equipment - (31,604) - - (31,604)
Proceeds from sale of property,
equipment and assets held for sale - 32,552 - - 32,552
Investment in and advances to subsidiaries 8,112 (8,818) 706 - -
Increase in long-term notes receivable - (92) (561) - (653)
Proceeds from collection of long-term
notes receivable - 35 963 - 998
Decrease in intangibles and other assets 28 1,281 8 - 1,317
-------- -------- -------- -------- --------
Net cash used in investing activities 8,140 (6,649) (977) - 514
-------- -------- -------- -------- --------
Repayment of long-term obligations (12,326) (1,790) - - (14,116)
Issuance of common stock 242 - - - 242
-------- -------- -------- -------- --------
Net cash used in financing activities (12,084) (1,790) - - (13,874)
-------- -------- -------- -------- --------
Decrease in cash (100) (4,446) (938) - (5,484)
Cash at beginning of year 100 8,018 1,172 - 9,290
-------- -------- -------- -------- --------
Cash at end of year $ - $ 3,572 $ 234 $ $ 3,806
</TABLE>
- --------------------------------------------------------------------------------
-54-
<PAGE> 55
- --------------------------------------------------------------------------------
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C>
Supplemental disclosures:
Cash paid during the year -
Interest $ 9,710 $485 $349 - $10,544
Income taxes refunded (1,188) - - - (1,188)
Non-cash inventory and financing
activities -
Note Receivable from DM Associates 10,000 - - - 10,000
Purchase of treasury stock (10,000) - - - (10,000)
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ----- ------------ ------------
<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 - 431,767 - - 431,767
Operating and administrative expenses 277 145,326 28 - 145,631
Interest expense 10,050 472 355 - 10,877
--------- --------- --------- --------- ---------
10,327 577,565 383 - 588,275
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
equity in income of consolidated subsidiaries (10,074) 7,416 129 - (2,529)
Benefit from (provision for) income taxes 2,802 (2,074) (35) - 693
--------- --------- --------- --------- ---------
Income (loss) before equity in income
of consolidated subsidiaries (7,272) 5,342 94 - (1,836)
Equity in income of consolidated subsidiaries 5,436 94 - (5,530) -
--------- --------- --------- --------- ---------
Net income (loss) $ (1,836) $ 5,436 $ 94 $ (5,530) $ (1,836)
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
AS OF FEBRUARY 1, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
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 - 24,057 - - 24,057
Prepaid expenses and other current 20 3,309 - - 3,329
assets
Deferred income taxes 933 878 - - 1,811
--------- --------- --------- --------- ---------
Total current assets 1,073 49,159 3,376 - 53,608
--------- --------- --------- --------- ---------
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 4,637 2,192 - 8,218
Investment in and Advances to Subsidiaries 129,085 1,175 843 (131,103) -
--------- --------- --------- --------- ---------
Total assets $ 131,547 $ 171,001 $ 6,411 $(131,103) $ 177,856
</TABLE>
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<PAGE> 56
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET (CONTINUED)
AS OF FEBRUARY 1, 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
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 10,214 129,085 2,018 (131,103) 10,214
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 131,547 $ 171,001 $ 6,411 $(131,103) $ 177,856
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries FINOP Eliminations Consolidated
-------- ------------ ---------- ------------ ------------
<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:
Purchases 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 10,580 350 - - 10,930
related warrants
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>
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<PAGE> 57
DAIRY MART CONVENIENCE STORES, INC. AND SUBSIDIARIES
17. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Quarterly financial information is as follows:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-------------------------
May 1, August 1, October 31, January 30,
Fiscal Year Ended January 30, 1999 1998 1998 1998 1999
- ---------------------------------- --------- ---------- ---------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 109,849 $ 126,129 $ 126,183 $ 114,886
Gross profit 31,221 35,724 37,522 33,272
Net Income (loss) (629) 846 637 (829)
Basic and Diluted earnings (loss)
per share (0.13) 0.18 0.13 (0.17)
</TABLE>
================================================================================
<TABLE>
<CAPTION>
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 37,566 36,522 32,301 30,546
Net Income (loss) 44 1,148 (265) (2,395)
Basic and Diluted earnings (loss)
per share 0.01 0.24 (0.06) (0.51)
</TABLE>
===========================================================================
In the quarter ended January 30, 1999, the Company changed its method for
valuing inventory (See Note 3). The quarterly financial information above
reflects the retroactive application of this change. For fiscal year 1999,
the change in inventory valuation method increased gross profit $90,000,
$30,000 and $60,000 and increased net income $53,000, $18,000 and $36,000
for the quarters ended May 1, August 1 and October 31, 1998, respectively.
For fiscal year 1998, the change in inventory valuation method increased
gross profit by $45,000, $45,000, $75,000 and $242,000 and increased net
income by $27,000, $26,000, $45,000 and $144,000 for the quarters ended May
3, August 2 and November 1, 1997 and January 31, 1998, respectively.
---------------------------------------------------------------------------
18. OPERATING SEGMENT
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, and is
established for reporting information about a company's operating segments.
It also established standards for related disclosures about products,
services, geographic areas and major customers.
The Company operates in one segment. That segment is the operating and
franchising of convenience food stores. Revenues from external customers
are derived primarily from three major categories - merchandise, gasoline
and food service. The Company's merchandise sales are comprised of
groceries, beverages, beer/wine, tobacco products, dairy products,
candy/snacks, non-food merchandise and services. Services include lottery,
and money order services. Food service sales are comprised of branded
restaurant sales such as Mr. Hero, Taco Bell, Subway and Pizza Hut.
The Company does not rely on any major customers as a source of revenue.
Excluding license royalties, the Company's operations are concentrated in
seven states in the midwest and southeastern part of the United States.
-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 23, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
April 23, 1999
-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 of Costs and Other and Accounts End of
Description Period Expenses Recoveries Written-off Period
----------------------------------- ------------ ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
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
Fiscal Year Ended January 30, 1999 2,240,638 421,905 - (588,436) 2,074,107
</TABLE>
-59-
<PAGE> 1
Exhibit 10.2
AGREEMENT OF AMENDMENT
This AGREEMENT OF AMENDMENT (this "Agreement") dated as of November 27,
1998, among DAIRY MART CONVENIENCE STORES, INC. (the "Company"), BANKBOSTON,
N.A., successor by merger to BANK OF BOSTON CONNECTICUT, individually and as
Agent under the Credit Agreement (as hereinafter defined), 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. Schedule I to the Credit Agreement shall be, and hereby is, amended
by deleting such Schedule I in its entirety and substituting the attached
Schedule I therefor.
3. Section 1.1 of the Credit Agreement shall be, and hereby is, amended
by deleting the definitions of "Capital Expenditures", "Letter of Credit Rate",
"Minimum Consolidated Net Worth" and "Termination Date" in their entirety and
substituting in lieu thereof the following:
"CAPITAL EXPENDITURES" any payment made directly or indirectly for the
purpose of acquiring, constructing or improving fixed assets, real
property or equipment which in accordance with GAAP would be added as a
net debit (after giving effect to any credits) to the fixed asset
account of the Person making such expenditure; PROVIDED, HOWEVER, that
expenditures, which otherwise would constitute Capital Expenditures
hereunder, funded by external sources such as bank financing, capital
or operating leases, allowances from gas companies, etc. shall not be
deemed to be Capital Expenditures for purposes of this definition.
"LETTER OF CREDIT RATE" for each Letter of Credit, at any time, a rate
per annum equal to the rate set forth below opposite the applicable
ratio of Consolidated
<PAGE> 2
Indebtedness to Consolidated EBITDA for the period of four consecutive
fiscal quarters ending on the FQED immediately preceding such time:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Ratio of Consolidated
Indebtedness to
Level Consolidated EBITDA Letter of Credit Rate
-------------------------------------------------------------------
<S> <C>
I Less than 3.00 to 1.00 1.00%
-------------------------------------------------------------------
II Less than 3.50 to 1.00, but
greater than or equal to
3.00 to 1.00 1.25%
-------------------------------------------------------------------
IIILess than 4.00 to 1.00, but
greater than or equal to
3.50 to 1.00 1.50%
-------------------------------------------------------------------
IV Less than 4.50 to 1.00, but
greater than or equal to
4.00 to 1.00 1.75%
-------------------------------------------------------------------
V Greater than or equal to
4.50 to 1.00 2.00%
-------------------------------------------------------------------
</TABLE>
"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 Consolidated Net Income earned after the FQED ending
approximately January 31, 1999.
"TERMINATION DATE" April 30, 2003, or such later date to which the
Termination Date may be extended in accordance with subsection 2.15.
2
<PAGE> 3
4. Section 1.1 of the Credit Agreement shall be, and hereby is, amended
by adding the following definition of "Store Properties Held For
Sale/Leaseback":
"STORE PROPERTIES HELD FOR SALE/LEASEBACK" as of any date, the book
value, as indicated on the Company's financial statements and determined in
accordance with GAAP, of any real or personal property owned by the Company and
held in anticipation of entering into a Sale/Leaseback Transaction with respect
thereto.
5. Section 2.16 of the Credit Agreement shall be, and hereby is,
amended by deleting such Section 2.16 in its entirety and substituting in lieu
thereof the following:
2.16 ANNUAL CLEAN-DOWN OF REVOLVING CREDIT LOANS. If at any time the
Company shall default in the observance or performance of any agreement
contained in Section 7, irrespective of whether such default is cured by the
Company or any action is taken by the Agent or any Bank, then, for a period of
at least 30 Consecutive Days during the Clean-Down Periods occurring during the
fiscal years set forth below, the aggregate principal amount of Revolving Credit
Loans outstanding at all times during such 30-day period shall not exceed the
amount set forth opposite the respective fiscal years:
<TABLE>
<CAPTION>
Maximum Revolving Credit
Fiscal Years Loans Outstanding
------------ ------------------------
<S> <C>
2001 $18,000,000
2002 12,000,000
2003 6,000,000
</TABLE>
6. 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 less Store Properties Held For Sale/Leaseback at
the end of such period to (ii) Consolidated EBITDA for such period to
be more than the ratio set forth opposite such FQED:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FQED RATIO
- --------------------------------------------------------------------------------
<S> <C>
The FQED ending on or about February 1, 1997 4.50 to 1.00
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
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 4.65 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 1999 4.50 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about July 31, 1999 4.35 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about October 30, 1999 4.25 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about January 31, 2000 4.25 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 2000 4.15 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about July 31, 2000 4.10 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about October 30, 2000 and thereafter 3.90 to 1.00
- --------------------------------------------------------------------------------
</TABLE>
7. 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FQED RATIO
- --------------------------------------------------------------------------------
<S> <C>
The FQED ending on or about February 1, 1997 2.00 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 1997, 1.60 to 1.00
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
July 30, 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
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 1999 2.00 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about July 31, 1999 2.00 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about October 30, 1999 2.10 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about January 31, 2000 2.10 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 2000 and 2.25 to 1.00
thereafter
- --------------------------------------------------------------------------------
</TABLE>
8. 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 EBITDAR minus the amount of any federal, state and
local income taxes levied by a Governmental Authority on the
revenues of the Company which are actually paid by the Company or
its consolidated Subsidiaries in cash during such period, to (ii)
Consolidated Interest Expense, plus all principal payments required
to be made during the period on account of any Consolidated
Indebtedness, plus the amount of any Consolidated Rent Expense
during the period, to be less than the ratio set forth opposite such
FQED:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FQED RATIO
- --------------------------------------------------------------------------------
<S> <C>
The FQED ending on or about January 31, 1998 1.25 to 1.00
- --------------------------------------------------------------------------------
The FQED ending on or about April 30, 1998 1.05 to 1.00
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
The FQED ending on or about July 31, 1998 1.15 to 1.00
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
</TABLE>
9. Section 7.8 of the Credit Agreement shall be, and hereby is, amended
by deleting Section 7.8 in its entirety and substituting in lieu thereof the
following:
7.8 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by way
of the acquisition of securities of any Person or otherwise) any
Capital Expenditures (excluding any expenses incurred in connection
with normal replacement and maintenance programs properly charged to
current operations) in the aggregate for the Company and its
Subsidiaries during any of the fiscal years of the Company set forth
below in an amount in excess of that set forth opposite such fiscal
year:
<TABLE>
<CAPTION>
Maximum Capital
Fiscal Year Expenditures
----------- ------------
<S> <C>
1997 $28,500,000
1998 $34,500,000
1999 $35,000,000
Each fiscal year
thereafter $25,000,000
</TABLE>
PROVIDED, however, that in the event the Company and its Subsidiaries
shall make Capital Expenditures in any fiscal year of less than the
maximum amount set forth above, an amount equal to the difference
between such maximum amount and the actual Capital Expenditures made
during such fiscal year shall be available (in addition to the maximum
amount stated above) to the Company for Capital Expenditures during
(but only during) the immediately following fiscal year.
10. 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.
11. This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut.
6
<PAGE> 7
12. The Company shall reimburse the Agent for the fees and expenses of
its counsel in connection with this Agreement.
13. 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.
3. There has been no material adverse change in the assets,
liabilities, operations or financial condition of the Company or any Designated
Subsidiary.
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.
3. The Agent shall have received payment in immediately available funds
of an amendment fee in the amount of $150,000.
7
<PAGE> 8
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:_______________________________________
Name:
Title:
BANKBOSTON, N.A., successor by merger to
BANK OF BOSTON CONNECTICUT,
Individually and as Agent
By:_______________________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY
By:_______________________________________
Name:
Title:
8
<PAGE> 9
SCHEDULE I
COMMITMENTS; ADDRESSES
<TABLE>
<CAPTION>
Commitment
$ Amount
- --------------------------------------------------------------------------------
<S> <C>
BANKBOSTON, N.A. $17,500,000
100 Pearl Street, 5th Floor
Hartford Corporate Banking
Hartford, Connecticut 06103
ATTENTION: Scott S. Barnett, Vice President
TELECOPY NO.: 860/727-6565
State Street Bank and Trust Company $12,500,000
Goodwin Square Building
225 Asylum Street
Hartford, CT 06103
ATTENTION: Karen Booth, Vice President
TELECOPY NO.: 860/244-1810
TOTALS: $30,000,000
</TABLE>
<PAGE> 1
Exhibit 10.6
DAIRY MART CONVENIENCE STORES, INC.
1990 STOCK OPTION PLAN
This Stock Option Plan (the "Plan) of DAIRY MART CONVENIENCE STORES,
INC. (the "Corporation") enables the Corporation to design a flexible
compensation package in order to attract and retain those employees who will
most effectively advance the interests of the Corporation and its shareholders.
It is intended that both qualified and non-qualified options will be granted
under the Plan.
1. STOCK SUBJECT TO PLAN.
The stock subject to the Plan shall be shares of the Corporation's
authorized but unissued or reacquired Class A Common Stock, par value $.01 per
share. The aggregate number of shares for which options may be granted pursuant
to the Plan shall not exceed 200,000 shares of Class A Common Stock. If an
option shall expire or terminate for any reason without having been exercised in
full, including shares for which an option was surrendered pursuant to Section 5
or 6, the shares subject to the unexercised or terminated option shall not be
considered to have been subject to an option for purposes of the limitation on
the aggregate number of shares subject to the Plan.
2. ADMINISTRATION.
The Plan shall be administered by the Board of Directors of the
Corporation or any committee thereof appointed by the Board of Directors.
Subject to the provisions of the Plan set forth herein, the Board or such
committee is authorized to determine the employees of the Corporation to whom
options shall be granted; the number of shares to be covered by each option; the
terms and conditions of each option (including restrictions on the sale or other
transfer of shares issued pursuant to the exercise of an option); and to
establish rules and regulations pertaining to participation and administration
of the Plan.
3. ELIGIBILITY AND PARTICIPATION.
Employees of the Corporation or any of its subsidiaries, as such term
is defined in Section 425(f) of the Internal Revenue Code of 1986
("Subsidiaries"), including employees who are officers or directors of the
Corporation or its Subsidiaries and, with respect to non-qualified options,
directors of the Corporation or its Subsidiaries who are not employees, shall be
eligible to be granted an option under this Plan. An individual who has been
granted an option may be granted additional options. Notwithstanding the
foregoing, no member of any committee administering the Plan may be granted an
option under this Plan.
4. GRANTING OF OPTIONS
Options granted under the Plan may be of two types, a non-qualified
stock option ("Non-Qualified Option"), and an incentive stock option ("Incentive
Stock Option"). The Board of
<PAGE> 2
Directors or the committee shall have the authority to grant Non-Qualified
Options, or to grant Incentive Stock Options, or to grant both types of Options
to any eligible person, PROVIDED, HOWEVER, that only officers and employees
employed by the Corporation or a Subsidiary may receive Incentive Stock Options,
but directors who are not employees of the Corporation or its Subsidiaries may
receive Non-Qualified Options. To the extent that any option is not designated
as an Incentive Stock Option, it shall constitute a separate Non-Qualified
Option.
It is intended that the Incentive Stock Options granted hereunder shall
constitute incentive stock options within the meaning of Section 422A of the the
Internal Revenue Code of 1986, as amended (the "Code") and shall be subject to
the tax treatment described in Section 421 of the Code. Anything in the Plan to
the contrary notwithstanding, no provision of the Plan relating to Incentive
Stock Options shall be interpreted, amended or altered, nor shall any discretion
or authority granted under the Plan be so exercised, so as to disqualify either
the Plan or any Incentive Stock Option under Section 422A of the Code.
5. GRANTING OF INCENTIVE STOCK OPTIONS
Each Incentive Stock Option granted under the Plan shall be evidenced
by a written agreement containing provisions not inconsistent with the Plan,
including the following:
(a) Each option shall state the number of shares to which it
pertains, the fair market value of said shares as of the date granted, and the
purchase price of each share subject thereto.
(b) The purchase price of each share subject to an Incentive
Stock Option under this Plan shall be stated therein and, except as otherwise
provided in the second sentence of this subparagraph, shall be not less than the
fair market value of such share on the date the option is granted. With respect
to employees who, at the time of the granting of the Incentive Stock Option,
own, or are deemed to own by virtue of the attribution rules of Code Section
425(d), more than 10% of the total combined voting power of all classes of stock
of (i) the Corporation, or (ii) of a corporation which is a Subsidiary of the
Corporation, the purchase price of each share subject to an option under this
Plan shall be at least 110% of the fair market value of such share on the date
the option is granted.
(c) The purchase price shall be paid in cash, certified or
bank cashier's or teller's check, or in shares of Class A Common Stock, par
value $.01 per share, or Class B Common Stock, par value $.01 per share, of the
Corporation, which shares shall have the value per share reported by the
National Association of Securities Dealers Automated Quotation System as of the
close of business on the date such shares are tendered to the Corporation for
payment for the exercise of an option.
(d) No option shall be exercisable prior to one (1) year from
the date it is granted or more than ten (10) years from the date it is granted,
except that if an employee owns or is deemed to own (by reason of the
attribution rules of Section 425(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Corporation or any Subsidiary
- --------------------------------------------------------------------------------
Page 2
<PAGE> 3
and an Incentive Stock Option is granted to such employee, the term of such
option shall be no more than five years from the date of grant.
(e) No option shall be assignable or transferable by an
optionee except by will or the laws of descent and distribution. An option may
be exercised only by the optionee during the optionee's life, unless the
optionee is legally incapacitated, in which case the optionee's appointed
guardian or legal representative may exercise the option.
(f) (i) Subject to Section 13, each Incentive Stock Option by
its terms shall require the optionee to remain in the continuous employ of the
Corporation or a Subsidiary for at least one year form the date of grant of the
Incentive Stock Option before the Incentive Stock Option shall be exercisable,
except if the optionee's employment with the Corporation or Subsidiary
terminates as a result of death.
(ii) An Incentive Stock Option shall not be exercisable
by the optionee unless, at the time of exercise, such optionee is an employee of
the Corporation or a Subsidiary, except that, upon termination of employment
with the Corporation or a Subsidiary, the optionee may exercise any option (1)
to the extent of any unexercised shares, whether or not the optionee was
entitled to do so at the termination of his employment, at any time within one
year thereafter if the termination of employment results from death and if such
death occurs while the Employee is employed by the Corporation or its
Subsidiaries or (2) to the extent that the optionee was entitled to do so at the
termination of his employment, at any time within three months thereafter if the
termination of employment results from a cause other than death.
(iii) If an optionee dies while an employee of the
Corporation or Subsidiary, such optionee's estate or any person who acquired the
right to exercise such option by bequest or inheritance or by reason of the
death of the optionee may exercise such optionee's option to the extent of all
unexercised shares, whether or not the optionee was entitled to do so at the
time of his death, at any time within one year following his date of death.
(iv) If the optionee dies within three months after
termination of employment with the Corporation or Subsidiary other than
termination resulting from death, such optionee's estate or any person who
acquired the right to exercise such option by bequest or inheritance or by
reason of the death of the optionee may exercise (to the extent that the
optionee was entitled to do so at the termination of his employment) such
optionee's option at any time within the period ending on the first anniversary
of the optionee's death.
(v) Notwithstanding any of the foregoing, in no event
shall an option be exercisable in whole or in part after the termination date
provided in the optionee's stock option agreement.
6. GRANTING OF NON-QUALIFIED OPTIONS.
Each Non-Qualified Option granted under the Plan shall be evidenced by
a written stock option agreement containing provisions not inconsistent with the
Plan, including the following:
- --------------------------------------------------------------------------------
Page 3
<PAGE> 4
(a) Each Non-Qualified Option shall be for a term of not more
than ten years and one day from the date of grant. In addition, each
Non-Qualified Option shall state the number of shares to which it pertains, the
fair market value of such shares as of the date granted, and the purchase price
of each share subject thereto, which purchase price may be no less than 85% of
the fair market value of the shares on the date of grant.
(b) EXERCISE.
(i) Subject to Section 13, and except for directors who
are not employees of the Corporation, each Non-Qualified Option by its terms
shall require the optionee to remain in the continuous employ of the Corporation
any Subsidiary for at least one year from the date of grant of the Option before
the Option shall be exercisable, except if the optionee's employment with the
Corporation or Subsidiary terminates as a result of death.
(ii) A Non-Qualified Option shall not be exercisable by
the optionee unless, at the time of exercise, such optionee is an employee of
the Corporation or a Subsidiary (except for any director of the Corporation or
Subsidiary who is not an employee), except that, upon termination of employment
with the Corporation or a Subsidiary, the optionee may exercise any
Non-Qualified Option (1) to the extent of any unexercised shares, whether or not
the optionee was entitled to do so at the termination of his employment, at any
time within one year thereafter if the termination of employment results from
death, or (2) to the extent that the optionee was entitled to do so at the
termination of his employment, at any time within three months thereafter if the
termination of employment results from a cause other than death.
(iii) If an optionee dies while an employee of the
Corporation or Subsidiary, such optionee's estate or any person who acquired the
right to exercise such Non-Qualified Option by bequest or inheritance or by
reason of the death of the optionee may exercise such optionee's option to the
extent of all unexercised shares, whether or not the optionee was entitled to do
so at the time of his death, at any time within one year following his date of
death.
(iv) If the optionee dies within three months after
termination of employment with the Corporation or Subsidiary, such optionee's
estate or any person who acquired the right to exercise such option by bequest
or inheritance or by reason of the death of the optionee may exercise (to the
extent that the optionee was entitled to do so at the termination of his
employment) such optionee's Non-Qualified Option at any time within the period
ending on the first anniversary of the optionee's death.
(v) Notwithstanding any of the foregoing, in no event
shall a Non-Qualified Option be exercisable in whole or in part after the
termination date provided in the optionee's stock option agreement.
(c) TRANSFERABILITY. Non-Qualified Options shall not be
transferable otherwise than by will or by the laws of descent and distribution,
and shall be exercisable during the optionee's lifetime only by the optionee or,
if legally incapacitated, by the optionee's duly appointed guardian or legal
representative.
- --------------------------------------------------------------------------------
Page 4
<PAGE> 5
(d) The purchase price of each share subject to a
Non-Qualified Option under this Plan shall be stated therein and shall be not
less than 85% of the fair market value of such share on the date the
Non-Qualified Option is granted.
7. VESTING.
Except as the Board of Directors or the committee may otherwise provide
in an optionee's stock option agreement, Incentive Stock Options and
Non-Qualified Options shall become exercisable in four equal annual
installments. The Board of Directors or the committee may, in its sole
discretion, permit the acceleration of the time to exercise one or more
installments.
8. OPTIONAL PAYMENT.
The Corporation, with the consent of the optionee, may elect in the case of an
option which is exercisable, upon the surrender of the option, to pay the
optionee on a per share basis either (i) cash equivalent to the excess of the
fair market value of shares to which the exercisable option pertains on the date
of surrender of the option over the purchase price under the option, or (ii)
cash equivalent to the excess of the per share net worth (determined by the
Corporation's public accountants in accordance with generally accepted
accounting principles consistently applied as of the close of the Corporation's
next preceding fiscal year) of the shares to which such exercisable option
pertains on the date the option is surrendered over the per share net worth of
such shares on the date the option was granted. If the Board of Directors of the
Corporation deems it to be necessary or advisable at any time in order to carry
out an acquisition or sale of assets, merger or a securities offering, the
Corporation may purchase any option granted hereunder, without the consent of
the employee holding the option, for a price calculated in accordance with (i)
of this paragraph as if the option were being exercised at such time.
9. CHANGE IN CAPITAL STRUCTURE.
If the Corporation's outstanding shares of Class A Common Stock are
increased or changed into or exchanged for a different number or kind of share
of capital stock or other securities of the Corporation by reason of any stock
dividend or split, recapitalization, reclassification, merger, consolidation,
combination of shares or other corporate change, the Board of Directors or the
committee shall make such substitution or adjustment, if any, as it deems to be
equitable, in the number or kind of shares or other securities as to which
options may be granted and in the number or kind of shares or other securities
allocated to unexercised options granted prior to such change.
In the case of any such substitution or adjustment, the aggregate
option price in each stock option agreement of all the shares covered thereby
prior to such substitution or adjustment shall be the option price for all the
shares or other securities substituted for such shares or to which such shares
are adjusted, and the option price per share after such substitution or
adjustment shall be determined accordingly; PROVIDED, HOWEVER, that no such
determination shall obligate the Corporation to issue or sell fractional shares
or other securities.
- --------------------------------------------------------------------------------
Page 5
<PAGE> 6
10. USE OF PROCEEDS.
All proceeds received by the Corporation under the Plan shall be used
for its general corporate purposes.
11. EFFECTIVE DATE OF PLAN.
The Plan shall not become effective until approved by the Board of
Directors of the Corporation and the holders of a majority of the voting power
of Class A Common Stock and Class B Common Stock (voting as a single class)
entitled to vote thereon.
12. TERM AND AMENDMENT
The Board of Directors of the Corporation may at any time revise,
amend, suspend or terminate the Plan; provided, however, that such revision,
amendment, suspension or termination shall not affect any option previously
granted under the Plan; and, provided further, that no amendment changing the
provisions of paragraph 3 hereof or increasing the aggregate number of shares
subject to the Plan shall be made without the approval of a majority of the
voting power of shares entitled to vote thereon. Except with respect to options
previously granted, the Plan shall terminate ten (10) years from the date on
which the Plan became effective.
13. ACCELERATION ON CERTAIN CHANGES.
(a) Notwithstanding any other provisions of the Plan, a
dissolution or liquidation of the Corporation, or a merger or consolidation in
which the Corporation is not the surviving corporation, or a Change of Control
of the Corporation (as defined below) shall cause any unexercised portion of the
option to terminate, except for any such portion as to which the Corporation or
another corporation makes appropriate provision for the protection of the value
thereof and either assumes the option or substitutes another option with
substantially similar terms; PROVIDED, HOWEVER, an optionee shall have the right
immediately prior to such dissolution, liquidation, merger, consolidation, or
Change in Control, to exercise the unexercised portion of the Option, in whole
or in part, without regard to any deferred exerciseability provisions contained
herein. The optionee shall have until the close of business on the date
preceding the effective date of any such dissolution, merger, consolidation, or
Change of Control, or preceding the commencement of any such liquidation, to
exercise the option. Such effective date or commencement date shall be the date
designated in a written notice from the Board of Directors or the committee to
the optionee, which notice shall be given not less than fourteen (14) days prior
to such designated effective date or commencement date, provided that for the
purposes of this Section 13 the effective date shall be the date designated,
whether or not the dissolution, merger, consolidation or Change of Control
actually becomes effective on such date. If such dissolution, liquidation,
merger, consolidation, or Change of Control is not consummated within thirty
(30) days after such effective date, and if the optionee has not exercised the
option in full, then the optionee's option (or any part of such option which has
not yet been exercised) shall continue in full force and effect as if no such
notice had been given.
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Page 6
<PAGE> 7
(b) For purposes hereof, a "CHANGE OF CONTROL" shall mean the
consummation of a transaction in which the beneficial ownership or control of
the Corporation is or may be changed such that one or more persons or entities
(other than persons who owned more than five percent (5%) of any class of the
shares of the Corporation on the date the option was granted) obtain beneficial
ownership or control or more than fifty percent (50%) of the assets or voting
power of the outstanding voting securities or equity interests of the
Corporation. Such transactions include, without limitation, sales of
substantially all of the assets of the Corporation, acquisitions of ownership or
control by tender offer, and acquisitions of such ownership or control through
the issuance of authorized but unissued capital stock of the Corporation.
(c) Except as herein specifically provided, no option or right
or interest under the Plan shall be subject to transfer, assignment, pledge,
charge or other alienation, whether voluntary or involuntary, and any attempt to
transfer, assign, pledge, charge or otherwise alienate the same shall be null
and void and of no effect. If any optionee or other person entitled to benefits
hereunder should attempt to assign, pledge, charge or otherwise alienate any
right or interest hereunder, then such benefits shall, in the discretion of the
Board of Directors or the committee, cease.
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Page 7
<PAGE> 1
12/29/97
Exhibit 10.26
DAIRY MART CONVENIENCE STORES, INC.
-----------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
Effective March 1, 1998
<PAGE> 2
DAIRY MART CONVENIENCE STORES, INC.
-----------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I - ESTABLISHMENT OF PLAN................................................................................1
1.1 Name of Plan...................................................................................1
1.2 Effective Date.................................................................................1
1.3 Purpose........................................................................................1
1.4 Restricted Coverage............................................................................1
1.5 Plan Unfunded..................................................................................1
ARTICLE II - DEFINITIONS.........................................................................................1
2.1 Accrued Benefit................................................................................2
2.2 Actuarial Equivalent...........................................................................2
2.3 Actuary........................................................................................2
2.4 Average Final Compensation.....................................................................2
2.5 Beneficiary....................................................................................2
2.6 Benefit Commencement Date......................................................................2
2.7 Board..........................................................................................2
2.8 Change in Control..............................................................................3
2.9 Code...........................................................................................6
2.10 Company........................................................................................6
2.11 Compensation...................................................................................7
2.12 Compensation Committee.........................................................................7
2.13 Disability.....................................................................................7
2.14 Early Retirement Date..........................................................................7
2.15 Effective Date.................................................................................7
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
2.16 Employing Company..............................................................................7
2.17 Entry Date.....................................................................................8
2.18 ERISA..........................................................................................8
2.19 Executive Employee.............................................................................8
2.20 Good Cause.....................................................................................8
2.21 Gross-Up Payment...............................................................................8
2.22 Net Worth Condition............................................................................9
2.23 Normal Retirement Date.........................................................................9
2.24 Other Retirement Benefits......................................................................9
2.25 Participant...................................................................................11
2.26 Plan..........................................................................................11
2.27 Plan Administrator............................................................................11
2.28 Plan Year.....................................................................................11
2.29 Separation from Service.......................................................................11
2.30 Service.......................................................................................11
2.31 Target Retirement Benefit.....................................................................12
2.32 Trust.........................................................................................12
2.33 Vested Benefit................................................................................12
2.34 Vesting Percentage............................................................................12
2.35 Year of Benefit Service.......................................................................12
ARTICLE III - PARTICIPATION.....................................................................................12
3.1 Eligibility Requirements......................................................................12
3.2 Entry and Re-entry Into the Plan..............................................................13
ARTICLE IV - RETIREMENT BENEFITS................................................................................13
4.1 Amount, Timing and Form of Benefits...........................................................13
</TABLE>
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<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
4.2 Gross-Up Payments.............................................................................13
(a) Calculation..........................................................................13
(b) Payment..............................................................................15
(c) Adjustment...........................................................................15
ARTICLE V - VESTING AND FORFEITURES.............................................................................16
5.1 Vesting Percentage............................................................................16
5.2 Vested Benefit................................................................................16
5.3 Forfeitures...................................................................................16
5.4 Amendment of Vesting Provisions...............................................................16
ARTICLE VI - ACCRUED BENEFITS...................................................................................17
6.1 Determination of Accrued Benefit..............................................................17
6.2 Adjustment for Early or Postponed Retirement..................................................17
ARTICLE VII - BENEFIT COMMENCEMENT DATE.........................................................................18
7.1 Eligibility for Payment.......................................................................18
7.2 Benefit Commencement Date.....................................................................18
(a) Time of Commencement.................................................................18
(b) Benefit Commencement Election........................................................18
7.3 Hardship Withdrawals..........................................................................19
(a) Definition...........................................................................19
(b) Procedure............................................................................19
ARTICLE VIII - BENEFIT FORMS AVAILABLE..........................................................................20
8.1 Forms of Benefit for Participants.............................................................20
(a) Normal Form of Benefits..............................................................20
(b) Installment Benefit Election.........................................................20
8.2 Forms of Benefit for Surviving Spouse Beneficiaries...........................................21
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
(a) Normal Form of Benefit...............................................................21
(b) Installment Benefit Election.........................................................21
8.3 Form of Benefit for Other Beneficiaries.......................................................22
ARTICLE IX - BENEFICIARIES......................................................................................22
9.1 Designation...................................................................................22
9.2 Failure to Designate a Beneficiary............................................................22
ARTICLE X - PLAN ADMINISTRATION.................................................................................23
10.1 Administrative Committee......................................................................23
10.2 Indemnification...............................................................................23
10.3 Ownership of Assets...........................................................................24
10.4 Expenses......................................................................................24
ARTICLE XI - TRUST AGREEMENT; LIQUIDITY FUND....................................................................25
11.1 Trust Fund....................................................................................25
11.2 Liquidity Fund................................................................................25
ARTICLE XII - AMENDMENT OF THE PLAN.............................................................................25
12.1 Amendment.....................................................................................25
12.2 Effect of Amendments on Vesting...............................................................26
ARTICLE XIII - TERMINATION OF THE PLAN..........................................................................26
13.1 Termination...................................................................................26
13.2 Benefits After Plan Termination...............................................................26
ARTICLE XIV - MISCELLANEOUS.....................................................................................27
14.1 Limitations of Rights; Employment Relationship................................................27
14.2 Determination of Benefits, Claims, Procedure and Administration...............................27
(a) Claim................................................................................27
(b) Decision on Claim....................................................................27
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
(c) Request for Review...................................................................28
(d) REVIEW OF DECISIONS..................................................................28
14.3 Arbitration...................................................................................29
14.4 Non-Assignability of Benefits.................................................................29
14.5 Facility of Payments..........................................................................29
14.6 Obligations to Withhold and Pay Taxes.........................................................30
14.7 Representations...............................................................................30
14.8 Severability..................................................................................30
14.9 Applicable Law................................................................................31
</TABLE>
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<PAGE> 7
DAIRY MART CONVENIENCE STORES, INC.
-----------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
ARTICLE I - ESTABLISHMENT OF PLAN
---------------------------------
1.1 NAME OF PLAN. The Plan shall be known as the Dairy Mart Convenience
Stores, Inc. Supplemental Executive Retirement Plan.
1.2 EFFECTIVE DATE. The Effective Date of the Plan is March 1, 1998.
1.3 PURPOSE. The Company intends this Plan to provide certain
retirement income benefits (as defined herein) to certain Executive Employees
(as identified from time to time on Schedule 3.1 to the Plan) of the Employing
Companies. Such benefits are intended to supplement the retirement income
benefits provided to a Participant by his or her Employing Company through its
other broad-based retirement programs and Social Security benefit taxes.
1.4 RESTRICTED COVERAGE. Participation in this Plan shall be limited to
Executive Employees, so that for purposes of Title I of ERISA the Plan will at
all times cover only employees who make up a select group of management or
highly compensated employees whose positions with an Employing Company allow
them to have a significant effect on the Employing Company's results of
operations by the performance of services of major importance in the management,
operation and development of the Employing Company's business.
1.5 PLAN UNFUNDED. This Plan is intended to be unfunded for purposes of
(i) Title I of ERISA and (ii) taxation of vested, accrued benefits pursuant to
the Code.
ARTICLE II - DEFINITIONS
------------------------
The following terms shall have the meanings specified below unless the
context otherwise requires:
<PAGE> 8
2.1 ACCRUED BENEFIT. The portion of a Participant's Target Retirement
Benefit that has accrued as of any date pursuant to Section 6.1.
2.2 ACTUARIAL EQUIVALENT. The lump sum equivalent value of an immediate
life annuity benefit or the immediate life annuity equivalence of a lump sum
benefit, determined in each case by applying the following assumptions:
(a) Interest, pre- and post-retirement, equal to seven percent
compounded annually.
(b) Mortality, pre-and post-retirement, as determined under a 50/50
blend of the male and female mortality rates from the 1983 Group Annuity
Mortality Table as published in IRS Revenue Ruling 95-6.
2.3 ACTUARY. The actuarial consultant designated by the Company from
time to time to make all actuarial computations required in connection with the
Plan.
2.4 AVERAGE FINAL COMPENSATION. The average of a Participant's
Compensation for the three calendar years in which the Participant's greatest
Compensation is received during his final five Plan Years of Service, provided
that the Participant's Compensation during his final Plan Year of Service shall
be deemed to equal (a) the Participant's annual base salary at the time of his
Separation from Service plus (b) any bonus received during that Plan Year.
2.5 BENEFICIARY. The individual(s), trust(s), or estate entitled to
receive benefits under this Plan after the death of a Participant or another
Beneficiary.
2.6 BENEFIT COMMENCEMENT DATE. The date as of which benefits hereunder
first become payable, in accordance with the provisions of Article VII, to or in
respect of a Participant.
2.7 BOARD. The Board of Directors of the Company.
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<PAGE> 9
2.8 CHANGE IN CONTROL. A change in control of the Company will occur
upon:
(a) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934
(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of
either (i) the then outstanding shares of the Company's common stock (the
"Common Stock") or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of the
directors (the "Outstanding Company Voting Securities"); provided, however, that
the following acquisitions shall not constitute a Change in Control: (A) any
acquisition directly from the Company (excluding an acquisition by virtue of the
exercise of a conversion privilege); (B) any acquisition by the Company or by
any corporation controlled by the Company; (C) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company; or (D) any acquisition by any corporation
pursuant to a consolidation or merger, if, following such consolidation or
merger, the conditions described in clauses (i), (ii), and (iii) of paragraph
(c) of this definition are satisfied; or
(b) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") ceasing for any reason to constitute at least two-thirds
of the Board over any period of 24 consecutive months or less; provided,
however, that any individual becoming a director subsequent to the Effective
Date whose election, or nomination for election by the Corporation's
shareholders, was approved by a vote or resolution of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election
-3-
<PAGE> 10
contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board.
(c) Adoption by the Board of a resolution approving an agreement of
consolidation of the Company with or merger of the Company into another
corporation or business entity in each case, unless, following such
consolidation or merger, (i) more than 60 percent of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
consolidation or merger and/or the combined voting power of the then outstanding
voting securities of such corporation or business entity entitled to vote
generally in the election of directors (or other persons having the general
power to direct the affairs of such entity) is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Common Stock and Outstanding
Company Voting Securities immediately prior to such consolidation or merger in
substantially the same proportions as their ownership, immediately prior to such
consolidation or merger, of the Common Stock and/or Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding the Company, any
employee benefit plan (or related trust) of the Company or such corporation or
other business entity resulting from such consolidation or merger and any Person
beneficially owning, immediately prior to such consolidation or merger, directly
or indirectly, 35 percent or more of the Common Stock and/or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 35 percent or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such consolidation or merger or
the combined voting power of the then outstanding voting securities of such
corporation or business entity entitled to vote generally in the election of its
-4-
<PAGE> 11
directors (or other persons having the general power to direct the affairs of
such entity) and (iii) at least two-thirds of the members of the board of
directors (or other group of persons having the general power to direct the
affairs of the corporation or other business entity) resulting from such
consolidation or merger were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such consolidation or merger;
provided that any right which shall vest by reason of the action of the Board
pursuant to this paragraph (c) shall be divested, with respect to any such right
not already exercised, upon (A) the rejection of such agreement of consolidation
or merger by the stockholders of the Company or (B) its abandonment by either
party thereto in accordance with its terms; or
(d) Adoption by the requisite majority of the whole Board, or by
the holders of such majority of stock of the Company as is required by law or by
the Certificate of Incorporation or By-Laws of the Company as then in effect, of
a resolution or consent authorizing (i) the dissolution of the Company or (ii)
the sale or other disposition of all or substantially all of the assets of the
Company, other than to a corporation or other business entity with respect to
which, following such sale or other disposition, (A) more than 60 percent of,
respectively, the then outstanding shares of common stock of such corporation
and/or the combined voting power of the outstanding voting securities of such
corporation or other business entity entitled to vote generally in the election
of directors (or other persons having the general power to direct the affairs of
such entity) is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in substantially
the same proportions as their ownership, immediately prior to such sale or other
disposition, of the Common Stock and/or Outstanding Company
-5-
<PAGE> 12
Voting securities, as the case may be, (B) no Person (excluding the Company and
any employee benefit plan (or related trust) of the Company or such corporation
or other business, entity and any Person beneficially owning, immediately prior
to such sale or other disposition, directly or indirectly, 35 percent or more of
the Common Stock and/or Outstanding Company Voting Securities, as the case may
be) beneficially owns, directly or indirectly, 35 percent or more of,
respectively, the then outstanding shares of common stock of such corporation
and/or the combined voting power of the then outstanding voting securities of
such corporation or other business entity entitled to vote generally in the
election of directors (or other persons having the general power to direct the
affairs of such entity) and (C) at least two-thirds of the members of the board
of directors (or other group of persons having the general power to direct the
affairs of such corporation or other entity) were members of the Incumbent Board
at the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company; provided
that any right which shall vest by reason of the action of the Board or the
stockholders pursuant to this paragraph (d) shall be divested, with respect to
any such right not already exercised, upon the abandonment by the Company of
such dissolution, or such sale or other disposition of assets, as the case may
be.
A Change in Control shall not occur upon the mere reincorporation of
the Company in another state.
2.9 CODE. The Internal Revenue Code of 1986, as amended, and including
all regulations thereunder.
2.10 COMPANY. Dairy Mart Convenience Stores, Inc. and, in the event of
a Change in Control, each successor to and assign of Dairy Mart Convenience
Stores, Inc.
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<PAGE> 13
2.11 COMPENSATION. The total salary plus bonuses and similar types of
remuneration earned by a Participant for personal services rendered to an
Employing Company for any Plan Year, regardless of when such remuneration is
actually paid (or would be paid if not deferred pursuant to any deferred
compensation plan). Compensation shall include (a) amounts deferred under any
deferred compensation plan and (b) amounts contributed from the Participant's
remuneration under any plan maintained by an Employing Company pursuant to Code
Sections 125 or 401(k). Compensation shall not include (a) employer
contributions to any employee benefit plan (including without limitation this
Plan) and all benefits provided under any such plan and (b) the value of or any
income from any types of equity-based compensation programs (including without
limitation stock options, stock appreciation rights and restricted stock).
2.12 COMPENSATION COMMITTEE. The compensation committee of the Board.
2.13 DISABILITY. A Participant's inability, on account of a physical or
mental impairment or condition, substantially to perform the material duties of
his position as an Executive Employee despite reasonable accommodations made or
proposed by his Employing Company; provided that such inability and impairment
or condition (a) are established to the satisfaction of the Board and (b) have
been (or are expected by the Board to be) of long or indefinite duration.
2.14 EARLY RETIREMENT DATE. The first of any month (a) following the
later of (i) a Participant's 55th birthday and (ii) the completion of his sixth
Year of Benefit Service and (b) prior to his Normal Retirement Date.
2.15 EFFECTIVE DATE. The date specified as such in Section 1.2 above.
2.16 EMPLOYING COMPANY. The Company and any present or future direct or
indirect subsidiary of the Company, provided that (a) any executive officer of
the Company approves the
-7-
<PAGE> 14
subsidiary's participation and (b) the board of directors of such subsidiary
accepts this Plan. For this purpose, the term "subsidiary" shall include (a) any
corporation if more than 50% of its capital stock is owned by the Company
(either directly or through any one or more such subsidiaries) and (b) any other
corporation designated as such by the Board.
2.17 ENTRY DATE. The date that an Executive Employee becomes a
Participant in the Plan as provided in Article III.
2.18 ERISA. Public Law No. 93-406, the Employee Retirement Income
Security Act of 1974, as amended, and including all regulations thereunder.
2.19 EXECUTIVE EMPLOYEE. An Employee who has been designated by his
Employing Company as an officer with senior management responsibilities.
2.20 GOOD CAUSE. A Participant's (a) willful and continuing failure
substantially to perform duties assigned in good faith from time to time by his
Employing Company (provided that such failure is not solely the result of (i) a
Disability or (ii) a leave of absence either granted in writing by his Employing
Company or guaranteed by applicable law or (iii) some other reason agreed to in
advance by the Board); or (b) willful conduct which is demonstrably and
materially injurious to any Employing Company; or (c) conviction of a felony or
a misdemeanor involving the theft, misappropriation or embezzlement of property
of any Employing Company.
For purposes of this definition, the term Board shall include the board
of directors (or body with a similar function) of the Company's successor
following a Change in Control.
2.21 GROSS-UP PAYMENT. A payment made to or on behalf of a Participant
pursuant to Section 4.2 of this Plan.
-8-
<PAGE> 15
2.22 NET WORTH CONDITION. A decrease in the Company's net worth (as
determined by the Company's independent accountants in accordance with the
methodology used in preparation of the Company's financial statements) below $1
million as of the end of any fiscal quarter.
2.23 NORMAL RETIREMENT DATE. The first day of the next month following
a Participant's 65th birthday.
2.24 OTHER RETIREMENT BENEFITS. The Actuarial Equivalent of the sum of
the following amounts paid or payable to or on behalf of a Participant upon or
after his or her Separation from Service: (a) one-half of the Social Security
retirement, survivorship and disability benefits available to or on behalf of
the Participant as of the later of his or her Normal Retirement Date or
Separation from Service (or as projected to be available on the Participant's
Normal Retirement Date if payment under this Plan is made or commences before
the Participant's Normal Retirement Date), as payable pursuant to Title II of
the Social Security Act, as amended, or successor legislation, PLUS (b) the lump
sum benefits available to or on behalf of the Participant as of the first day of
the next month following his or her Separation from Service: (i) under each of
the benefit plans specified below (regardless of whether such plans were adopted
before, on or after the Effective Date of this Plan), (ii) attributable to
Employing Company contributions, and (iii) calculated as specified for each such
benefit plan:
- DAIRY MART CONVENIENCE STORES, INC. 401(K) PLAN (and any
successor thereto) ("401(k) plan")--the benefit attributable to
Employing Company contributions only (including without
limitation employer matching contributions), as determined by
aggregating all such contributions which could have been
obtained by the Participant pursuant to the terms of the 401(k)
Plan and applicable law (including without limitation
operational
-9-
<PAGE> 16
contribution limits resulting from application of the rules of
Code Sections 401(k), 401(m) and 415) regardless of the amount
of such contributions actually made, AND ADDING deemed interest
at a rate of seven percent compounded annually (but prorated
for partial years) over the periods of time between the date of
each contribution and the date of the determination of the
Participant's Other Retirement Benefits, and without reduction
for any hardship withdrawal or other benefit distribution taken
by the Participant under the 401(k) plan.
- DAILY MART CONVENIENCE STORES, INC. EMPLOYEE STOCK OWNERSHIP
PLAN (and any successor thereto) ("ESOP")--the benefit
determined by MULTIPLYING all shares of Company stock allocated
to the Participant's ESOP account through the date of the
determination of his or her Other Retirement Benefits TIMES the
share value of such stock on the date of the Participant's
initial participation in the ESOP (but adjusted for any stock
dividends, stock splits, stock combinations or other
recapitalization after such date) AND ADDING deemed interest on
such product at a rate of seven percent compounded annually
(but prorated for partial years) over the period of time
between the date of the Participant's initial participation in
the ESOP and the date of the determination of the Participant's
Other Retirement Benefits, and without reduction for any
benefit distribution taken by the Participant under the ESOP.
- DAIRY MART CONVENIENCE STORES, INC. SUPPLEMENTAL EMPLOYEE STOCK
OWNERSHIP PLAN AND TRUST (and any successor thereto)
("SESOP")--the
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<PAGE> 17
Participant's SESOP benefit, as determined pursuant to the
principles specified above for the ESOP.
- OTHER PLANS--the benefits determined pursuant to the principles
specified above for the 401(k) plan that are attributable to
Employing Company contributions or allocations on the
Participant's behalf to or under any other deferred
compensation or retirement-type plan, whether or not such plan
is tax qualified pursuant to the Code or is deemed to be a
"pension plan" pursuant to ERISA.
2.25 PARTICIPANT. Any Executive Employee who is covered by this Plan in
accordance with the provisions of Article III.
2.26 PLAN. The Dairy Mart Convenience Stores, Inc. Supplemental
Executive Retirement Plan, as stated herein and as amended or supplemented from
time to time.
2.27 PLAN ADMINISTRATOR. The committee appointed to administer the plan
pursuant to Section 10.1 of this Plan.
2.28 PLAN YEAR. The fiscal year, ending on the last day of each
February following the Effective Date while this Plan remains in effect,
provided that for purposes of the definitions of Average Final Compensation and
Year of Benefit Service, "Plan Year" shall include all such periods before or
after the Effective Date of the Plan.
2.29 SEPARATION FROM SERVICE. The termination of a Participant's
Service for any reason, including the death of the Participant.
2.30 SERVICE. A Participant's period of employment with an Employing
Company and (for periods prior to the Effective Date only) any period of service
by such Participant as a member of the Board.
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<PAGE> 18
2.31 TARGET RETIREMENT BENEFIT. The Actuarial Equivalent of a
retirement benefit payable on a Participant's Normal Retirement Date and
continuing for the Participant's life in an amount equal to the excess, if any,
of (a) fifty percent (50%) of the Participant's Average Final Compensation over
(b) his or her Other Retirement Benefits.
2.32 TRUST. The trust created under the Dairy Mart Convenience Stores,
Inc. Supplemental Executive Retirement Plan Trust Agreement in the event of a
Change in Control.
2.33 VESTED BENEFIT. The portion of a Participant's Accrued Benefit
calculated in accordance with Section 5.2 of this Plan.
2.34 VESTING PERCENTAGE. The percentage determined in accordance with
Section 5.1 of this Plan.
2.35 YEAR OF BENEFIT SERVICE. Except as otherwise specified in Schedule
3.1 to the Plan, a Participant shall be credited with one Year of Benefit
Service for each Plan Year during which the Participant has any Service.
Notwithstanding the foregoing, no Participant shall receive credit for more than
three Years of Benefit Service on account of any Service prior to the Effective
Date of the Plan.
ARTICLE III - PARTICIPATION
---------------------------
3.1 ELIGIBILITY REQUIREMENTS. Only Executive Employees shall be
eligible to become and remain Participants of the Plan. An Executive Employee
shall become a Participant only upon designation as a Participant on Schedule
3.1 to the Plan by the Board after recommendation by the Compensation Committee
of the Board. A Participant shall continue as a Participant for the purpose of
accruing additional benefits under the Plan only so long as he remains in
Service as an Executive Employee.
-12-
<PAGE> 19
3.2 ENTRY AND RE-ENTRY INTO THE PLAN. An Executive Employee shall
become a Participant on the effective date of his designation as a Participant
on Schedule 3.1. If a Participant's Service is subsequently broken and he is
later reemployed as an Executive Employee, he shall resume his participation in
the Plan only if he is again designated as a Participant by the Board on an
amended Schedule 3.1 and only on the effective date of such new designation.
ARTICLE IV - RETIREMENT BENEFITS
--------------------------------
4.1 AMOUNT, TIMING AND FORM OF BENEFITS. A Participant who has a
Separation from Service after his or her Entry Date shall be entitled to receive
the Actuarial Equivalent of his or her Vested Benefit, as determined in
accordance with Articles V and VI, commencing on the Participant's Benefit
Commencement Date as determined in Article VII, and payable in the form provided
in Article VIII.
4.2 GROSS-UP PAYMENTS.
(a) CALCULATION. In the event that any payment or benefit received or
to be received by or on behalf of a Participant pursuant to the terms of this
Plan (the "Plan Payments") or to be received by or on behalf of the Participant
in connection with his or her Separation from Service pursuant to any plan or
arrangement or other agreement with the Company (or any affiliate that would be
an Employing Company upon adoption of this Plan) (".Other Payments" and,
together with the Plan Payments, the "Payments") would be subject to the excise
tax (the "Excise tax") imposed by Code Section 4999, as determined below, the
Company shall pay to or on behalf of the Participant at the time specified in
paragraph (b) of this Section 4.2, an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Participant or other recipient
-13-
<PAGE> 20
(the "Payee"), after deduction of the Excise Tax on all Payments and any
federal, state and local income tax and Excise Tax upon the payment provided for
by this paragraph (a), and any interest, penalties or additions to tax payable
by him or her with respect thereto, shall be equal to the total present value
(determined at a discount rate of seven percent compounded annually) of all of
the Payments at the time such Payments are to be made. For purposes of
determining whether any of the Payments will be subject to the Excise Tax and
the amounts of such Excise Tax, (i)(I) the total amount of the Payments shall be
treated as "parachute payments" within the meaning of Code Section 280G(b)(2),
and (II) all "excess parachute payments" within the meaning of Code Section
280G(b)(1) shall be treated as subject to the Excise Tax, except to the extent
that, in the opinion of independent tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Payee ("Tax Counsel"), a
Payment (in whole or in part) does not constitute a "parachute payment" within
the meaning of Code Section 280(b)(2), or such "excess parachute payments" (in
whole or in part) are not subject to the Excise Tax, (ii) the amount of the
Payments that shall be treated as subject to the Excise Tax shall be equal to
the lesser of (I) the total amount of the Payments or (II) the amount of "excess
parachute payments" within the meaning of Code Section 280(b)(1) (after applying
clause (i) hereof), and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by Tax Counsel in accordance with the
principles of Code Sections 280G(d)(3) and (4). For purposes of determining the
amount of the Gross-Up Payment, the Payee shall be deemed to pay federal income
tax at the highest marginal rates of federal income taxation applicable to
individuals in the calendar year in which the Gross-Up Payment is to be
-14-
<PAGE> 21
made and state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of his or
her residence in the calendar year in which the Gross-Up Payment is to be made,
net of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
(b) PAYMENT. The Gross-Up Payments provided for in paragraph (a) of
this Section 4.2 shall be made upon the earlier of (i) the payment to the Payee
of any Payment or (ii) the imposition upon him or her or payment by him or her
of any Excise Tax.
(c) ADJUSTMENT. If it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding or the opinion of Tax
Counsel that the Excise Tax is less than the amount taken into account under
paragraph (a) of this Section 4.2, the Payee shall repay to the Company within
five days of his or her receipt of notice of such final determination or opinion
the portion of the Gross-Up Payment attributable to such reduction (plus the
portion of the Gross-Up Payment attributable to the excise tax and federal,
state and local income tax imposed on the Gross-Up Payment being repaid by him
or her if such repayment results in a reduction in Excise Tax or a federal,
state and local income tax deduction) plus any interest received by him or her
on the amount of such repayment. If it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding or the
opinion of Tax Counsel that the Excise Tax exceeds the amount taken into account
under paragraph (a) of this Section 4.2 (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess within five days of the Company's receipt of notice of such final
determination or opinion.
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<PAGE> 22
ARTICLE V - VESTING AND FORFEITURES
-----------------------------------
5.1 VESTING PERCENTAGE. A Participant's Vesting Percentage as of any
date shall be the greater of (a) one hundred percent (100%) if such date is on
or after the date on which any of the following events occurs: (i) a Change in
Control unless such Change in Control was approved by a resolution adopted by at
least two-thirds of the members of the Incumbent Board (as defined in Section
2.8), or (ii) the Participant's Separation from Service either involuntarily
without Good Cause or on account of death or Disability and (b) otherwise the
percentage specified in the following table for the number of Years of Benefit
Service credited to the Participant as of such date:
<TABLE>
<CAPTION>
Years of
--------
Benefit Service Vesting Percentage
--------------- ------------------
<S> <C>
Five or Fewer 0%
Six or More 100%
</TABLE>
5.2 VESTED BENEFIT. A Participant's Vested Benefit under this Plan
shall be the product of his Accrued Benefit multiplied by his Vesting
Percentage.
5.3 FORFEITURES. Any portion of a Participant's Accrued Benefit that is
not included in his or her Vested Benefit at the time of his or her Separation
from Service shall be immediately forfeited. Any amounts forfeited by a
Participant shall remain the sole and exclusive property of the Participant's
Employing Company and shall not increase the benefits of any other Participant.
5.4 AMENDMENT OF VESTING PROVISIONS. No amendment made to the Plan
shall reduce a Participant's Vested Benefit under the Plan. However, an
amendment may increase the Service required and impose or change any other
requirements or conditions that a Participant must meet
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<PAGE> 23
in order to become vested or further vested in any Accrued Benefit to the extent
not already vested as of the date that the amendment is adopted.
ARTICLE VI - ACCRUED BENEFITS
-----------------------------
6.1 DETERMINATION OF ACCRUED BENEFIT. A Participant's Accrued Benefit
as of any date shall be the greater of (a) one hundred percent (100%) of his
Target Retirement Benefit if such date is on or after the date on which either
of the following events occurs: (i) a Change in Control, unless such Change in
Control was approved by a resolution adopted by at least two-thirds of the
members of the Incumbent Board (as defined in Section 2.8), or (ii) the
Participant's involuntary Separation from Service without Good Cause and (b)
otherwise, the percentage of his Target Retirement Benefit determined by
multiplying one hundred percent (100%) times the fraction (not greater than one)
equal to the number of the Participant's credited Years of Benefit Service as of
the determination date divided by the total number of credited Years of Benefit
Service that the Participant would have at his Normal Retirement Date if he
remained in Service until such date.
6.2 ADJUSTMENT FOR EARLY OR POSTPONED RETIREMENT. Any benefit that is
paid or begun prior to a Participant's Normal Retirement Date or on account of
the Participant's death or is postponed beyond the Participant's Normal
Retirement Date shall equal the Actuarial Equivalent of the amount that would
have been payable if the same benefit were paid on his or her Normal Retirement
Date.
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<PAGE> 24
ARTICLE VII - BENEFIT COMMENCEMENT DATE
---------------------------------------
7.1 ELIGIBILITY FOR PAYMENT. A Participant's benefits shall be paid
from the Plan only after both of the following conditions are met: (a) the
occurrence of the Participant's Separation from Service and (b) the first to
occur of (i) the Participant's attainment of his Early Retirement Date, (ii) the
Participant's death or Disability, (iii) a Change in Control, or (iv) the Net
Worth Condition.
7.2 BENEFIT COMMENCEMENT DATE.
(a) TIME OF COMMENCEMENT. Unless a Participant or Beneficiary (as the
case may be) has made a timely election to defer payment with the approval of
the Administrative Committee pursuant to paragraph (b) of this Section 7.2, the
Participant's Vested Benefit under this Plan shall be paid or begin 60 days
after the date on which the conditions of Section 7.1 are first met.
Notwithstanding the foregoing, at any time after a Participant's Separation from
Service and prior to the earlier of (i) payment or commencement of the
Participant's Benefit. pursuant to this Section 7.2 and (ii) the date on which a
Change in Control occurs, the Company may elect unilaterally to defer payment or
commencement of all or any portion of the Participant's Benefit until the next
January following the Participant's Separation from Service if the Participant
was a "covered employee" within the meaning of Code Section 162(m) at the time
of his or her Separation from Service. Any such election by the Company may be
made by either the Board, the Compensation Committee, the Administrative
Committee or the Company's chief executive officer, and shall be evidenced in
writing and sent to the Participant (at his or her last known address).
(b) BENEFIT COMMENCEMENT ELECTION. Subject to the Administrative
Committee's approval, a Participant or Beneficiary may make a one-time
irrevocable election to defer
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<PAGE> 25
payment of benefits to a postponed Benefit Commencement Date on any determinable
date beyond the Participant's initial Benefit Commencement Date determined
pursuant to paragraph (a) of this Section 7.2, provided that such election is
made on the form prescribed by the Administrative Committee and is received by
the Administrative Committee not later than 30 days before such initial Benefit
Commencement Date. The Administrative Committee shall have absolute discretion
to approve, disapprove or modify before approving any such election to defer
benefits. Notwithstanding the foregoing, the Participant's benefits shall be
paid immediately in one lump sum if the Net Worth Condition ever occurs and the
Participant fails to confirm his election, subject to the Administrative
Committee's approval, before payment is made.
7.3 HARDSHIP WITHDRAWALS.
(a) DEFINITION. A Hardship exists when a Participant has suffered a
severe financial setback resulting from any of the following: (i) a sudden and
unexpected illness or accident of the Participant or of a dependent (within the
meaning of Code Section 152(a)) of the Participant, (ii) loss of or to the
Participant's property due to casualty, or (iii) other similar extraordinary and
unforeseeable circumstances, arising in each case from events beyond the
Participant's control. Whether circumstances constitute an unforeseeable
emergency depends upon the facts of each case. Moreover, in any event, no amount
may be paid to a Participant pursuant to this Section 7.3 to the extent that any
claimed Hardship is or may be relieved (i) through reimbursement or compensation
by insurance or otherwise or (ii) by liquidation of the Participant's assets, to
the extent that such liquidation would not itself cause severe financial
hardship. Hardship shall not include payment of college expenses or the purchase
of a home.
(b) PROCEDURE. A Participant who has had a Separation from Service or
the Beneficiary of a deceased Participant may request withdrawal of a necessary
portion of the
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<PAGE> 26
Participant's Vested Benefit under the Plan on account of Hardship if the
Participant or Beneficiary is awaiting payment under Section 7.2 or installment
payments under Sections 8.2 or 8.3. Such request must be in writing to the
Administrative Committee and shall be accompanied by evidence of the existence
of all applicable Hardship conditions specified in paragraph (a) of this Section
7.3. The Administrative Committee shall review each such request and determine
whether payment of any amount is justified. If payment is justified, the amount
shall be limited to an amount reasonably needed to meet the demonstrated
financial Hardship, but including any income and employment taxes reasonably
expected to result from the Hardship distribution itself. The Administrative
Committee shall also determine the form of any payment to be made to a
Participant on account of a demonstrated Hardship. Any remaining amount of the
Participant's Vested Benefit after any such Hardship withdrawal shall continue
to be held subject to the Plan for later distribution in accordance with the
provisions of this Section 7 and of Section 8 of the Plan.
ARTICLE VIII - BENEFIT FORMS AVAILABLE
--------------------------------------
8.1 FORMS OF BENEFIT FOR PARTICIPANTS.
(a) NORMAL FORM OF BENEFITS. Unless a Participant has made a timely
election to receive installment payments with the approval of the Administrative
Committee pursuant to paragraph (b) below, the Participant's Vested Benefit
shall be paid in one lump sum.
(b) INSTALLMENT BENEFIT ELECTION. Subject to the Administrative
Committee's approval, a Participant who has had no Separation from Service
before attaining his Early Retirement Date or whose Separation from Service was
on account of his Disability may make a one-time irrevocable election to receive
the Actuarial Equivalent of his Vested Benefit in
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<PAGE> 27
substantially equal annual installments over a period of years not to exceed the
Participant's life expectancy or the joint life expectancies of the Participant
and his spouse, in each case determined as of the date that the installment
payments begin. Any such election shall be made on the form prescribed by the
Administrative Committee and must be received by the Administrative Committee no
later than 30 days before the Benefit is to be paid pursuant to Section 7.2 of
the Plan (after taking into account any election made by the Participant under
paragraph (b) of Section 7.2). The Administrative Committee shall have absolute
discretion to approve, disapprove or modify (including but not limited to
changing the number of installments) before approving any such election to
receive installment payments. Notwithstanding the foregoing, the Actuarial
Equivalent value of the Participant's remaining installment benefits shall be
paid immediately in one lump sum if the Net Worth Condition ever occurs and the
Participant fails to confirm his election, subject to the Administrative
Committee's approval, before payment is made.
8.2 FORMS OF BENEFIT FOR SURVIVING SPOUSE BENEFICIARIES.
(a) NORMAL FORM OF BENEFIT. Unless a surviving spouse Beneficiary of a
deceased Participant has made a timely election to receive installment payments
with the approval of the Administrative Committee pursuant to paragraph (b)
below, the Vested Benefit of such surviving spouse Beneficiary shall be paid in
one lump sum.
(b) INSTALLMENT BENEFIT ELECTION. Subject to the Administrative
Committee's approval, a surviving spouse Beneficiary may make a one-time
irrevocable election to receive the Actuarial Equivalent of the Participant's
Vested Benefit in substantially equal annual installments over a period of years
not to exceed the surviving spouse's life expectancy, as determined on the date
that the installment payments begin. Any such election shall be made on
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<PAGE> 28
the applicable form prescribed by the Administrative Committee and must be
received by the Administrative Committee no later than 30 days before the
Benefit is to be paid pursuant to Section 7.2 of the Plan (after taking into
account any election made by the surviving spouse Beneficiary under paragraph
(b) of Section 7.2). The Administrative Committee shall have absolute discretion
to approve, disapprove or modify (including but not limited to changing the
number of installments) before approving any such election to receive
installment payments. Notwithstanding the foregoing, the Actuarial Equivalent
value of the Beneficiary's remaining installment benefits shall be paid
immediately in one lump sum if the Net Worth Condition ever occurs and the
Beneficiary fails to confirm his or her election, subject to the Administrative
Committee's approval, before payment is made.
8.3 FORM OF BENEFIT FOR OTHER BENEFICIARIES. Death benefits to any
Beneficiary who is not the surviving spouse of the Participant shall be paid in
one lump sum.
ARTICLE IX - BENEFICIARIES
--------------------------
9.1 DESIGNATION. Each Participant (and each surviving Beneficiary who
is awaiting or receiving payment of a Vested Benefit under the Plan) shall have
the right to designate a Beneficiary, and to amend or revoke such designation at
any time. Each such designation, amendment or revocation shall be made on the
form prescribed by the Administrative Committee, and shall be effective only
upon receipt by the Administrative Committee.
9.2 FAILURE TO DESIGNATE A BENEFICIARY. If no designated Beneficiary
survives the Participant (or a surviving Beneficiary) and any Vested Benefit is
payable following the Participant's (or surviving Beneficiary's) death, the
Administrative Committee shall direct that
-22-
<PAGE> 29
payment of such Vested Benefit be made to the person or persons in the first of
the following classes of successive preference Beneficiaries:
(a) Spouse
(b) Descendants, Per Stirpes
(c) Parents
(d) Siblings
(e) Estate
ARTICLE X - PLAN ADMINISTRATION
-------------------------------
10.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by an
Administrative Committee of one or more members appointed by the Board, and
shall be the Compensation Committee unless a different appointment is then in
effect under this Plan. Each member shall serve at the pleasure of the Board.
The Administrative Committee shall act by majority decision of its members. The
Committee shall have responsibility for the operation and administration of the
Plan and shall have the power and authority to adopt, interpret, alter, amend or
revoke all forms, rules and regulations necessary to administer the Plan, to
interpret all provisions of the Plan and determine all questions of eligibility
for participation in and benefits under the Plan and all other issues of
administration, and to delegate ministerial duties and employ such outside
professionals as may be required for prudent administration of the Plan. The
Administrative Committee shall also have the authority to enter into agreements
on behalf of any Participating Employer as necessary to implement this Plan. The
members of the Administrative Committee, if otherwise eligible, may participate
in the Plan, but shall not make decisions of the Committee solely with respect
to their own benefits or Hardship withdrawals.
10.2 INDEMNIFICATION. Each Employing Company shall jointly and
severally indemnify and save harmless any individual acting as a member of the
Administrative Committee or in any
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<PAGE> 30
other fiduciary capacity from, against, for and in respect of any and all
damages, losses, obligations, liabilities, liens, deficiencies, attorneys' fees,
costs and expenses incident to the performance of such person's duties unless
resulting from the gross negligence, willful misconduct, or lack of good faith
of such individual. Such indemnification shall apply to any such individual even
though at the time liability was imposed the individual was no longer acting in
a fiduciary capacity or as a member of the Administrative Committee.
10.3 OWNERSHIP OF ASSETS. All amounts accrued under this Plan, all
property and rights purchased with such amounts, and all income attributable to
such amounts, property or rights shall remain (until made available to the
Participant or Beneficiary) solely the property and rights of the relevant
Employing Company (without being restricted to the provision of benefits under
this Plan) and shall be subject to the claims of the general creditors of the
Company and of each Employing Company. Except after a Change in Control, no
trust is created under this Plan and it is not otherwise funded in any manner.
No Participant or Beneficiary shall have any preferred claim on, or any
beneficial ownership interest in, any assets of any Employing Company or any
Accrued Benefit under the Plan prior to the time such assets are distributed as
a Vested Benefit, and all rights created under the Plan shall be mere unsecured
contractual rights. Notwithstanding the foregoing, nothing in this Plan shall be
construed to prohibit any one or more Participants or Beneficiaries from
purchasing insurance to protect against loss on account of the provisions of
this Section 10.3, and the Employing Companies shall reasonably cooperate in any
effort to obtain such insurance; provided that any such insurance shall be
obtained, owned and paid for solely by the insured persons and not by any
Employing Company.
10.4 EXPENSES. Each Employing Company shall pay (a) its share of all
fees and expenses incurred in administering the Plan, (b) all taxes imposed on
such Employing Company
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<PAGE> 31
in connection with the Plan, and (c) all costs and expenses (including
reasonable attorneys' fees) incurred by each Participant and Beneficiary to
enforce the terms of the Plan against the Employing Company or to collect a
Vested Benefit under the Plan from the Employing Company.
ARTICLE XI - TRUST AGREEMENT; LIQUIDITY FUND
--------------------------------------------
11.1 TRUST FUND. Except after a Change in Control, no assets of any
Employing Company shall be held in trust for any purposes under the Plan. Upon
the occurrence of a Change in Control, and from time to time (but at least once
each Plan Year) thereafter, the Company shall cause each Employing Company to
contribute to the Trust assets sufficient to actuarially meet the Employing
Company's liability for all Vested Benefits under the Plan at each time that
assets are contributed.
11.2 LIQUIDITY FUND. Any Employing Company at its sole option may from
time to time maintain liquid assets representing all or any portion of the value
of its Participants' Accrued Benefits. Any such liquidity fund shall be invested
at the discretion of the Administrative Committee, shall not be held in trust
for any Participant or Beneficiary, and shall in all respects remain subject to
the provisions of Section 10.3.
ARTICLE XII - AMENDMENT OF THE PLAN
-----------------------------------
12.1 AMENDMENT. The Company reserves the right to amend the Plan at any
time and from time to time. Each amendment shall be approved by the Compensation
Committee. No amendment shall diminish or deprive a Participant of any benefit
already accrued. The Company may amend the Plan, and may do so retroactively if
necessary, to conform the Plan to mandatory
-25-
<PAGE> 32
provisions of applicable laws or regulations or as permitted by the Internal
Revenue Service or the Department of Labor.
12.2 EFFECT OF AMENDMENTS ON VESTING. Notwithstanding the provisions of
the preceding Section 12. 1, no amendment to the Plan's vesting provisions shall
reduce any Participant's Vested Benefit, determined as of the later of (a) the
date of execution of such amendment or (b) the effective date of such amendment.
ARTICLE XIII - TERMINATION OF THE PLAN
--------------------------------------
13.1 TERMINATION. The Company (for itself and each Employing Company)
intends to continue the Plan indefinitely, but it does not assume a contractual
obligation to do so, and the Company may terminate the Plan at any time (or
terminate the participation of one or more Employing Companies), provided that
no such action of the Company shall reduce any Participant's Vested Benefit.
Each Employing Company reserves the right by action of its board of directors to
withdraw from the Plan, provided that no such withdrawal shall reduce any
Participant's Vested Benefit.
13.2 BENEFITS AFTER PLAN TERMINATION. In the event that the Company
shall terminate the Plan, in whole or in part, the rights of nonvested
Participants to benefits accrued under the Plan as of the date of such
termination shall remain unvested unless the Plan is specifically amended to
provide for additional partial or full vesting. In no event shall any person
have recourse against any Employing Company for any reason upon termination of
the Plan other than for non-payment of Vested Benefits.
-26-
<PAGE> 33
ARTICLE XIV - MISCELLANEOUS
---------------------------
14.1 LIMITATIONS OF RIGHTS; EMPLOYMENT RELATIONSHIP. Neither the
establishment of this Plan nor any modification thereof, nor the accrual or
vesting of any benefits, nor the creation of any fund or account, nor the
payment of any benefits, shall be construed as giving a Participant or any other
person any legal or equitable right against any Employing Company except as
provided in this Plan. In no event shall the terms of employment of any employee
be modified or in any way be affected by the Plan.
14.2 DETERMINATION OF BENEFITS, CLAIMS, PROCEDURE AND ADMINISTRATION.
(a) CLAIM. A person who believes that he or she is being denied a
benefit to which he or she is entitled under the Plan (hereinafter referred to
as a "Claimant") may file a written request for such benefit with the Company,
setting forth his or her claim. The request must be addressed to the
Administrative Committee in care of the Company at its then principal place of
business.
(b) DECISION ON CLAIM. Upon receipt of a claim, the Administrative
Committee shall advise the Claimant that a reply will be forthcoming within 90
days and shall, in fact, deliver such reply within such period. The
Administrative Committee may, however, extend the reply period for an additional
90 days for a reasonable cause.
If the claim is denied in whole or in part, the Administrative
Committee shall adopt a written opinion, using language calculated to be
understood by the Claimant, setting forth:
(i) The specific reason or reasons for such denial;
(ii) The specific reference to pertinent provisions of the Plan on
which such denial is based;
-27-
<PAGE> 34
(iii) A description of any additional material or information necessary
for the Claimant to perfect his or her claim and an explanation of why such
material or such information is necessary;
(iv) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review; and
(v) The time limits for requesting a review and for completing any such
review.
(c) REQUEST FOR REVIEW. Within 60 days after the receipt by the
Claimant of the written opinion described above, the Claimant may request in
writing that the chief executive officer of the Company (or his designee) review
the determination of the Administrative Committee. Such request must be
addressed to the chief executive officer of the Company, at the Company's then
principal place of business. The Claimant or his or her duly authorized.
representative may, but need not, review the pertinent documents and submit
issues and comments in writing for consideration by the chief executive officer
or his designee. If the Claimant does not request a review of the Administrative
Committee's determination by the chief executive officer of the Company within
such 60-day period, he or she shall be barred and estopped from challenging the
Administrative Committee's determination.
(d) REVIEW OF DECISIONS. Within 60 days after receipt of a request for
review, the chief executive officer of the Company or his designee shall review
the Administrative Committee's determination. After considering all materials
presented by the Claimant the chief executive officer or his designee shall
render a written opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for a decision and containing
specific references to the pertinent provisions of the Plan on which the
decision is based. If special circumstances require that the 60-day time period
be extended, the chief executive officer
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<PAGE> 35
or his designee shall so notify the Claimant and shall render the decision as
soon as possible, but not later than 120 days after receipt of the request for
review.
14.3 ARBITRATION. Any dispute between any person claiming benefits or
any other rights under the Plan and the relevant Employing Company as to the
interpretation or application of the provisions of the Plan and amounts payable
hereunder that is not finally resolved under the claims procedure in Section
14.2 of the Plan shall be determined exclusively by binding arbitration in
Cleveland, Ohio in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court of competent jurisdiction. Except as provided in Section 10.4 after a
Change in Control, all fees and expenses of such arbitration shall be paid as
determined by the arbitrator.
14.4 NON-ASSIGNABILITY OF BENEFITS. Neither the Participant nor his or
her Beneficiary nor any other beneficiary under the Plan shall have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part or all of the amounts payable hereunder, which are expressly declared to be
nonassignable and non-transferable. Any such attempted assignment or transfer
shall be void. No amount payable under the Plan shall, prior to actual payment
thereof, be subject to seizure by any creditor of any such person for the
payment of any debt, judgment or other obligation, by a proceeding at law or in
equity, or be transferable by operation of law in the event of the bankruptcy,
insolvency, divorce or death of the Participant, his or her designated
Beneficiary or any other beneficiary under this Plan.
14.5 FACILITY OF PAYMENTS. In the event that the Administrative
Committee shall determine that any person to whom a benefit is payable under the
Plan is unable to care for his or her affairs because of illness or accident, or
is otherwise mentally or physically incompetent, or unable to give a valid
receipt, the Committee may cause the payment becoming due to be paid to
-29-
<PAGE> 36
the person's spouse, child, grandchild, parent, brother or sister, or to any
appropriate individual appointed by a court of competent jurisdiction, or to any
person deemed by the Committee to have incurred expense for such person
otherwise entitled to payment.
14.6 OBLIGATIONS TO WITHHOLD AND PAY TAXES. Each Participant or other
recipient of benefits under the Plan shall be liable for all tax obligations, if
any, with respect to any sum received pursuant to the Plan and for accurately
reporting and paying in full all such taxes to the appropriate federal, state
and local authorities. The relevant Employing Company shall have the right to
deduct and withhold from any payment due under the Plan or from other amounts
owed to or with respect to the Participant all withholding taxes and other
amounts required by law or as necessary to set off amounts owed by the
Participant to such Employing Company.
14.7 REPRESENTATIONS. No Employing Company hereby represents or
guarantees that any particular federal or state income, payroll, personal
property or other tax consequence will result from participation in this Plan. A
Participant should consult with professional tax advisors to determine the tax
consequences of his or her participation.
14.8 SEVERABILITY. If a court of competent jurisdiction holds any
provision of this Plan to be invalid or unenforceable, the remaining provisions
of the Plan shall continue to be fully effective.
-30-
<PAGE> 37
14.9 APPLICABLE LAW. This Plan shall be governed by and construed in
accordance with applicable federal law and, to the extent not preempted by such
federal law, the laws of the State of Ohio applicable to contracts that are made
and to be wholly performed in such jurisdiction.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
under seal by its duly authorized representative this 5th day of May, 1998.
DAIRY MART CONVENIENCE STORES, INC.
By: /s/ Greg G. Landry
--------------------------
Title: Exec. V.P.
-31-
<PAGE> 38
SCHEDULE 3.1 TO THE DAIRY MART CONVENIENCE STORES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Designation of Participants and Retroactive Benefit Service Credits
Effective as of March 1, 1998)
- --------------------------------------------------------------------------------
EFFECTIVE DATE RETROACTIVE CREDIT FOR YEARS OF
PARTICIPANT OF PARTICIPATION BENEFIT SERVICE PRIOR TO ENTRY DATE
- ----------- ---------------- -----------------------------------
Robert Stein March 1, 1998 As specified in the Plan document
Gregory Landry March 1, 1998 As specified in the Plan document
<PAGE> 1
Exhibit 10.27
DIRECTORS' DEFERRED COMPENSATION PLAN
DAIRY MART CONVENIENCE STORES, INC. (the "Company") desires to
establish a Directors' Deferred Compensation Plan (the "Plan") to assist it in
attracting and retaining persons of competence and stature to serve as outside
directors by enabling them to defer receipt of the fees payable to them by the
Company for their services as directors.
Therefore, the Company hereby adopts the Plan as hereinafter set forth:
1. EFFECTIVE DATE. The Plan shall apply to all elections to defer made
after its adoption and shall apply to all directors' fees payable with respect
to periods commencing with the Company's fiscal quarter which begins November 1,
1998.
2. PARTICIPATION. Each director of the Company (a) who is duly elected
or appointed to the Company's Board of Directors and (b) who receives fees for
services as a director, may elect to defer receipt of fees otherwise payable to
him, as provided for in the Plan. Each such director who elects to defer fees
shall be a Participant in the Plan.
3. ADMINISTRATION. The Company's Board of Directors appoints Robert B.
Stein, Jr. and Gregory G. Landry, each of whom is a director or officer of the
Company who is not eligible to become a Participant, to act as the Administrator
of the Plan ("Administrators"). The Administrators shall serve at the pleasure
of the Board of Directors and shall administer, construe and interpret the Plan.
The Administrators shall not be liable for any act done or determination made in
good faith. The Board of Directors shall have the power to designate additional
or replacement Administrators at its discretion.
4. DEFERRALS.
(a) DEFERRAL ELECTION. Any eligible director may file with the
Administrators of the Plan, prior to January 1 of each year an election in
writing to participate in the Plan for
<PAGE> 2
that year or for that year and succeeding years. Each director who first becomes
eligible to participate after the date of the adoption of this Plan may make an
election for the portion of the year in which he first become eligible with
respect to fees for services to be rendered after the date of such election.
When a deferral election is filed, no fees will be paid for services so
designated for that year (or portion thereof) or, if the election so provides,
for that year and for succeeding years. If an election has been filed to
participate in the Plan for succeeding years and a Participant wishes to
discontinue deferral, an election to terminate participation in the Plan for any
year must be filed prior to January 1 of that year.
(b) ACCOUNTING. The Company shall maintain appropriate records which
shall list and reflect each Participant's credits and valuations ("Deferral
Accounts"). The Company shall credit to each Participant's Deferral Account an
amount equal to the fees that would have been paid to him if he had not elected
to participate in the Plan. The credit shall be made on the date on which the
fee would have been paid absent a deferral election. No funds shall be
segregated into the Deferral Account of Participants; said accounts shall
represent a general unsecured obligation of the Company.
(c) VALUATION. Until the first distribution is made to a Participant,
amounts credited to a Deferral Account of such Participant shall be increased or
decreased as measured by the market value of the Company's Class A Common Stock
(the "Common Stock") plus the value of dividends or other distributions on the
Company's Common Stock. Each amount credited to a Deferral Account shall be
assigned a number of Share Units (including fractions of a Share) determined by
dividing the amount credited to the Deferral Account, whether in lieu of payment
of fees for service as a director or as a dividend or other distribution
attributable to such Share Units, by the fair market value of a share of the
Company's Common Stock on the date of
2
<PAGE> 3
credit. Fair market value shall be the mean between the high and low selling
price of a share of the Company's Common Stock on the American Stock Exchange on
the applicable date or, if no sales occurred on such date, on the most recent
earlier date on which sales occurred. Each Share Unit shall have the value of a
Common Stock of the Company. The number of Share Units shall be adjusted to
reflect stock splits, stock dividends or other capital adjustments effected
without receipt of consideration by the Company.
5. DISTRIBUTION. A Participant shall elect in writing, at the time he
makes each deferral election under subparagraph 4(a), the year in which
distribution of the credits to his Deferral Account to which the deferral
election relates shall commence, and whether distribution will be made in a lump
sum or in installments, as permitted in the second succeeding sentence of this
Section 5. Payment shall commence not earlier than the January 1 following the
year in which the Participant attains age 55 and not later than the January 1
following the year in which the Participant attains age 72. Commencing
immediately prior to the first distribution to a Participant and continuing
thereafter, amounts credited to the Deferral Account of such Participant shall
be credited with interest, compounded quarterly, calculated at a rate per annum
for each fiscal quarter of the Company equal to the prime rate of interest
published in THE WALL STREET JOURNAL on the first business day of that quarter.
Payment may be made in one lump sum, or in five or ten equal annual installments
of the Deferral Account balance allocated to such installment payments
determined as of the December 31 immediately preceding commencement of
distribution, with each payment accompanied by any interest credited during the
period preceding payment of the installment. The time and method of distribution
of benefits may vary with each separate election, but each election shall be
irrevocable. The Deferral Accounts do not represent rights to acquire the
Company's Common Stock; payment shall only be made in cash.
3
<PAGE> 4
6. DEATH OR DISABILITY.
(a) If a Participant's service is terminated by reason of death or
disability prior to the distribution of any portion of his benefits, the Company
shall, within ninety (90) days of the date of service termination, commence
distribution of benefits to the Participant (or to the beneficiary or the
beneficiaries in the event of death). Distribution shall be made in accordance
with the method of distribution elected by the Participant pursuant to paragraph
5 hereof. If a Participant's death or disability occurs after distribution of
benefits hereunder has begun, the Company shall continue to make distributions
to the Participant (or to the beneficiary or beneficiaries in the event of
death) in accordance with the methods of distribution elected by the Participant
pursuant to paragraph 5 hereof.
(b) Each Participant may designate one or more beneficiaries to receive
distributions in the event of Participant's death by filing with the Company a
beneficiary designation on a form provided. The designated beneficiary or
beneficiaries may be changed by a Participant at any time prior to his death by
the delivery to the Company of a new beneficiary designation form. If no
beneficiary shall have been designated, or if no designated beneficiary shall
survive the Participant, distributions pursuant to this provision shall be made
to the Participant's estate.
7. ASSIGNMENT AND ALIENATION OF BENEFITS. To the extent permitted by
law, the right of any Participant to any account, benefit or payment hereunder
shall not be subject in any manner to attachment or other legal process for the
debts of such Participant, and no account, benefit or payment shall be subject
to anticipation, alienation, sale, transfer, assignment or encumbrance.
4
<PAGE> 5
8. AMENDMENT OR TERMINATION. The Board of Directors of the Company may
terminate this Plan at any time or amend it at any time and from time to time.
No amendment or termination of this Plan shall affect the rights of a
Participant accrued prior thereto.
9. TAXES. The Company shall not be responsible for the tax consequences
under federal, state or local law of any election made by any Participant under
the Plan. All payments under the Plan shall be subject to withholding and
reporting requirements to the extent permitted by applicable law.
10. APPLICABLE LAW. This Plan shall be interpreted under the laws of
the State of Ohio.
IN WITNESS WHEREOF, the Company has caused this Plan to be adopted, and
executed by its President, this 1ST day of July, 1998.
DAIRY MART CONVENIENCE STORES, INC.
/s/ Robert B. Stein, Jr.
By:_______________________________
Robert B. Stein, Jr., President
5
<PAGE> 1
Exhibit 18.1
Dairy Mart Convenience Stores, Inc.
300 Executive Parkway
Hudson, Ohio 44236
Re: Form 10-K Report for the year ended January 30, 1999.
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrants independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that as of February 1, 1998, the Company changed from the
LIFO method of accounting for certain of its inventories to the FIFO method. The
Company had previously accounted for approximately 50% of its inventory on the
LIFO method. According to the management of the Company, this change was made to
more appropriately cost inventory in light of continuing price volatility in the
prices of its inventory, particularly as it relates to price volatility in the
category of cigarettes, thus eliminating the confusion to financial statement
users and provide a more uniform system for valuing all its inventories
company-wide.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
Very truly yours,
Arthur Andersen LLP
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-8, File No. 33-8209 and File No.
33-47893.
Cleveland, Ohio
April 30, 1999
<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-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 3,367
<SECURITIES> 2,724
<RECEIVABLES> 15,541
<ALLOWANCES> 2,074
<INVENTORY> 24,293
<CURRENT-ASSETS> 42,492
<PP&E> 152,711
<DEPRECIATION> 53,882
<TOTAL-ASSETS> 181,331
<CURRENT-LIABILITIES> 58,832
<BONDS> 90,467
0
0
<COMMON> 66
<OTHER-SE> 9,191
<TOTAL-LIABILITY-AND-EQUITY> 181,331
<SALES> 0
<TOTAL-REVENUES> 477,047
<CGS> 339,308
<TOTAL-COSTS> 466,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,806
<INCOME-PRETAX> 175
<INCOME-TAX> (150)
<INCOME-CONTINUING> 25
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
