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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 26, 1996
Commission File Number 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 1410
1801 Douglas Drive
Sanford, NC 27331-1410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 774-6700
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ x ]
As of December 20, 1996, there were issued and outstanding 114,029
shares of the registrant's Common Stock. The registrant's Common Stock is not
traded in a public market.
Documents incorporated by reference: None
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THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
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Part I Page
<S> <C> <C>
Item 1: Business........................................................................................1
Item 2: Properties......................................................................................7
Item 3: Legal Proceedings...............................................................................7
Item 4: Submission of Matters to a Vote of Security Holders.............................................7
Part II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.......................8
Item 6: Selected Financial Data.........................................................................9
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................11
Item 8: Consolidated Financial Statements and Supplementary Data.......................................19
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................................................38
Part III
Item 10: Directors and Executive Officers of the Registrant.............................................38
Item 11: Executive Compensation.........................................................................40
Item 12: Security Ownership of Certain Beneficial Owners and Management.................................44
Item 13: Certain Relationships and Related Transactions.................................................45
Part IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K................................46
Signatures ...............................................................................................49
</TABLE>
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PART I
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in such forward-looking statements and are subject to risks
including, but not limited to, those identified in the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
February 11, 1994.
Item 1. Business
General
The Pantry, Inc. (the "Company" or "The Pantry"), a privately
held company, is a leading operator of convenience stores in the Southeast and
the largest operator of traditional convenience stores in North and South
Carolina. As of September 26, 1996, the Company operated 379 convenience stores
under the name "The Pantry" primarily in smaller towns and suburban areas
throughout North and South Carolina, western Kentucky, Tennessee and southern
Indiana. The Company's stores offer a broad selection of merchandise and
services designed to appeal to the convenience needs of its customers, including
tobacco products, beer, soft drinks, self-service fast food and beverages,
publications, dairy products, groceries, health and beauty aids, video games and
money orders. In its Kentucky and Indiana stores, the Company also sells lottery
products. As of September 26, 1996, self-service gasoline was sold at 352 Pantry
stores, 307 of which sold gasoline under the Amoco, British Petroleum (BP),
Chevron, Citgo, Exxon or Texaco brand names. In the last three fiscal years,
sales of merchandise (including commissions from services) and gasoline sales
have averaged approximately 51% and 49% of total revenues, respectively.
Ownership Change
On November 30, 1995, Freeman Spogli & Co. Incorporated,
through its affiliates, FS Equity Partners III, L.P., a Delaware limited
partnership ("FSEP III") and FS Equity Partners International, L.P., a
Delaware limited partnership ("FSEP International, "collectively with
FSEP III, "the FS Group," the FS Group collectively with Freeman Spogli
& Co. Incorporated, "FS & Co.") and Chase Manhattan Capital
Corporation ("Chase") acquired a 39.9% and 12.0% interest in
the Company, respectively. The transaction included the purchase of common stock
from certain shareholders and the purchase of newly issued common and
preferred stock from the Company. On August 19, 1996, the FS Group and
Chase subsequently acquired additional interests in
the Company of approximately 37.0% and 11.1%, respectively, through
the purchase of common and preferred stock from certain shareholders.
As of September 26, 1996, the capital stock of the Company is
owned 76.9% and 18.5% by the FS Group and Chase, respectively. By December
31, 1996, the FS Group will make an additional equity investment of $17.5
million. For further discussion of the ownership change and more detailed
discussion of the equity transactions see "Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Item 12. Security Ownership of Certain
Beneficial Owners and Management".
Operations
For a discussion of Fiscal Year 1996 operating results see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
On November 30, 1995, the FS Group and Chase
acquired ownership interests in the Company. During the next
several months immediately after their investment, the
Company strengthened its management team. Peter J. Sodini, an
experienced retail executive, was hired as President and Chief Executive
Officer. In addition, the following executive
positions were filled: Senior Vice President of Administration
and Gasoline Marketing, Senior Vice President of
Operations and Vice President of Marketing. The individuals all bring strong
experience in retail operations. In addition, several other new employees were
hired to fill positions with specific skill requirements.
The management team reorganized the management structure and
reporting relationships to improve organizational effectiveness, reduce
operating costs and increase profitability. Having made progress towards
reducing overhead, the management team focused on reducing the acquisition cost
of goods and services. At the same time, store expenses were examined and a
number of new policies and procedures were implemented designed to reduce costs,
particularly store labor. The combination of these changes and initiatives
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enhanced the Company's ability to focus on competitive repositioning. A number
of initiatives were launched to increase customer traffic, transaction size and
same store sales volume.
Merchandise Sales
General. Over the past three fiscal years, the Company's sales
of merchandise (including commissions from services) relative to total revenues
have been fairly stable with such sales accounting for approximately 51% of
total revenues. The Company's gross margins on merchandise sales after purchase
rebates, mark-downs, inventory spoilage and inventory shrink have averaged
approximately 34.3% over the last three fiscal years. Average merchandise sales
per store have increased each year over the past three years as the results at
the Company's new higher volume stores have more than offset the impact of
closing older, lower volume stores.
The following table highlights certain information with
respect to merchandise sales for the last three fiscal years:
<TABLE>
<CAPTION>
1994 1995 1996
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Average number of stores ..................................... 411 405 392
Merchandise sales (in millions) ............................. $ 189.2 $ 187.4 $ 188.1
Average merchandise sales per store (in thousands) ........... $ 460.4 $ 462.7 $ 479.8
Merchandise gross margins (after purchase rebates, mark-downs,
inventory spoilage and inventory shrink) ..................... 34.9% 34.9% 33.0%
</TABLE>
Product Categories. The Pantry's stores generally carry approximately
2,200 stock keeping units and offer a full line of convenience products,
including tobacco products, beer, soft drinks, self-service fast foods and
beverages (including fountain beverages and coffee), candy, newspapers and
magazines, snack foods, dairy products, canned goods and groceries, health and
beauty aids and other immediate consumables. The Company's merchandising
strategy is to offer a broader and more locally defined variety of products in
many of its markets relative to its traditional convenience store competition
and major oil company stores. Adjusting the product mix in this way is designed
to maintain a high percentage of products carried by each store that appeal to
the tastes of local customers and to improve inventory turnover. For example,
during the summer season, the Company's stores in resort areas are stocked with
more vacation oriented items such as a larger souvenir assortment, beachwear and
beach toys and chairs. Services offered in many of the Company's stores include
video games, money orders, public telephones and lottery products in the
Company's Indiana and Kentucky stores.
Purchasing. The Pantry purchases over 50% of its general merchandise
(including most tobacco products, candy, paper products, pet food and food
service items) and groceries from a single wholesale grocer,
McLane Company, Inc. ("McLane"). In addition, McLane supplies health
and beauty aids, cigars, smokeless tobacco, toys, and seasonal
items to all stores. However, there are adequate alternative sources
available to purchase this merchandise should a change from the
current wholesaler become necessary or desirable. The Pantry
purchases the balance of its merchandise from a variety of other distributors.
Gasoline Operations
General. While the number of locations selling gasoline has
decreased, the number of gallons sold on a Company-wide and per store basis has
increased each year over the past three fiscal years. During fiscal 1996, the
Company discontinued gasoline operations at fourteen locations as a result of
closing or selling those locations. To offset the loss of gasoline locations,
the Company has focused on improving the sales volume at existing
locations. For fiscal 1996, both the total gallons sold and average
volume per store increased over fiscal 1995 due to (i) opening fourteen new
higher volume stores over the last two fiscal years and (ii) upgrading several
locations with enhanced gasoline dispensing or payment equipment including the
installation of multi-product dispensers ("MPDs") or pay at the pump
credit card readers ("CRINDS"). To upgrade a location with CRINDs,
the Company can either retro-fit existing MPDs with CRINDs or install
new MPDs with CRINDs. The Company installed 29 CRINDs at existing stores
in fiscal 1996 and 36 CRINDs at existing stores in fiscal 1995. In
addition, each of the new stores opened in fiscal 1995 and 1996
sells gasoline and has CRINDs.
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The following table highlights certain information regarding
the Company's gasoline operations for the last three fiscal years:
<TABLE>
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1994 1995 1996
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Store data (at end of period):
Locations selling gasoline.............................. 365 362 352
Number of company-owned branded locations................ 278 285 285
Number of company-owned unbranded locations.............. 13 7 6
Number of third-party locations (branded & unbranded).... 74 70 61
Operating data:
Gasoline sales ($ in millions)........................... $175.1 $187.2 $192.7
Gasoline gallons sold (in millions)...................... 158.5 160.3 160.7
Average gallons sold per store (in thousands)............ 423.7 440.3 448.8
Average retail price per gallon.......................... $1.10 $1.17 $1.20
Average gross profit per gallon (in cents)............... 13.63(cent) 16.21(cent) 15.64(cent)
</TABLE>
Branded Gasoline. Of the 352 Pantry stores that sold gasoline
as of September 26, 1996, 307 (which includes twenty-two third-party locations
selling under these brands), or 87%, were branded under the Amoco, British
Petroleum (BP), Chevron, Citgo, Exxon or Texaco brand names. The Company has
continually sought to increase the number of its branded locations by opening
new branded locations and by converting unbranded locations to branded
locations.
Ownership of Gasoline Operations. As of September 26, 1996,
the Company-owned the gasoline operations at 291 locations and at 61 locations
had gasoline operations that were operated under third-party arrangements. At
Company-owned locations, the Company owns the gasoline storage tanks, pumping
equipment and canopy, and retains 100% of the gross profit received from
gasoline sales. In fiscal 1996, these locations accounted for 87.7% of total
gallons sold. Under third-party arrangements, an independent gasoline
distributor owns and maintains the gasoline storage tanks and pumping equipment
at the site, prices the gasoline and pays the Company approximately 50% of the
gross profit. In fiscal 1996, third-party locations accounted for 12.3% of the
total gallons sold by the Company.
Purchasing. The Pantry purchases its gasoline from major oil
companies and independent refiners. There are 18 gasoline terminals in the
Company's operating areas, enabling the Company to choose from more than one
distribution point for most of its stores. The Company's inventories of gasoline
(both branded and unbranded) turn approximately every seven days.
Store Locations
As of September 26, 1996, The Pantry operated 379 convenience
stores located primarily in smaller towns and suburban areas in five states.
Substantially all of the Company's stores are free standing structures
containing approximately 2,400 square feet and providing ample customer parking.
The following table shows the geographic distribution by state of the Company's
stores at September 26, 1996:
<TABLE>
<CAPTION>
Number of Percent of
State Stores Total Stores
<S> <C> <C>
North Carolina........................................................ 148 39%
South Carolina........................................................ 127 34%
Kentucky.............................................................. 57 15%
Tennessee............................................................. 25 7%
Indiana............................................................... 22 5%
Total.............................................................. 379 100%
</TABLE>
3
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Over the past three fiscal years, the Company has opened a
limited number of new stores and closed or sold a substantial number of
underperforming stores. The following table summarizes these activities:
1994 1995 1996
Number of Stores at Beginning of Year 415 406 403
Opened .............................. 1 10 4
Closed or Sold ...................... (10) (13) (28)
Number of Stores at End of Year ..... 406 403 379
The Company continually evaluates the performance of each of
its stores to determine whether any particular store should be closed or sold
based on its sales trends and profitability. In deciding to close or sell an
underperforming store, the Company considers such factors as store location,
gasoline volumes and margins, merchandise sales and gross profits, lease term,
rental rate and other obligations and the store's contribution to corporate
overhead. Although closing or selling underperforming stores reduces revenues,
the Company's operating results typically improve.
Upgrading of Store Facilities and Equipment
During fiscal 1996, the Company upgraded the facilities and
equipment at many of its store locations, including gasoline equipment upgrades,
at a cost of approximately $6.1 million. The Company's store renovation program
is an integral part of the Company's operating strategy. The Company continually
evaluates the performance of individual stores and periodically upgrades store
facilities and equipment based on sales volumes, the lease term for leased
locations and management's assessment of the effect of the upgrades on store
profitability. Upgrades for many stores have included installing interior
fixtures and equipment for self-service food and beverages, enhancing interior
lighting, installing in-store rest rooms for customers and improving exterior
lighting and signage. The upgrading program for the Company's gasoline
operations has included the addition of CRINDs to
MPDs to enhance customer convenience and service and the installation of
underground storage tank ("UST") leak detection and other equipment in
accordance with applicable EPA environmental regulations. See "Government
Regulation and Environmental Matters."
Site Selection
Most of the Company's stores are located in smaller towns and
suburban areas of medium size cities in its market areas. In opening new stores
in recent years, the Company has focused on selecting store sites on highly
traveled thoroughfares in suburban markets of larger cities or near exit and
entrance ramps of highly traveled highways that provide convenient access to the
store location. The Company's cost of opening new stores in these high-traffic
areas has been higher than it has incurred in connection with its prior store
development activities. In selecting sites for new stores, the Company uses an
evaluation process designed to enhance its return on investment by focusing on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. The Company also
reviews the location of competitive stores and customer activity at those
stores.
Store Operations
Each store is staffed with a manager, an assistant manager and
sales associates, and most stores are open 24 hours, seven days a week. The
Company's field operations organization is comprised of a network of regional
and district managers who, with the Company's corporate management, evaluate
store operations on a weekly basis. The Pantry also monitors store conditions,
maintenance and customer service through a regular store visitation program by
district and regional management.
Employees
As of September 26, 1996, the Company employed approximately 1,840
full-time and 493 part-time employees. Fewer part-time employees are employed
during the winter months than during the Company's peak spring and summer
seasons. Of the Company's employees, approximately 2,191 are employed in the
Company's stores and 142 are corporate and field management personnel. None of
the Company's employees are represented by unions. The Company considers its
employee relations to be good.
4
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Government Regulation and Environmental Matters
Many aspects of the Company's operations are subject to
regulation under federal, state and local laws. The most significant of such
laws are summarized below.
Storage and Sale of Gasoline. The Company is subject to
various federal, state and local environmental laws. Federal, state, and local
regulatory agencies have adopted regulations governing USTs that require the
Company to make certain expenditures for compliance. In particular, at the
federal level, the Resource Conservation and Recovery Act requires the EPA to
establish a comprehensive regulatory program for the detection, prevention and
cleanup of leaking USTs.
In addition to the technical standards, the Company is
required by federal and state regulations to maintain evidence of financial
responsibility for taking corrective action and compensating third parties in
the event of a release from its UST systems. In order to comply with the
applicable requirements, the Company maintains a letter of credit in the
aggregate amount of $2.1 million issued by a commercial bank in favor of state
environmental agencies in the states of North Carolina, South Carolina,
Tennessee, Kentucky and Indiana and relies upon the reimbursement provisions of
applicable state trust funds.
Regulations enacted by the EPA in 1988 established
requirements for (i) installing UST systems; (ii) upgrading UST systems; (iii)
taking corrective action in response to releases; (iv) closing UST systems; (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. These regulations
permit states to develop, administer and enforce their own regulatory programs,
incorporating requirements which are at least as stringent as the federal
standards. The following is an overview of the requirements imposed by these
regulations:
Leak Detection. The EPA and states' release detection
regulations were phased in based on the age of the USTs. All USTs were required
to comply with leak detection requirements by December 22, 1993. The Company
utilizes two approved leak detection methods for all Company-owned UST systems.
Daily and monthly inventory reconciliations are completed at the store level and
at the corporate support center. The daily and monthly reconciliation data is
also analyzed using Statistical Inventory Reconciliation ("SIR") which compares
the reported volume of gasoline purchased and sold with the capacity of each UST
system and highlights discrepancies. The Company also performs annual leak
detection tests. The Company believes it is in full or substantial compliance
with the leak detection requirements applicable to its USTs.
Corrosion Protection. The 1988 EPA regulations require that
all UST systems have corrosion protection by December 22, 1998. The Company
began installing non-corrosive fiberglass tanks and piping in 1982. The Company
has a comprehensive plan to upgrade all of its steel tank UST systems to 1998
standards by 1998 through internal tank lining and cathodic protection. As of
September 26, 1996, approximately 79% of the Company's USTs have been protected
from corrosion either through the installation of fiberglass tanks or upgrading
steel USTs with interior fiberglass lining and the installation of cathodic
protection.
Overfill/Spill Prevention. The 1988 EPA regulations require
that all sites have overfill/spill prevention devices by December 22, 1998. The
Company is systematically installing these devices on all Company-owned UST
systems to meet the regulations. The Company has installed spill/overfill
equipment for approximately 79% of its USTs.
The Company anticipates that it will meet the 1998 deadline
for installing corrosion protection and spill/overfill equipment for all of its
USTs and has budgeted approximately $2.0 million of capital expenditures for
these purposes over the next two years.
State Trust Funds. All states in which the Company operates or
has operated UST systems have established trust funds for the sharing,
recovering and reimbursing of certain cleanup costs and liabilities incurred as
a result of releases from UST systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of UST systems, are funded by a UST registration fee and a tax on
the wholesale purchase of motor fuels within each state. The Company has paid
UST registration fees and gasoline taxes to each state where it operates to
participate in these trust programs and the Company has filed claims and
received reimbursement in North Carolina, South Carolina and Tennessee. The
coverage afforded by each state fund varies but
3
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generally provides for up to $1 million per site for the cleanup of
environmental contamination, and most provide coverage for third party
liability. Costs for which the Company does not receive reimbursement include
but are not limited to: (i) the per-site deductible; (ii) costs incurred in
connection with releases occurring or reported to trust funds prior to their
inception; (iii) removal and disposal of UST systems; and (iv) costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require the Company to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its UST
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. Reimbursements from state trust funds will be
dependent upon the continued maintenance and solvency of the various funds.
Sale of Alcoholic Beverages. In certain areas where stores are
located, state or local laws limit the hours of operation for the sale of
certain products, the most significant of which limit or govern the sale of
alcoholic beverages. State and local regulatory agencies have the authority to
approve, revoke, suspend or deny applications for and renewals of permits and
licenses relating to the sale of alcoholic beverages and to impose various
restrictions and sanctions.
In many states, retailers of alcoholic beverages have been
held responsible for damages caused by intoxicated individuals who purchased
alcoholic beverages from them. While the potential exposure to the Company for
damage claims as a seller of alcoholic beverages is substantial, the Company has
adopted procedures intended to minimize such exposure.
Store Operations. The Company's stores are subject to
regulation by federal agencies and to licensing and regulations by state and
local health, sanitation, safety, fire and other departments relating to the
development and operation of convenience stores, including regulations relating
to zoning and building requirements and the preparation and sale of food.
Difficulties in obtaining or failures to obtain the required licenses or
approvals could delay or prevent the development of a new store in a particular
area.
The Company's operations are also subject to federal and state
laws governing such matters as wage rates, overtime, working conditions and
citizenship requirements. Significant numbers of the Company's store personnel
are paid at rates related to the federal minimum wage and, accordingly, further
increases in the minimum wage could increase the Company's labor costs. At the
federal level, there are proposals under consideration from time to time to
increase minimum wage rates and to introduce a system of mandated health
insurance.
Competition
The convenience store and retail gasoline industries are
competitive and the number and type of competitors vary by location. The major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. Most of the Company's stores are located in
small towns and suburban areas of medium-sized cities in its markets. Within the
Company's operating area, The Pantry's principal competitors are smaller
convenience store chains and major oil company-owned convenience stores.
In addition, the Company's stores compete to some degree with large convenience
store chains, supermarket chains, drug stores, independent gasoline service
stations, fast food operations and other similar retail outlets.
Trade Names, Service Marks and Trademarks
The Company has registered or applied for registration of a
variety of trade names, service marks and trademarks for use in its business,
including The Pantry(R), Worth(R), Bean Street Coffee Company(TM), Big Chill(R),
Lil' Chill(R) and others, which the Company regards as having significant value
and as being important factors in the marketing of the Company and its
convenience stores.
6
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Item 2. Properties
As of September 26, 1996, the Company owned the real property
at 126 of its stores and leased the real property at 253 of its stores.
Management believes that none of its leases is individually material to the
Company. Most of the Company's leases are net leases requiring the Company to
pay taxes, insurance and maintenance costs. Although the Company's leases expire
at various times, 178 of such leases have terms, including renewal options,
extending beyond the end of fiscal 2001. Of the Company's leases that expire
prior to the end of fiscal 2001, management anticipates that it will be able to
negotiate acceptable extensions of the leases for those locations that it
intends to continue operating.
The Company owns its corporate headquarters, a three story,
51,000 square foot office building in Sanford, North Carolina. Management
believes that the Company's headquarters are adequate for its present and
foreseeable needs.
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is party
to various legal actions which the Company believes are routine in nature and
incidental to the operation of its business. While the outcome of such actions
cannot be predicted with certainty, the Company believes that the ultimate
resolution of these matters will not have a material adverse impact on the
business, financial condition or prospects of the Company.
As reported in the Company's Current Reports on Form 8-K dated
July 18, 1996 and August 30, 1996, on July 16, 1996, the Company entered into a
Settlement Agreement with Montrose Value Fund Limited Partnership ("MVF"),
Montrose Financial No. 6 Limited Partnership (Pantry) ("MF#6", together with
MVF, the "Montrose Group"), FS & Co. and Messrs. W. Clay Hamner
("Hamner") and Wayne M. Rogers ("Rogers"). The Settlement Agreement resolved
the litigation the Montrose Group brought against FS & Co.,
certain related entities and Chase. In the litigation, the Company was
named as a defendant. On August 19, 1996, the above
parties closed the transactions contemplated by the Settlement Agreement.
At the closing: (i) the FS Group and Chase purchased all the
Montrose Group's remaining capital stock in the Company; (ii) Hamner and Rogers
resigned from the Company's Board of Directors and (iii) Hamner's employment
agreement with the Company, which extended to December 31, 2000, terminated in
exchange for a payment of $750,000 and Hamner's agreement not to compete with
the Company for a period of three years. Pursuant to the Settlement Agreement
and as a result of the consummation of the transactions at closing, the parties
including the Company exchanged mutual releases and dismissed with prejudice the
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
7
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information - There is no market for the Common Stock.
(b) Principal Shareholders - As of December 20, 1996, there were
four holders of record of the Common Stock.
(c) Dividends - During the last two fiscal years, the Company has
not paid any cash dividends on the Common Stock. The Company
intends to retain earnings to support operations and to
finance expansion and does not intend to pay cash dividends on
the Common Stock for the foreseeable future. The payment of
cash dividends in the future will depend upon such factors as
the Company's earnings, operations, capital requirements,
financial condition and other factors deemed relevant by the
Board of Directors. The payment of any cash dividends was
prohibited in fiscal 1996 under restrictions contained in the
indenture relating to the Company's 12% Series B Senior Notes
Due 2000 (the "Indenture").
(d) During fiscal 1996, the Company entered into the following
transactions, part of which included the sale of securities by
the Company which were not registered under the Securities Act
of 1933, as amended. On November 30, 1995, the Company entered
into certain stock purchase and related agreements (the
"Agreements") with the FS Group, Chase, the Montrose Group,
Hamner and Rogers. In order to facilitate the above
transactions, the Company exchanged .228
of a share of a new series of Series A Preferred Stock of the
Company (the "Preferred Stock") and 1 share of Common Stock
for each outstanding share of Common Stock (the "Common Stock
Exchange"). Immediately after the Common Stock Exchange (a)
the FS Group acquired 45,501 shares of the Company's Common
Stock and 10,374.228 shares of the Company's Preferred Stock
for an aggregate purchase price of $17,290,380, and (b) Chase
acquired 13,700 shares of the Company's Common Stock
and 3,123.600 shares of the Company's Preferred Stock for an
aggregate purchase price of
$5,206,000. Of the total shares acquired by the FS Group,
45,172 shares of Common Stock and 10,299.216 shares of
Preferred Stock were acquired from certain stockholders and
the remaining shares were acquired from the Company.
Specifically, FSEP III and FSEP International purchased from
the Company 316 shares and 13 shares, respectively, of Common
Stock and 72.124 shares and 2.888 shares, respectively, of
Preferred Stock with FSEP III paying the Company an
aggregate purchase price of $120,156 for such shares
and FSEP International paying the Company an aggregated
purchase price of $4,864. In addition, the Company sold to
Chase 13,700 shares of Common Stock and 3,123.600 shares of
Preferred Stock for an aggregated purchase price of $5,206,000
(representing $152.00 per share of Common Stock and $1,000 per
share of Preferred Stock).
The Preferred Stock is subject to
the right of the Company to voluntarily redeem such stock at a
redemption price of $1,000 per share plus an amount in cash
equal to all accrued but unpaid dividends to the date of such
redemption. The Company, at its sole option, also may require
the outstanding shares of Preferred Stock to be exchanged, in
whole or in part, for junior subordinated notes due 2005 of
the Company paying interest semi-annually at a rate that
equals 12% per annum (the "Notes"). The Notes shall be subject
to mandatory redemption of the entire principal amount of each
such Note on the date which is 10 years from the original
issue date of the shares of Preferred Stock. Holders of
outstanding shares of Preferred Stock which are required to be
exchanged will be entitled to receive $1,000 principal amount
of the Notes in exchange for each outstanding share of
Preferred Stock held by them which is required to be
exchanged.
No underwriter was engaged in connection with the
foregoing sales of securities. Sales of the securities to the
above parties were made in reliance upon Section 4(2) of the
Securities Act of 1933, as amended, as transactions not
involving any public offering. The above parties who purchased
securities from the Company were accredited investors as
defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended.
8
<PAGE>
Item 6. Selected Financial Data
The following table sets forth historical consolidated
financial data and store operating data for the periods indicated. The selected
historical annual consolidated financial data is derived from, and is qualified
in its entirety by, the Company's annual Consolidated Financial Statements,
including those contained elsewhere in this report. The information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements and
related notes thereto included elsewhere in this report. (Dollars are in
millions except per store and per gallon data.)
<TABLE>
<CAPTION>
Fiscal Year Ended
September 24, September 30, September 29, September 28, September 26,
1992 1993 1994 1995 1996
Income Statement Data: (52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise Sales $ 182.7 $ 191.9 $ 189.2 $ 187.4 $ 188.1
Gasoline sales 166.2 175.7 175.1 187.2 192.7
Commissions 4.1 4.4 4.5 4.5 4.0
Total Revenues 353.0 372.0 368.8 379.1 384.8
Cost of Sales:
Merchandise 121.8 126.4 123.1 122.0 126.0
Gasoline 148.4 154.6 153.5 161.2 167.6
Gross Profit 82.8 91.0 92.2 95.9 91.2
Store operating expense 52.0 54.1 53.2 56.2 57.8
General and administrative expenses 15.1 16.9 17.9 18.2 17.1
Restructuring charges - - - - 2.2
Impairment of long-lived assets - - - - 3.0
Depreciation and amortization (a) 9.5 9.8 10.2 11.5 9.2
Income from operations 6.2 10.2 10.9 10.1 1.9
Interest expense 7.9 7.4 12.0 13.2 12.0
Net income(loss) (1.3) 2.6 (0.5) (4.2) (8.1)
Other Financial Data:
EBITDA (b) $ 15.9 $ 20.5 $ 22.0 $ 22.3 $ 13.0
Capital expenditures (c) 2.5 11.2 10.7 16.7 7.1
Ratio of earnings to fixed charges (d) -- (d) 1.3x -- (d) -- (d) -- (d)
EBITDA/interest expense 2.0x 2.8x 1.8x 1.7x 1.1x
Store Operating Data:
Number of stores (end of period) 435 415 406 403 379
Average merchandise sales per
store (in thousands) $ 415.3 $ 451.5 $ 460.4 $ 462.7 $ 479.8
Average gasoline gallons sold per
store selling gasoline (in thousands) 358.9 398.1 423.7 440.3 448.8
Same store sales growth (e):
Merchandise 4.2 % 4.3 % 3.3 % (0.8)% 2.8 %
Gasoline gallons 3.3 % 5.7 % 5.2 % 0.2 % (4.3)%
Merchandise gross margin 33.3 % 34.2 % 34.9 % 34.9 % 33.0 %
Gasoline gallons sold (in millions) 145.3 156.9 158.5 160.3 160.7
Average retail gasoline price per gallon $ 1.14 $ 1.12 $ 1.10 $ 1.17 $ 1.20
Average gasoline gross profit
per gallon (in cents) 12.25 c 13.43 c 13.63 c 16.21 c 15.64 c
Balance Sheet Data (end of period):
Working Capital (f) $ (22.5) $ 0.5 $ 6.7 $ (0.8) $ (5.7)
Total assets 104.9 105.7 124.0 127.7 120.9
Long-term debt, including capital
lease obligations (g) 57.3 79.1 101.9 101.5 101.1
Redeemable preferred stock (h) 7.2 8.6 (i) - - -
</TABLE>
9
<PAGE>
Notes to Selected Financial Data
(a) Excludes amortization of debt premium of $222,000 in fiscal 1992.
(b) Represents income (loss) before depreciation and amortization, interest
expense, income tax (expense) benefit, $2.6 million of the total $3.0 million
charge for impairment of long-lived assets related to goodwill, due diligence
costs, cumulative effect of accounting change and extraordinary item. The
Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, income from
operations or cash flow as an indication of the Company's operating
performance.
(c) For the fiscal year ended 1993, capital expenditures included the
purchase by the Company of its corporate office building in April 1993 for $3.9
million and the purchase by the Company of four previously leased stores in
August 1993 for $3.2 million. Purchases of assets to be held for resale are
excluded from these amounts.
(d) For the purpose of determining the ratio of earnings to fixed charges:
(i) earnings consist of income (loss) before income tax benefit (expense),
extraordinary item and cumulative effect of accounting change plus fixed
charges and (ii) fixed charges consist of interest expense and the portion of
rental expense representative of interest (deemed to be one-third of rental
expense). The Company's earnings were inadequate to cover fixed charges by $1.6
million, $0.2 million, $3.6 million and $10.8 million for fiscal 1992, 1994,
1995 and 1996, respectively.
(e) The stores included in calculating same store sales growth are stores
that were in operation for both fiscal years of the comparable period. The same
store sales results for fiscal 1993, which was a 53-week year, has been
adjusted to reflect a 52-week year.
(f) Prior to 1993, accrued interest relating to senior debt and
subordinated debt and the current portion of senior debt were classified as
current liabilities, and were the primary causes for the working capital
deficit in those years. At September 30, 1993, substantially all of the current
portion of senior debt and accrued interest were classified as long-term and
are included in the long-term debt balance ($8.3 million of current maturities
and $16.1 million of accrued interest).
(g) Long-term debt includes senior debt, subordinated debt, capital lease
obligations and, as of September 30, 1993, accrued and unpaid interest on
senior debt of $0.4 million and subordinated debt of $15.7 million.
(h) For fiscal 1992 and 1993, this amount includes accrued and unpaid
dividends related to the redeemable preferred stock. In fiscal 1990, 82,000
shares ($8.2 million) of the redeemable preferred stock were redeemed; however,
the accrued dividends on the redeemed stock remained an obligation of the
Company. Interest accrued on these unpaid dividends from June 1990 through
August 1992. For years prior to fiscal 1993, this interest is included in
current liabilities. For fiscal 1993, the accrued interest ($1.1 million) was
classified as a long-term liability and is therefore included in the redeemable
preferred stock amount as of September 30, 1993.
(i) Includes (i) $2.6 million of outstanding preferred stock and $2.0
million of accrued dividends thereon and (ii) $2.9 million of accrued dividends
on previously redeemed preferred stock and $1.1 million of accrued interest
thereon.
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
On November 30, 1995, the FS Group and Chase acquired a 39.9%
and 12.0% interest, respectively, in the Company through the purchase of common
stock from certain stockholders and the purchase of common stock and newly
issued preferred stock from the Company. The FS Group and Chase acquired common
stock previously owned by Truby G. Proctor, Jr. (11,380 shares), Frank E.
Proctor (13,792 shares) and Lee-Moore Oil Company (20,000 shares). In
conjunction with these transactions, certain covenants of the Indenture were
amended subject to the condition that $22.6 million of new equity be invested in
the Company before December 31, 1996 (see Liquidity and
Capital Resources below). These transactions contemplated a further
series of transactions, in which the FS Group and Chase were to
purchase all common and preferred stock then owned by the Montrose Group
and were to purchase additional common and preferred
stock from the Company. Subsequently, the Montrose Group, controlled
by certain members of the Company's Board of Directors, filed
suit against FS & Co., certain of its affiliates, Chase
and the Company. This suit was settled whereby, among other things,
the FS Group and Chase purchased all of the Montrose Group's common and
preferred stock. See "Item 3. Legal Proceedings."
By December 31, 1996, the FS Group will purchase an
additional $17.5 million of newly issued securities of the Company. Including
the November 1995 transaction discussed above, this transaction will bring the
total equity raised by the Company from newly issued securities to $22.8
million. The proceeds from the December 1996 transaction are expected to be used
to fund capital expenditures including existing store upgrades, new stores,
potential acquisitions, transaction expenses and general corporate purposes.
Additionally, the Supplemental Indenture (see Long-Term Debt discussion under
Liquidity and Capital Resources below) amending certain covenants of the
Indenture will become effective upon the consummation of the $17.5 million
investment described above.
Prior to 1996, the Company pursued a strategy of enhancing
operating income by maintaining relatively high merchandise and gasoline gross
margins. By mid 1995, this strategy was leading to declining same store
merchandise and gasoline gallon sales. The combination of unusually poor
weather, a more competitive gas environment and a poorly executed merchandising
and gas pricing strategy, resulted in lower than anticipated operating results
for first and second quarters of fiscal 1996.
As a result, the Company's management team was strengthened
in the second quarter of fiscal 1996. The management team, led by a new Chief
Executive Officer, Senior Vice President of Administration and Gasoline
Marketing, Senior Vice President of Operations and Vice President
of Marketing, implemented a series of steps
to improve operating performance and profitability. In general, management
enhanced store merchandising while reducing the cost of goods sold, lowering
store operating costs and decreasing general and administrative expenses. These
steps resulted in improved third and fourth quarter results.
In addition to augmenting the management team and refining
its operating strategy, in fiscal 1996, the Company implemented a number of
specific initiatives to strengthen the franchise including the following:
(i) introduced several new merchandising programs including its
new Bean Street Coffee Company(TM) coffee program and Parrot
Ice frozen drink offering;
(ii) transitioned to a new wholesale grocer in order to take
advantage of the new supplier's buying power and advanced
technology;
(iii) upgraded 29 gasoline facilities;
(iv) opened four new larger stores;
(v) closed its 13 branded quick service restaurant test operations
and
(vi) closed 28 unprofitable or marginally profitable stores.
11
<PAGE>
Results of Operations
The Company's operations for fiscal years 1994, 1995 and 1996 each
contained 52 weeks. Set forth below are selected financial and operating data of
the Company for these three fiscal years (dollars and gallons are in thousands,
except per store and per gallon).
THE PANTRY, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
September 29, September 28, September 26, Incr/(decr)
1994 1995 1996 94/95 95/96
<S> <C> <C> <C> <C> <C>
Total revenue $ 368,793 $ 379,061 $384,807 2.8% 1.5%
Total gross profit $ 92,175 $ 95,906 $ 91,218 4.0% -4.9%
Overall gross margin 25.0% 25.3% 23.7%
MERCHANDISE OPERATIONS
Average store count 411 405 392 -1.5% -3.2%
Sales $ 189,244 $ 187,380 $188,091 -1.0% 0.4%
Gross profit $ 66,102 $ 65,404 $ 62,112 -1.1% -5.0%
Gross margin 34.9% 34.9% 33.0%
Average sales per store $ 460,447 $ 462,666 $479,824 0.5% 3.7%
Average gross profit per store $ 160,833 $ 161,491 $158,449 0.4% -1.9%
Same store sales comparison 3.3% -0.8% 2.8%
GASOLINE OPERATIONS
Average store count 374 364 358 -2.7% -1.6%
Sales $ 175,083 $ 187,165 $192,737 6.9% 3.0%
Gallon sales 158,469 160,267 160,665 1.1% 0.2%
Gross profit $ 21,607 $ 25,986 $ 25,127 20.3% -3.3%
Average retail price per gallon $ 1.10 $ 1.17 $ 1.20 5.7% 2.7%
Average gross profit per gallon $ 0.1363 $ 0.1621 $ 0.1564 18.9% -3.5%
Average gallons sold per store 423,714 440,295 448,785 3.9% 1.9%
Average gross profit per store $ 57,773 $ 71,390 $ 70,187 23.6% -1.7%
Same store sales comparison 5.2% 0.2% -4.3%
Commission income $ 4,466 $ 4,516 $ 3,979 1.1% -11.9%
Average commission income per store $ 10,866 $ 11,150 $10,151 2.6% -9.0%
Store expenses $ 53,201 $ 56,206 $57,841 5.6% 2.9%
Store expenses as % of merchandise sales 28.1% 30.0% 30.8%
General and administrative expenses $ 17,893 $ 18,159 $17,127 1.5% -5.7%
G&A expenses as % of merchandise sales 9.5% 9.7% 9.1%
Income from operations $ 10,917 $ 10,071 $ 1,874 -7.7% -29.6%
EBITDA $ 22,030 $ 22,252 $12,991 1.0% -41.6%
EBITDA Margin 6.0% 5.9% 3.4%
Average EBITDA per store $ 53,601 $ 54,947 $33,140 2.5% -37.8%
Interest expense $ 12,047 $ 13,240 $11,992 9.9% -9.4%
EBITDA/Total interest 1.8x 1.7x 1.1x -8.1% -33.5%
Net loss $ (480) $ (4,245) $(8,114) -784.4% 31.8%
</TABLE>
12
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
Revenues. Merchandise sales increased 0.4% in fiscal 1996 from
fiscal 1995 due to an increase in same store sales which was partially offset by
a reduction in the total number of stores. The increase in same store sales came
from increased sales of cigarettes at lower retail prices and improved and new
merchandising programs. At the beginning of the fiscal 1996, in response to same
store merchandise decreases in fiscal 1995, the Company lowered the retail price
of its cigarettes. During the year, especially in the third and fourth quarters,
the Company experienced significant increases in the volume of cigarettes sold
over fiscal 1995. Additionally, during the year, the Company added off-shelf
merchandise displays to its stores, added new products and modified certain of
its ongoing merchandise programs such as its novelty and sandwich programs.
Together, along with other changes including the change in wholesale grocer
supplier to McLane Company, same store sales increased 2.8% over fiscal 1995.
Average merchandise sales per store increased as the Company shut down or sold
28 lower volume stores while opening up four new stores. Gasoline sales
increased 3.0% in fiscal 1996 from fiscal 1995 due to an increase in retail
price per gallon and a slight increase in total volume sold which offset a
decrease in same store sales volume. The average retail price per gallon in
fiscal 1996 was $1.20 versus an average retail price per gallon in fiscal 1995
of $1.17. The Company has raised its retail prices in response to higher costs
charged by its suppliers. Total gasoline volume increased, despite the same
store volume decrease of 4.3%, as the Company benefited from a full year's
operation at the ten high volume stores opened in fiscal 1995 and from the
operations at the four high volume stores opened in fiscal 1996.
Gross Profit. Gross profit for fiscal 1996 decreased from
fiscal 1995 as the Company experienced lower margins on its merchandise sales
and a lower gross profit per gallon on its gasoline volume. These lower margins
offset the increase in sales. The gross margin on merchandise sales was 33.0% in
fiscal 1996 compared to 34.9% in fiscal 1995. The primary reason for the
decrease in merchandise gross margin was the decrease in cigarette margins
resulting from the Company lowering its retail prices to become more
competitive. The Company includes purchase rebates, mark-downs, inventory
spoilage and shrink in its merchandise gross profit computation. Gasoline gross
profit decreased 3.3% in fiscal 1996 from fiscal 1995 as the gross profit per
gallon in fiscal 1996 decreased to $0.1564 cents per gallon from $0.1621 cents
per gallon in fiscal 1995.
Store Operating Expenses. Store operating expenses increased
in fiscal 1996 over fiscal 1995 both in terms of total dollars and as a
percentage of merchandise sales. Store expenses increased due to an increase in
rent expense associated with the new stores opened in fiscal 1995 and fiscal
1996 and non-recurring advertising expense related to the first quarter
introduction of Bean Street Coffee Company(TM) coffee. In addition, fiscal 1995
store operating expense benefited from the one time positive effect totaling
$750,000 which resulted from the qualification of a contaminated site for
reimbursement under a state tank fund. Fiscal 1996 store expenses were 30.8% of
merchandise sales, up from 30.0% of merchandise sales in fiscal 1995.
General and Administrative Expenses. Fiscal 1996 general and
administrative expenses, exclusive of restructuring charges, were down 5.7%.
The decrease in general and administrative expenses was due to lower workers'
compensation expense resulting from improved management control in this area,
lower incentive compensation expense (bonuses) due to lower fiscal 1996
operating results and lower recruiting expenses, which were partially offset
by an increase in medical benefit costs and management development costs
resulting from the Company's November 1995 convention.
Restructuring Charges. During fiscal 1996, after disappointing
operating results, management changes were made including the hiring of new
senior managers. The Company also released certain personnel, including former
officers. The Company accrued for all liabilities due under employment contracts
due to these former officers and paid severance compensation to others in
accordance with a pre-existing severance plan. Additionally, concurrent with the
buyout of the Montrose Group's equity interests in the Company, the Company
bought out the contract of its former CEO for $750,000. Additional expenses
included in this line item consist of moving expenses to move new employees and
additional charges associated with the aforementioned ownership litigation.
Income from Operations. Income from operations decreased
as a result of the items discussed above as well as the fiscal 1996 write-down
of certain long-lived assets in accordance with the Company's adoption of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting
for the Impairment of Long-Lived Assets."
Interest Expense. Interest expense for fiscal 1996 decreased
as a $0.6 million interest accrual that was recorded in fiscal 1995 was reversed
in fiscal 1996. The accrual had been recorded related to a potential income tax
issue that was resolved in the Company's favor in fiscal 1996.
Cumulative Effect of Accounting Change. During the fourth
quarter of fiscal 1995, the Company adopted, retroactive to September 30, 1994,
Statement of Financial Accounting Standards No. 112 (SFAS No. 112),
13
<PAGE>
"Employer's Accounting for Postemployment Benefits" and restated its first
quarter results to reflect the adoption. SFAS No. 112 requires that employers
expense the costs of postemployment benefits over the service lives of employees
if certain conditions are met. The cumulative effect of adopting SFAS No. 112 as
of September 30, 1994 was an after tax charge of $1.0 million.
Acquisition Due Diligence Costs. During fiscal 1995, the
Company spent approximately $1.2 million in due diligence costs related to the
evaluation of the potential purchase of a regional convenience store company.
The proposed transaction was abandoned and as a result, the costs incurred in
connection with the prospective acquisition were charged to earnings in fiscal
1995.
Income Tax Expense (Benefit). Income tax benefit increased in
fiscal 1996 as a result of the increase in the Company's pre-tax loss. The
increase in benefit was partially offset by the non-deductible write-off of
goodwill associated with the adoption of SFAS No. 121
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). EBITDA represents income (loss) before depreciation and
amortization, interest expense, income tax (expense) benefit,
$2.6 million of the total $3.0 million charge for impairment of
long-lived assets related to goodwill, extraordinary item and
write-off of acquisition due diligence costs. The
Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, income from operations
or cash flow as an indication of the Company's operating performance. Exclusive
of the impact of SFAS No. 121, EBITDA decreased for fiscal 1996 due to a
combination of the decrease in gross profit discussed above and the increases in
store operating and general and administrative expenses previously discussed.
The resulting EBITDA/interest expense coverage for fiscal 1996 was 1.1 times.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Merchandise sales decreased in fiscal 1995 from
fiscal 1994 due to the decrease in same store sales and a reduction in the
number of stores. The decrease in same store sales of 0.8% was primarily caused
by a drop in tobacco (cigarette) sales of approximately 10% as the Company
experienced price competition in its markets in this category. Additionally,
the Company restructured its marketing and operations departments during the
year. While this process was undertaken, short term promotional sales, including
fountain soft drink price promotions, were suspended while the new group focused
on long-term planning. The Company also experienced an unusually rainy year in
its markets, which adversely affected sales. Average per store sales increased,
reflecting the addition of ten new stores and the closing of thirteen
underperforming stores in fiscal 1995. The increases in gasoline sales resulted
both from an increase in the average retail price per gallon of gasoline for
the year and a small increase in the volume of gasoline sold. Both same store
and average per store gasoline volume increased in fiscal 1995. These increases
resulted from several factors including (i) the impact of the store openings and
closings noted above, (ii) improved gasoline facilities resulting from the
installation of CRINDs at 46 locations (including new stores) during fiscal
1995, which increased the total number of locations with CRINDs to 69 locations
as compared to 23 locations at September 29, 1994, and (iii) the branding or
re-branding of gasoline at 29 sites formerly selling unbranded gasoline or
gasoline branded under brands that are less popular in the Company's market
area. Increases in gasoline sales for fiscal 1995 more than offset the decrease
in merchandise sales.
Gross Profit. Gross profit for fiscal 1995 increased over
fiscal 1994 as increased gross profit on gasoline sales more than offset
decreased gross profit on merchandise sales. The overall increase was achieved
despite the decreases from fiscal 1994 in both the average number of total
stores open and average number of gasoline stores open. Gross profit on
merchandise sales decreased primarily due to the decrease in sales discussed
above, as the average gross margin on merchandise sales remained unchanged from
fiscal 1994. The Company includes purchase rebates, mark-downs, inventory
spoilage and inventory shrink in its gross profit and gross margin computations.
Such items totaled $3.0 million in fiscal 1995 and $3.9 million in fiscal 1994.
The fiscal 1995 gross profit from gasoline sales increased significantly over
fiscal 1994 and was the primary reason for the overall increase in gross profit.
The increase in gasoline gross profit reflected increases in both the average
gross profit per gallon and volume of gasoline sold in fiscal 1995, due
primarily to the increased number of locations with CRINDs, the re-branding of
selected sites to historically more profitable gasoline brands and an increase
in the percentage of locations selling branded gasoline.
Store Operating Expenses. Store operating expenses for fiscal
1995 increased over fiscal 1994, both in total dollars and as a percentage of
merchandise sales. The primary reason for the increase in store operating
14
<PAGE>
expenses was an increase in store labor and related expenses, and, to a lesser
extent, increases in (i) repair and maintenance and (ii) real estate lease
expense, which reflects the leases for nine of the ten new stores opened in
fiscal 1995. These increases were partially offset by a reduction in
environmental clean-up expense recognized in the fiscal 1995. Labor costs
increased partially due to the implementation of thirteen branded fast food
concepts, which require more labor per sales dollar than traditional convenience
stores, and as a result of a more competitive labor market in certain of the
Company's markets. All of the Company's branded fast food concepts were closed
during the first quarter of fiscal 1996.
General and Administrative Expenses. General and
administrative expense for fiscal 1995 increased over fiscal 1994, both in total
dollars and as a percentage of merchandise sales. The increases were due
primarily to increases in insurance expense, primarily workers' compensation
insurance. In addition, the Company experienced an increase in supplies expense
and an increase in its employee retirement plan matching contribution expense
due to increased plan enrollment. These expenses were partially offset by a
decrease in professional fees and medical insurance expense in fiscal 1995.
Amortization of Non-Compete Agreement. Effective with the July
11, 1994 termination of a former officer of the Company, the non-compete portion
of a fiscal 1993 contract between the Company and the former officer, which
restricted the former officer and his affiliated companies from operating
convenience stores in competition with The Pantry, became the principal source
of value of the contract. On June 30, 1995, the terms of the contract were
amended, including a change in the expiration of the non-compete period from
December 2001 to December 1996. Due to the significance of the reduction of the
non-compete period, the unamortized balance of the non-compete asset was written
off in fiscal 1995.
Income from Operations. Income from operations decreased
as a result of the fiscal 1995 write-off of the non-compete agreement,
discussed above, and increases in store operating and general and administrative
expenses. These charges were partially offset by the increase in gross profit.
Interest Expense. Interest expense for fiscal 1995 increased
due primarily to (i) interest recognized in fiscal 1995 in accounting for
certain employment obligations that were recognized in the fourth quarter of
fiscal 1994, (ii) because the Company's 12% $100 million Senior Notes due
2000, (the "Notes"), issued on November 4, 1993, were outstanding during all of
fiscal 1995 versus only a portion of fiscal 1994, and (iii) interest related to
a potential income tax issue.
Cumulative Effect of Accounting Change. During the fourth
quarter of fiscal 1995, the Company adopted, retroactive to September 30, 1994,
Statement of Financial Accounting Standards No. 112 (SFAS No. 112), "Employer's
Accounting for Postemployment Benefits" and restated its first quarter results
to reflect the adoption. SFAS No. 112 requires that employers expense the costs
of postemployment benefits over the service lives of employees if certain
conditions are met. The cumulative effect of adopting SFAS No. 112 as of
September 30, 1994 was an after tax charge of $1.0 million.
Acquisition Due Diligence Costs. During fiscal 1995, the
Company spent approximately $1.2 million in due diligence costs related to the
evaluation of the potential purchase of a regional convenience store company.
The proposed transaction was abandoned and as a result, the costs incurred in
connection with the prospective acquisition were charged to earnings in fiscal
1995.
Income Tax Expense (Benefit). Income tax benefit decreased in
fiscal 1995 despite an increase in the Company's pre-tax loss. The decreased
benefit resulted from a lower deferred tax benefit in fiscal 1995 and certain
non-cash inter-period tax allocations stemming from the Company's change in its
tax fiscal year-end to coincide with its book fiscal year end.
Extraordinary Item. During the first quarter of fiscal 1994,
the Company used a portion of the proceeds from the sale of the Notes to retire
all its previously outstanding long-term debt. The Company wrote off $1.2
million of loan origination fees associated with the retired debt. This loss was
offset by a gain of $0.1 million realized on the early payment of long-term debt
and a tax benefit of $0.4 million. This resulted in an extraordinary charge to
earnings of $0.7 million in fiscal 1994.
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). EBITDA represents income (loss) before depreciation and
amortization, interest expense, income tax (expense) benefit, $2.6 million
of the total $3.0 million charge for impairment of long-lived
assets related to goodwill, extraordinary item and the write-off
of the acquisition due diligence costs. The Company has included
information concerning EBITDA herein because it understands that
such information is used by certain investors as one measure
of an issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or more meaningful than, income from
operations or cash flow as an indication of the Company's operating performance.
EBITDA increased for fiscal 1995 primarily as a result of the increase in
gasoline gross profit discussed above, partially offset by the increases in
store
15
<PAGE>
operating and general and administrative expenses previously discussed. The
resulting EBITDA/interest expense coverage for fiscal 1995 was 1.7 times.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of the Company's
business, substantially all sales are for cash, and cash provided by operations
is the Company's primary source of liquidity. Currently, capital expenditures
represent the primary use of Company funds. Cash provided by operating
activities for fiscal 1996 decreased $6.7 million from fiscal 1995. The decrease
reflects the decrease in fiscal 1996 income from operations.
Line and Letter of Credit Facility. To supplement cash on hand
and cash provided by operating activities, the Company has a $25 million credit
facility, which will expire on January 31, 1998 consisting of a $10 million
working capital line of credit and a $15 million line of credit for issuance of
standby letters of credit to vendors, insurance companies, federal and state
regulatory agencies for self insurance of workers compensation and for other
letter of credit needs. Up to $2.5 million of the standby letter of credit
facility can be used as an additional working capital line of credit. As of
September 26, 1996, there were no borrowings outstanding under the working
capital line of credit and approximately $10.8 million of letters of credit were
issued under the standby letter of credit facility.
Capital Expenditures. Fiscal 1996 capital expenditures totaled
$11.1 million, comprised of: (i) $4.0 million for new stores, which were
subsequently or will be financed through sale/leasebacks; (ii) $1.0 million for
new store equipment and (iii) $6.1 million for existing stores. Existing store
capital expenditures consist of investment capital expenditures and maintenance
capital expenditures. Investment capital expenditures are for store upgrades and
remodels or upgraded gasoline equipment (e.g., CRINDs), from which the Company
expects to realize incremental returns through increased operating results.
Maintenance capital expenditures, such as those required to replace existing
equipment, comply with the phase-in requirements of applicable environmental
regulations or make structural repairs or improvements to store facilities, are
made to allow the store to maintain its operations but are not expected to
significantly enhance the profitability of the store.
Store Expansion. In fiscal 1996, the Company opened four new
stores. The Company intends to open approximately ten stores in fiscal 1997. The
Company intends to finance the real estate through either a sale/leaseback or
build-to-suit agreement. The equipment purchases are expected to be financed
through operating cash flow.
Acquisitions. The Company will consider for acquisition
selected groups of convenience stores from other operators. Based on the
Company's experience, the cost of acquiring stores and converting them to
conform to the Company's operating practices varies depending on whether the
Company acquires one or a group of stores from a single operator, the location
of each store, whether it is leased or owned and the costs associated with
branding the location (if it was previously unbranded), installing gasoline and
store equipment upgrades and upgrading the store interior. The Company does not
currently have any agreements, arrangements or understandings for the
acquisition of any particular stores, and there can be no assurance that any
such acquisitions will be consummated.
Long-Term Debt. The Company's long-term debt consists
primarily of $100 million of the Notes. The interest payments on the Notes are
due May 15 and November 15. The Indenture, which governs the Notes, contains
restrictive covenants that affect the ability of the Company to expand its
business.
In connection with the transactions involving the FS Group and
Chase (see Items 1. and 12.), a Supplemental Indenture was executed on December
4, 1995 (the "Supplemental Indenture") by the Company and IBJ Schroder Bank &
Trust Company, as Trustee under the Indenture. The Supplemental Indenture makes
certain changes in the Indenture, including the following: (i) permitted
borrowings under Section 4.10(b) of the Indenture are increased from $25.0
million to $35.0 million and the purposes for which such borrowings can be used
is expanded; (ii) borrowings permitted under Section 4.10(d) of the Indenture
are increased from $5.0 million to $10.0 million, the purposes for which such
borrowings can be used are expanded to include capital expenditures generally
(rather than furniture, fixtures and equipment) and the restriction that all
such borrowings be non-recourse to the Company is removed; (iii) the time period
in which proceeds of Asset Sales (as defined in the Indenture) can be reinvested
is increased and the amount of Asset Sales for which no prepayment of the Notes
is required under Section 4.13 of the Indenture is increased to facilitate
potential sale/leaseback transactions; (iv) the limitations on Restricted
Payments (as defined in the Indenture) are modified to allow the Company to make
loans to employees to purchase Company stock and to allow the Company to
repurchase stock from employees when their employment with the Company
terminates; (v) the Company is required to own a minimum of 112 convenience
store properties at all times; and (vi) the interest rate payable on the Notes
will increase if a specified Consolidated Fixed Charge Coverage Ratio (as
defined in the Indenture) is not maintained until the required Consolidated
Fixed Charge Coverage Ratio is achieved. The Supplemental Indenture will become
operative concurrent with the sale of Qualified Capital Stock (as defined in the
16
<PAGE>
Indenture) to the FS Group and Chase for at least $22.6 million in cash, as
described above, for the purchase of capital stock of the Company.
Cash Flows from Financing Activities. The Company incurred
$3.1 million of financing costs related primarily to payments to registered
holders of its Notes made in exchange for their consent not to accept the Change
of Control Offer and to accept the Supplemental Indenture in conjunction with
the November 30, 1995 transactions.
Shareholders' Deficit. The Company had a shareholders' deficit
of $27.5 million at September 26, 1996. This deficit is due partially to the
accounting treatment applied to a 1987 leveraged buyout of the outstanding
common stock of the Company's predecessor which resulted in a debit to common
stock of $17.1 million. This debit had the effect, among others, of offsetting
$7.0 million of equity capital invested in the Company by its shareholders. The
remainder of the deficit, $17.4 million, reflects accrued dividends on
previously outstanding preferred stock of $5.0 million, accrued dividends on
current outstanding preferred stock of $2.7 million, the net cost of the fiscal
1996 equity transactions and the cumulative results of operations, which include
interest expense of $17.2 million on previously outstanding subordinated
debentures and preferred stock obligations. This interest and the related
subordinated debt and these dividends and the related preferred stock were paid
or redeemed in full with a portion of the proceeds from the fiscal 1994 sale of
the 12% Senior Notes due 2000 (the "Old Notes").
Environmental Considerations. Federal, state, and local
regulatory agencies have adopted various regulations governing USTs that require
the Company to make certain expenditures for compliance. Regulations enacted by
the EPA in 1988 established requirements for (i) installing UST systems; (ii)
upgrading UST systems; (iii) taking corrective action in response to releases;
(iv) closing UST systems; (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. UST systems upgrading consists of: installing and employing leak
detection equipment and systems, upgrading UST systems for corrosion protection
and installing overfill/spill prevention devices.
Leak detection - The Company believes it is in full or substantial
compliance with the leak detection requirements applicable to its
USTs.
Corrosion Protection - The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. The Company
began installing non-corrosive fiberglass tanks and piping in 1982.
The Company has a comprehensive plan to upgrade all its steel tank UST
systems to 1998 standards by 1998 through internal tank lining and
cathodic protection. As of September 26, 1996, approximately 79% of
the Company's USTs have been protected from corrosion either through
the installation of fiberglass tanks or upgrading steel USTs with
interior fiberglass lining and the installation of cathodic
protection.
Overfill/Spill Prevention - The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Company is systematically installing these devices on all
Company-owned UST systems to meet the regulations. The Company has
installed spill/overfill equipment for approximately 79% of its USTs.
The Company anticipates that it will meet the 1998 deadline for
installing corrosion protection and spill/overfill equipment for all
of its USTs and has budgeted approximately $2.0 million of capital
expenditures for these purposes over the next two years. Additional
regulations or amendments to the existing UST regulations could result
in future revisions to the estimated upgrade compliance and
remediation costs outlined herein. Such expenditures are expected to
be funded from cash generated by operations and are not expected to
adversely affect liquidity.
All states in which the Company operates or has operated UST
systems have established trust funds for the sharing, recovering and reimbursing
of certain cleanup costs and liabilities incurred as a result of releases from
UST systems. These trust funds essentially provide insurance coverage for the
cleanup of environmental damages caused by the operation of UST systems. The
coverage afforded by each state fund varies but generally provides for up to $1
million per site for the cleanup of environmental contamination and most provide
coverage for third party liability. The trust funds require the Company to pay
deductibles ranging from $10,000 to $100,000 per occurrence depending on the
upgrade status of its UST system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. Reimbursements from
state trust funds will be dependant upon the continued maintenance and solvency
of the various funds.
17
<PAGE>
The Company currently estimates that its total costs for
remediation of contamination discovered at its existing and former store
locations will be approximately $6.2 million. The Company anticipates that
approximately $1.1 million of these future remediation costs will not be
reimbursed by state trust funds or covered by private insurance. Of the
remaining $5.1 million which may have to be spent for remediation at these
sites, the Company believes that (i) approximately $5.0 million will be
reimbursed from state trust funds based on prior acceptance of sites for
reimbursement or anticipated acceptance based on date of discovery of the
contamination and (ii) approximately $0.1 million will be covered by insurance
based on the prior acceptance of sites for such coverage. Reimbursements from
state trust funds will be dependent upon the continued solvency of the various
funds. These estimates are based on consultants' and management's estimates of
the cost of remediation, tank removal, and litigation associated with all known
contaminated sites as a result of releases (e.g., overfills, spills and UST
system leaks). Releases or contamination may be discovered at other locations
where the Company currently operates or has operated stores, and any such
releases or contamination could require substantial additional remediation
costs, some or all of which may not be eligible for reimbursement from state
trust funds.
Cash Requirements. The Company believes that cash on hand,
together with cash flow anticipated to be generated from operations, new equity
to be sold by December 31, 1996 in connection with the transaction described
above, short-term borrowing for seasonal working capital and permitted
borrowings by its Unrestricted Subsidiary will be sufficient to enable the
Company to satisfy anticipated cash requirements for operating, investing and
financing activities, including debt service through fiscal 1997. To the extent
that earnings and cash flow are less than management's estimates, the Company
will curtail its proposed acquisition activities, and, if necessary, its
expenditures for stores it currently plans to build in fiscal 1997.
New Accounting Standards. During fiscal 1996, the Company
early-adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of the adoption
of this statement was a charge to income from operations of approximately $3.0
million in fiscal 1996.
SFAS No. 112, "Employers' Accounting for Post-employment
Benefits," was adopted by the Company in fiscal 1995. SFAS No. 112 requires that
employers expense the cost of postemployment benefits over the service lives of
employees if certain conditions are met. The cumulative effect of adopting SFAS
No. 112 was a charge in fiscal 1995 of approximately $1.0 million, net of tax.
18
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Reports of Independent Auditors................................................................20
Report of Independent Accountants..............................................................21
Consolidated Balance Sheet as of September 28, 1995
and September 26, 1996................................................................22
Consolidated Statement of Operations for the years
ended September 29, 1994, September 28, 1995,
and September 26, 1996................................................................24
Consolidated Statement of Changes in Shareholders'
Deficit for the years ended September 29, 1994,
September 28, 1995, and September 26, 1996............................................25
Consolidated Statement of Cash Flows for the years ended
September 29, 1994, September 28, 1995,
and September 26, 1996................................................................26
Notes to Consolidated Financial Statements.....................................................29
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves............................S-1
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheet of The Pantry, Inc.
and subsidiaries as of September 26, 1996 and the related consolidated
statements of operations, shareholders' deficit, and cash flows for the year
then ended. Our audit also included the financial statement schedule for the
year ended September 26, 1996 listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Pantry, Inc. and subsidiaries
at September 26, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule for the year
ended September 26, 1996, when considered in relation to the basic 1996
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in fiscal 1996
the Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
Deloitte & Touche LLP
Raleigh, North Carolina
December 19, 1996
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
The Pantry, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index as of and for each of the two years in the period ended
September 28, 1995 appearing in this Form 10-K Annual Report present fairly, in
all material respects, the financial position, results of operations and cash
flows of The Pantry, Inc. and its subsidiaries as of and for each of the two
years in the period ended September 28, 1995 in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evalutating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of The Pantry, Inc. for any period
subsequent to September 28, 1995.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 112 (SFAS 112), Employers'
Accounting for Postemployment Benefits, during fiscal 1995.
PRICE WATERHOUSE LLP
Raleigh, North Carolina
November 30, 1995
21
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
September 28, September 26,
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash $ 10,999 $ 5,338
Receivables (net of allowance for doubtful
accounts of $251 at 1995 and $150 at 1996) 2,851 2,860
Inventories (Note 2) 12,286 13,223
Prepaid expenses 795 775
Income taxes receivable -- 63
Property held for sale 2,047 2,816
Deferred income taxes (Note 6) 1,304 879
Total current assets 30,282 25,954
Property and equipment, net (Notes 3, 4, 7, 8 and 11) 67,119 65,455
Other assets:
Goodwill (net of accumulated amortization of
$6,390 at 1995 and $9,705 at 1996) (Note 11) 20,167 16,852
Deferred lease cost (net of accumulated
amortization of $8,854 at 1995 and $8,911 at 1996) 416 359
Deferred financing cost (net of accumulated
amortization of $1,525 at 1995 and $2,884 at 1996) 4,241 5,940
Environmental receivables (Note 9) 4,695 5,162
Deferred income taxes (Note 6) -- 790
Other 800 368
Total other assets 30,319 29,471
$127,720 $120,880
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
22
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
September 28, September 26,
1995 1996
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 4) $ 15 $ 16
Current maturities of capital lease obligations (Note 7) 327 285
Accounts payable:
Trade 14,468 15,666
Money orders 1,882 2,788
Accrued interest 5,143 4,416
Accrued compensation and related taxes 2,691 2,338
Income taxes payable 657 --
Other accrued taxes 1,735 2,135
Accrued insurance 3,300 3,629
Other accrued liabilities 825 1,194
Total current liabilities 31,043 32,467
Long-term debt (Note 4) 100,169 100,148
Other non-current liabilities:
Environmental expenses (Note 9) 5,720 6,232
Deferred income taxes (Note 6) 1,193 --
Capital lease obligations (Note 7) 1,287 982
Employment obligations (Note 8) 2,294 2,039
Accrued dividends -- 2,654
Other 2,346 3,905
Total other non-current liabilities 12,840 15,812
Shareholders' deficit:
Preferred stock, $.01 par value, 150,000 shares authorized; none issued and
outstanding at September 28, 1995;
25,999 issued and outstanding at September 26, 1996 -- --
Common stock, $.01 par value, 300,000 shares authorized;
100,000 issued and outstanding at September 28, 1995;
114,029 issued and outstanding at September 26, 1996 1 1
Additional paid in capital (10,110) (10,557)
Accumulated deficit (6,223) (16,991)
Total shareholders' deficit (16,332) (27,547)
Commitments and contingencies (Notes 5, 7 and 9) -- --
$ 127,720 $ 120,880
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
September 29, September 28, September 26,
1994 1995 1996
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Revenues:
Merchandise sales $ 189,244 $ 187,380 $ 188,091
Gasoline sales 175,083 187,165 192,737
Commissions 4,466 4,516 3,979
Total revenues 368,793 379,061 384,807
Cost of sales:
Merchandise 123,142 121,976 125,979
Gasoline 153,476 161,179 167,610
Total cost of sales 276,618 283,155 293,589
Gross profit 92,175 95,906 91,218
Operating expenses:
Store expenses 52,310 55,122 56,567
Store expenses - related parties (Note 8) 891 1,084 1,274
General and administrative expenses 17,850 18,159 17,127
General and administrative expenses -
related parties (Note 8) 43 - -
Restructuring charges (Note 12) - - 2,184
Impairment of long-lived assets - - 3,034
Depreciation and amortization 10,085 9,505 9,158
Amortization of non-compete agreement 79 1,965 -
Total operating expenses 81,258 85,835 89,344
Income from operations 10,917 10,071 1,874
Other income (expense):
Interest (11,652) (12,974) (11,992)
Interest - related parties (Note 8) (395) (266) -
Miscellaneous 949 711 (660)
Due diligence costs - (1,181) -
Total other expense (11,098) (13,710) (12,652)
Loss before income taxes and other items (181) (3,639) (10,778)
Income tax benefit (Note 6) 372 354 2,664
Income (loss) before extraordinary item and
cumulative effect of accounting change 191 (3,285) (8,114)
Cumulative effect of change in accounting for
post-employment benefits (net of income
tax benefit of $640) - (960) -
Extraordinary item - write-off of deferred financing
costs related to debt retired, net of gain on debt
retired (net of income tax benefit of $448) (671) - -
Net loss $ (480) $ (4,245) $ (8,114)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
24
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
(dollars in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Additional
Par Par Paid in Accumulated
Shares Value Shares Value Capital Other(1) Total Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1993 - $ - 100,000 $ 1 $ 6,999 $ (17,109) $ (10,109) $ (1,467) $ (11,576)
Net loss - - - - - - - (480) (480)
Dividends on preferred
stock - - - - - - - (31) (31)
Balance,
September 29, 1994 - - 100,000 1 6,999 (17,109) (10,109) (1,978) (12,087)
Net loss - - - - - - - (4,245) (4,245)
Balance,
September 28, 1995 - - 100,000 1 6,999 (17,109) (10,109) (6,223) (16,332)
Net loss - - - - - - - (8,114) (8,114)
Net proceeds from
stock issue 25,999 - 14,029 - (447) - (447) - (447)
Dividends on preferred
stock - - - - - - - (2,654) (2,654)
Balance,
September 26, 1996 25,999 $ - 114,029 $ 1 $ 6,552 $ (17,109) $ (10,556) $ (16,991) $ (27,547)
</TABLE>
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders (Note 1).
The accompanying notes are an integral part of these consolidated
financial statements.
25
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
September 29, September 28, September 26,
1994 1995 1996
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (480) $ (4,245) $ (8,114)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary write-off of deferred financing cost 1,191 -- --
Extraordinary gain on retirement of debt (72) -- --
Cumulative effect of change in accounting for
post-employment benefits -- 1,600 --
Impairment of long-lived assets -- -- 3,034
Interest paid upon debt refinancing (529) -- --
Interest paid upon debt refinancing -
related parties (17,235) -- --
Depreciation and amortization 10,164 11,470 9,158
Change in deferred income taxes (2,082) (2,451) (1,558)
(Gain) loss on sale of property and equipment (38) 2 385
Reserves for environmental expenses (461) (418) 45
Reserves for closed stores 116 292 673
Write-off of property held for sale (50) -- 168
Amortization of deferred revenues (174) (568) (1,163)
(Increase) decrease in:
Receivables 176 141 (44)
Inventories (98) 1,694 (937)
Prepaid expenses (97) 119 20
Income taxes receivable -- 13 (63)
Environmental receivables -- 240 --
Other assets (109) (279) 69
Increase (decrease) in:
Accounts payable - trade 260 2,167 1,198
Accounts payable - money orders (165) 127 906
Accrued interest 4,717 1,002 (478)
Accrued interest - related parties 395 -- --
Accrued compensation and related taxes 631 (786) (353)
Income taxes payable (421) 249 (657)
Other accrued taxes (216) (369) 400
Accrued insurance 346 114 329
Employment obligations 85 (140) (255)
Other accrued liabilities 25 (247) 121
Other liabilities 1 2,176 2,300
Net cash provided by (used in) operating activities (4,120) 11,903 5,184
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
26
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended
September 29, September 28, September 26,
1994 1995 1996
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale (Note 7) -- (18,600) (4,050)
Additions to property and equipment (9,862) (16,650) (7,084)
Proceeds from sale of property held for sale (Note 7) -- 19,436 2,462
Proceeds from sale of property and equipment 119 533 1,468
Additions to property and equipment from refinancing (869) -- --
Net cash provided by (used in) investing activities (10,612) (15,281) (7,204)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (535) (413) (347)
Principal payments on debt (186) (7,281) (21)
Proceeds from issuance of debt 200 7,267 --
Proceeds from line of credit, net -- -- --
Net proceeds from equity issue -- -- (216)
Other financing costs -- (523) (3,057)
Debt refinancing activity:
Proceeds from issuance of Senior notes 100,000 -- --
Long-term debt retired (58,014) -- --
Preferred stock and related dividends retired (7,562) -- --
Capital lease obligations retired (2,481) -- --
Payment of loan closing costs (5,467) -- --
Net cash provided by (used in) financing activities 25,955 (950) (3,641)
Net increase (decrease) in cash 11,223 (4,328) (5,661)
CASH AT BEGINNING OF PERIOD 4,104 15,327 10,999
CASH AT END OF PERIOD $ 15,327 $ 10,999 $ 5,338
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended
September 29, September 28, September 26,
1994 1995 1996
<S> <C> <C> <C>
Cash paid (refunded) during the year for:
Interest $ 24,671 $ 12,650 $ 12,719
Income taxes $ 2,031 $ 1,197 $ (403)
</TABLE>
Interest paid during fiscal 1994 includes $17,235 of interest related to the
1987 and 1990 series subordinated debentures. Interest had been accruing since
the debt issue dates; however, no interest was paid on this debt until fiscal
1994, at which time the interest was paid with a portion of the proceeds from
the Company's Senior Note offering.
28
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
The consolidated financial statements include the accounts of The Pantry, Inc.
(The Pantry or the Company) and its wholly-owned subsidiaries, Sandhills, Inc.
and PH Holding Corporation (PH) and PH's wholly-owned subsidiaries, TC Capital
Management, Inc. and Pantry Properties, Inc. All intercompany transactions and
balances have been eliminated in consolidation. The Pantry owns and operates
approximately 379 convenience stores in North Carolina, South Carolina,
Tennessee, Kentucky, and Indiana.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its affiliates,
FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP III"), and
FS Equity Partners International, L.P., a Delaware limited partnership
("FSEP International," collectively with FSEP III, "the FS Group,") acquired
a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in
the Company through a series of transactions which included the purchase of
common stock from certain shareholders and the purchase of newly issued common
and preferred stock. The FS Group and Chase subsequently acquired the remaining
interests of approximately 37.0% and 11.1%, respectively, on August 19, 1996
through the purchase of common and preferred stock from certain
shareholders. As of September 26, 1996, the Company is owned 76.9%
and 18.5% by the FS Group and Chase, respectively.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of Montrose
Pantry Acquisition Corporation (MPAC), an entity formed to affect the 1987
leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged into
MPAC and MPAC's name was changed to The Pantry. MPAC had no assets or operations
other than its investment in The Pantry.
Acquisition accounting
MPAC acquired all of The Pantry's common stock in a leveraged buy-out as of
August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of accounting was established as a
result of the acquisition to the extent of the "new" equity interests (partial
step-up). The original basis of accounting was retained for those shareholders
that retained an equity interest in MPAC after the acquisition. To the extent of
ownership change, the excess amount paid over The Pantry's net book value was
allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values. To the extent that certain
individuals and entities maintained their equity interests, the excess amount
paid over net book value was recorded as a debit in shareholders' deficit
($17,109,000). Had there not been a partial step-up, this amount would have been
allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values.
Long-lived assets
During fiscal 1996, the Company early-adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If an evaluation is required, the projected future undiscounted
cash flows attributable to each store would be compared to the carrying value of
the long-lived assets (including an allocation of goodwill, if appropriate) of
that store to determine if a write-down to fair value is required. See Note 11.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited. The Company assesses the recoverability of this intangible
asset by determining whether amortization of the goodwill balance over its
remaining life can be recovered through estimated undiscounted future operating
results. Estimated future results are based on a trend of historical results for
the trailing three fiscal years and management's estimate of future results
which indicate that the goodwill balances will be recovered over the various
periods remaining to be benefited.
29
<PAGE>
Goodwill of $24,946,000 with accumulated amortization of $8,257,000 related to
the 1987 leveraged buy-out is being amortized on a straight-line basis over 40
years. Goodwill of $1,611,000 with accumulated amortization of $1,448,000
related to acquisitions of stores is being amortized on a straight-line basis
over 20 years.
Deferred lease cost
Deferred lease cost represents the value assigned to favorable leases acquired.
Such amounts are being amortized over the remaining term of the respective
leases using the effective interest method.
Property held for sale
Certain property is classified as current assets when management's intent is to
sell these assets in the ensuing fiscal year, and is recorded at the lower of
cost or fair value.
Deferred financing cost
Deferred financing cost represents expenses related to issuing the Company's
long-term debt (Note 4), obtaining its lines of credit (Note 5), and obtaining
lease financing (Note 7). Such amounts are being amortized over the remaining
term of the respective financing.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for financial
statement purposes and by accelerated methods for income tax purposes.
Upon sale or retirement of depreciable assets, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized.
Leased buildings capitalized in accordance with SFAS No. 13 are recorded at the
lesser of fair value or the discounted present value of future lease payments at
the inception of the leases. Amounts capitalized are amortized over the
estimated useful lives of the assets or terms of the leases (generally 5 to 20
years) using the straight-line method.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method.
Non-compete agreement
Effective with the July 11, 1994, termination of a former officer of The Pantry,
the non-compete portion of a fiscal 1993 contract between the Company and the
former officer, which restricted the former officer and his affiliated companies
from operating convenience stores in competition with The Pantry, became the
principal source of value. On June 30, 1995, the terms of this contract were
amended, including a change in the expiration of the non-compete period from
December 2001 to December 1996. Due to the significance of the reduction of the
non-compete period, the unamortized balance of the non-compete asset was written
off in fiscal 1995.
Income taxes
All operations of The Pantry and its subsidiaries are included in a consolidated
Federal income tax return. Pursuant to SFAS No. 109, Accounting for Income
Taxes, The Pantry recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between financial
statement carrying amounts and the related tax bases.
Redeemable preferred stock
For fiscal 1993, there were 108,000 shares authorized and 26,000 shares issued
and outstanding of 12.5% cumulative, $100 par value, redeemable preferred stock.
On November 4, 1993, The Pantry issued $100,000,000 of 12% notes due November
15, 2000 (Note 4). The proceeds from this issuance were used in part to retire
all the redeemable preferred stock and dividends and accrued interest thereon.
Use of estimates
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 liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
30
<PAGE>
Recently issued accounting standards not yet adopted
In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, Environmental Remediation Liabilities. SOP 96-1 contains authoritative
guidance on specific accounting issues that are present in the recognition,
measurement, display and disclosure of environmental remediation liabilities.
The provisions of SOP 96-1 are effective for fiscal years beginning after
December 15, 1996 (the Company's 1998 fiscal year). The Company does not believe
the adoption of SOP 96-1 will have a material effect on its consolidated
financial statements.
Accounting period
The Pantry operates on a 52-53 week fiscal year ending on the last Thursday in
September. For 1994, 1995 and 1996, each of the Company's fiscal years contained
52 weeks.
Reclassifications
Certain amounts in the fiscal 1994 and 1995 consolidated financial statements
have been reclassified to conform to the current year presentation.
Accounting Change
During the fourth quarter of fiscal 1995, the Company adopted, retroactive to
September 30, 1994, SFAS No. 112, "Employer's Accounting for Postemployment
Benefits" and restated its first quarter results to reflect the adoption. SFAS
No. 112 requires that employers expense the costs of postemployment benefits
over the service lives of employees if certain conditions are met. The
cumulative effect of adopting SFAS No. 112 as of September 30, 1994 was an after
tax charge of $960,000.
NOTE 2 - INVENTORIES:
At September 28, 1995 and September 26, 1996, inventories consisted of the
following (in thousands):
1995 1996
Inventories at FIFO cost:
Merchandise $ 13,779 $ 13,841
Gasoline 2,970 4,013
16,749 17,854
Less adjustment to LIFO cost:
Merchandise (4,152) (4,012)
Gasoline (311) (619)
Inventories at LIFO cost $ 12,286 $ 13,223
The positive effect on cost of sales of LIFO inventory liquidations was $99,000,
$957,000 and $68,000 for fiscal years 1994, 1995 and 1996, respectively.
NOTE 3 - PROPERTY AND EQUIPMENT:
At September 28, 1995 and September 26, 1996, property and equipment consisted
of the following (in thousands):
1995 1996
Land $ 15,926 $ 16,116
Buildings 29,408 28,731
Gasoline equipment 37,103 39,670
Other equipment, furniture and fixtures 24,807 24,020
Leasehold improvements 7,397 8,403
Automobiles 179 123
Construction in progress 41 110
114,861 117,173
Less - accumulated depreciation and amortization (47,742) (51,718)
$ 67,119 $ 65,455
31
<PAGE>
NOTE 4 - LONG-TERM DEBT:
At September 28, 1995 and September 26, 1996, long-term debt consisted of the
following (in thousands):
1995 1996
Notes payable ("Senior Notes"); due November
15, 2000; interest payable semi-annually at 12% $ 100,000 $ 99,995
Note payable; secured by certain property;
due monthly through 2004; interest at 10% 184 169
100,184 100,164
Less - current maturities (15) (16)
$ 100,169 $ 100,148
While the Senior Notes are unsecured, the terms of the Senior Notes contain
certain covenants restricting: the use of proceeds from the offering; liens on
properties; certain "restricted payments" as defined in the agreement; the
incurrance of additional debt; the sale of assets; any merger, consolidation or
change in control; lines of business and transactions with affiliates.
In August 1995, PH borrowed $7,267,000 to finance the purchase of certain
convenience stores from a lessor of The Pantry (Note 7). The amount borrowed was
repaid in August 1995 when a majority of these stores were subsequently sold.
NOTE 5 - LINES OF CREDIT:
As of September 26, 1996, The Pantry had two bank lines of credit with borrowing
capacity limits of $10 million and $15 million, respectively. These lines expire
January 31, 1998. The $10 million line of credit bears interest at prime (8.25%
at September 26, 1996) plus 0.5%. As of September 26, 1996, there were no
balances outstanding under the $10 million line of credit. The $15 million line
of credit secures the Company's outstanding letters of credit of $10,812,000 at
September 26, 1996. The Company may use up to $2.5 million of the $15.0 million
letter of credit facility for working capital purposes. During fiscal 1996 and
as of September 26, 1996, there were no draws against the letters of credit.
NOTE 6 - INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
1994 1995 1996
Current:
Federal $ 935 $ 1,033 $ (1,111)
State 327 424 5
1,262 1,457 (1,106)
Deferred:
Federal (1,992) (1,839) (1,074)
State (90) (612) (484)
(2,082) (2,451) (1,558)
$ (820) $ (994) $ (2,664)
32
<PAGE>
For fiscal years 1994, 1995, and 1996, deferred tax liabilities (assets) are
comprised of the following (in thousands):
1994 1995 1996
Depreciation $ 5,013 $ 5,742 $ 5,523
Deferred lease cost 304 12 16
Inventory 828 1,000 994
Other -- 450 491
Gross deferred tax liabilities 6,145 7,204 7,024
Capital lease obligations (775) (618) (205)
Allowance for doubtful accounts (133) (96) (57)
Environmental expenses (427) (301) (410)
Accrued insurance reserves (559) (1,208) (1,391)
Accrued compensation (264) (1,033) (932)
Other (268) (631) (478)
Gross deferred tax assets (2,426) (3,887) (3,473)
Net operating loss carryforwards -- (1,992) (5,007)
General business credits (1,442) (991) (991)
AMT Credits -- (1,018) (1,004)
Deferred tax assets valuation allowance 62 573 1,782
$ 2,339 $ (111) $(1,669)
Reconciliations of income taxes at the Federal statutory rate (34%) to actual
taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate $ (442) $(1,783) $(3,665)
Tax expense (benefit) at state rate, net of Federal
income tax benefit 156 (779) (316)
Permanent differences:
Amortization of goodwill 237 237 1,127
Other 57 75 14
Tax benefit from creation of general business credits (590) (175) --
Interperiod tax allocation (181) 920 --
Other -- -- 176
Valuation allowance (57) 511 --
Net income tax expense (benefit) $ (820) $ (994) $(2,664)
</TABLE>
As of September 26, 1996 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of a
valuation allowance, as a reduction in the Company's net deferred tax asset.
These credits expire in fiscal 2004 through 2011.
NOTE 7 - LEASES:
The Pantry leases store buildings, office facilities and store equipment under
both capital and operating leases. The asset balances related to capital leases
at September 28, 1995 and September 26, 1996, are as follows (in thousands):
1995 1996
Buildings $ 2,781 $ 2,196
Less - accumulated amortization (1,807) (1,464)
$ 974 $ 732
Amortization expense related to capitalized leased assets was $406,000,
$269,000, and $261,000 for fiscal 1994, 1995, and 1996, respectively.
33
<PAGE>
Future minimum lease payments as of September 26, 1996, for capital leases and
operating leases that have initial or remaining terms in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Capital Operating
year leases leases
<S> <C> <C>
1997 $509 $5,987
1998 439 5,442
1999 357 4,977
2000 205 4,212
2001 107 2,920
Thereafter 390 27,581
Total minimum lease payments 2,007 51,119
Estimated executory costs -- --
Net minimum lease payments 2,007 $51,119
Amount representing interest (8% to 20%) (740)
Present value of net minimum lease payments 1,267
Less - current maturities (285)
$982
</TABLE>
The above amounts do not include total future minimum sublease rentals of
approximately $106,000 related to capital and operating leases. Rental expense
for operating leases was approximately $6,562,000, $6,759,000, and $8,126,000
for fiscal years 1994, 1995, and 1996, respectively.
In August 1995, PH purchased seventeen convenience stores under lease to the
Pantry from the lessor for approximately $10,747,000. Fourteen of these stores
were immediately sold, for approximately $10,792,000, and subsequently leased to
The Pantry. The remaining three stores are being operated by The Pantry. The
affect of these transactions is included in the $18,600,000 of additions to and
$19,436,000 of proceeds from sale of property held for sale in the consolidated
statement of cash flows.
NOTE 8 - RELATED PARTIES:
Certain of the above leases are with partnerships and corporations controlled by
former shareholders, former officers and current and former directors of The
Pantry. Rents under these leases were approximately $891,000, $1,079,000, and
$1,274,000 for fiscal years 1994, 1995, and 1996, respectively. Such leases
expire at various intervals over the next twenty years.
During fiscal 1995, the Company sold certain convenience stores to an entity
controlled by former officers and current and former directors of the Company
for approximately $3,300,000, which approximated the Company's investment in
these properties. These stores are currently being leased back from this
entity (rental amounts are included above).
Under the terms of a contract with a former officer, the Company is obligated to
pay the former officer certain amounts through September 30, 2000. The Company
has recorded a liability equal to the net present value of the payments due
under the contract and has classified the resulting annual interest expense as
related party interest.
The Company had aggregate expenses of $368,000 and $259,000 for fiscal 1994 and
1995, respectively, for environmental remediation and consultation services,
repair and maintenance services for the Company's gasoline equipment at
approximately 60 store locations and chartered airline services provided by
companies which are either owned or partially owned by a former officer,
director and shareholder of The Pantry.
At selected locations, The Pantry sold petroleum to fleet customers of a company
owned by a former officer. The former officer's company paid The Pantry for its
cost of petroleum plus $.03 per gallon. The Pantry's total fuel sales under this
program during fiscal 1994 and 1995 were $1,412,000 and $465,000, respectively.
The contract for these services expired during fiscal 1995 and was not renewed.
During fiscal 1994, the Company paid a fee to a placement agent in connection
with the sale of the Senior Notes. A former director of The Pantry was an
employee of the placement agent and received $280,000 from the investment
company related to this transaction.
34
<PAGE>
The 1987 and 1990 series of subordinated debentures and related accrued interest
thereon of $15,747,000 at September 30, 1993 were held by various former related
parties. Interest expense for these debentures for fiscal 1994 was $395,000.
All liabilities related to these debentures were liquidated on November 4, 1993.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
At September 28, 1995, The Pantry was contingently liable for outstanding
letters of credit in the amount of $10,812,000 related primarily to several
areas in which The Pantry is self-insured. The letters of credit are not to be
drawn against unless The Pantry defaults on the timely payment of related
liabilities.
The Pantry is involved in certain legal actions arising in the normal course of
business. In the opinion of management, based on a review of such legal
proceedings, the ultimate outcome of these actions will not have a material
effect on the accompanying consolidated financial statements.
Environmental liabilities and contingencies
The Company is subject to various federal, state and local environmental laws
and regulations governing underground petroleum storage tanks (USTs) that
require The Pantry to make certain expenditures for compliance. In particular,
at the federal level, the Resource Conservation and Recovery Act requires the
EPA to establish a comprehensive regulatory program for the detection,
prevention, and cleanup of leaking USTs. Regulations enacted by the EPA in 1988
established requirements for (i) installing UST systems; (ii) upgrading UST
systems; (iii) taking corrective action in response to releases; (iv) closing
UST systems; (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. These
regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as stringent
as the federal standards. The following is an overview of the 1988 requirements:
* Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply
with leak detection requirements by December 22, 1993. The Company utilizes
two approved leak detection methods for all Company-owned UST systems.
Daily and monthly inventory reconciliations are completed at the store
level and at the corporate support center. The daily and monthly
reconciliation data is also analyzed using Statistical Inventory
Reconciliation ("SIR") which compares the reported volume of gasoline
purchased and sold with the capacity of each UST system and highlights
discrepancies. The Company also performs annual leak detection tests.
* Corrosion Protection: The 1988 EPA regulations require that all UST systems
have corrosion protection by December 22, 1998. The Company began
installing non-corrosive fiberglass tanks and piping in 1982. The Company
has a comprehensive plan to upgrade all its steel tank UST systems to 1998
standards by 1998 through internal tank lining and cathodic protection. As
of September 26, 1996, approximately 79% of the Company's USTs have been
protected from corrosion either through the installation of fiberglass
tanks or upgrading steel USTs with interior fiberglass lining and the
installation of cathodic protection.
* Overfill/Spill Prevention: The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. The Pantry is
systematically installing devices on all Company-owned UST systems to meet
these regulations.
As of September 26, 1996, The Pantry believes it is in full or substantial
compliance with the leak detection requirements applicable to its USTs.
Approximately 79% of The Pantry's USTs have been protected from corrosion either
through the installation of fiberglass tanks or upgrading steel USTs with
interior fiberglass lining and the installation of cathodic protection. The
Pantry has installed spill/overfill equipment for approximately 79% of its USTs.
The Pantry anticipates that it will meet the 1998 deadline for installing
corrosion protection and spill/overfill equipment for all of its USTs and has
budgeted approximately $2.0 million of cumulative capital expenditures for these
purposes over the next two years.
In addition to the technical standards, The Pantry is required by federal and
state regulations to maintain evidence of financial responsibility for taking
corrective action and compensating third parties in the event of a release from
its UST systems. In order to comply with this requirement, The Pantry maintains
a letter of credit in favor of state environmental enforcement agencies in the
states of North Carolina, South Carolina, Tennessee, Indiana and Kentucky and
relies on reimbursements from applicable state trust funds.
35
<PAGE>
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST systems.
These trust funds, which essentially provide insurance coverage for the cleanup
of environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and/or a tax on the wholesale purchase of motor fuels
within each state. The Company has paid UST registration fees and/or a gasoline
tax to each state where it operates to participate in these programs and has
filed claims and received reimbursement in North Carolina, South Carolina, and
Tennessee. The coverage afforded by each state fund varies but generally
provides up to $1 million per site for the cleanup of environmental
contamination, and most provide coverage for third party liability. Costs for
which the Company does not receive reimbursement include but are not limited to:
(i) the per-site deductible; (ii) costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; and (iii) costs
incurred in connection with sites otherwise ineligible for reimbursement from
the trust funds. The trust funds require the Company to pay deductibles ranging
from $10,000 to $100,000 per occurrence depending on the upgrade status of its
UST system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. Reimbursement from state trust funds will be
dependent upon the maintenance and continued solvency of the various funds.
As of September 26, 1996, the Company is responsible for the remediation of
contamination at 56 sites. Other third parties are responsible for remediation
of contamination at another 13 sites. The Pantry has accrued $6,231,000 for
estimated total future remediation costs at the sites for which it is
responsible. The Pantry anticipates that approximately $1,069,000 of these
future remediation costs will not be reimbursed by state trust funds or covered
by private insurance. Of the remaining $5,162,000, The Pantry believes that (i)
approximately $5,007,000 will be reimbursed from state funds based on prior
acceptance of sites for reimbursement under these programs or anticipated
acceptance based on date of discovery of contamination and program regulations
and (ii) approximately $155,000 will be covered by insurance based on prior
acceptance of sites for such coverage. Reimbursements from state trust funds
will be dependent upon the continued solvency of the various funds. These
estimates are based on consultants' and management's estimates of the cost of
remediation, tank removal, and litigation associated with all known contaminated
sites as a result of releases (e.g. overfills, spills and UST system leaks).
Although the Company is not aware of releases or contamination at other
locations where it currently operates or has operated stores, any such releases
or contamination could require substantial remediation costs, some or all of
which may not be eligible for reimbursement from state trust funds.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean up
matters. Additionally, The Pantry is awaiting closure notices on several other
locations which will release the Company from responsibility related to known
contamination at those sites.
NOTE 10 - BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for eligible
employees. Employees must be at least nineteen years of age and have one year of
service with at least 1,000 hours worked to be eligible to participate in the
plan. Employees may contribute up to 15% of their annual compensation, and
contributions are matched by The Pantry on the basis of 50% of the first 5%
contributed. Matching contribution expense was $196,000, $346,000, and $330,000
for fiscal years 1994, 1995, and 1996, respectively.
36
<PAGE>
NOTE 11 - IMPAIRMENT OF LONG-LIVED ASSETS:
During fiscal 1996, the Company early-adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived and certain identifiable intangibles to be
disposed of.
Pursuant to SFAS No. 121, the Company evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Projected future cash flows for each store were estimated for a
period approximating the remaining lives of that store's long-lived assets,
based on earnings history, lease expiration dates and renewal periods, market
conditions and assumptions reflected in internal operating plans and strategies.
Based on this evaluation, the Company determined that certain long-lived assets
were impaired and recorded an impairment loss based on the difference between
the carrying value and the fair value of the assets. Fair value was determined
based on an evaluation of each property's value. The impairment consists
of the following assets (in thousands):
Property, plant and equipment $ 415
Goodwill 2,619
Total $3,034
NOTE 12 - RESTRUCTURING CHARGES:
During 1996, the Company recorded restructuring charges of $2,184,000 pursuant
to a formal plan to restructure its corporate offices. The costs include
$1,484,000 for employee severance; $350,000 for employee moving costs; and
$350,000 for legal costs related to the ownership litigation. Substantially all
of these amounts were expended during fiscal 1996.
37
<PAGE>
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On June 25, 1996, the Company filed with the Securities and
Exchange Commission a Current Report on Form 8-K regarding the Company's
dismissal of Price Waterhouse LLP as its principal independent accountants and
the engagement of Deloitte & Touche LLP as its new principal independent
accountants. As reported in the Form 8-K, none of Price Waterhouse LLP's
reports for either of the past two years contained adverse opinions, disclaimers
of opinion, or were qualified as to uncertainty, audit scope or accounting
principles. In addition, there were no disagreements with Price Waterhouse LLP
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure in connection with the two most recent
fiscal years and any subsequent interim period preceding the engagement of the
new auditors.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding
the directors and executive officers of the Company as of December 15, 1996:
<TABLE>
<CAPTION>
Name Age Position with the Company
<S> <C> <C>
Peter J. Sodini 55 President, Chief Executive Officer and Director
Dennis R. Crook 53 Senior Vice President, Administration and Gasoline Marketing
Douglas M. Sweeney 58 Senior Vice President, Operations
Mark C. King 35 Senior Vice President, Chief Financial Officer and Secretary
Daniel J. McCormack 54 Vice President, Marketing
John H. Hearne 53 Vice President, Real Estate
Eugene B. Horne, Jr. 54 Vice Chairman of the Board of Directors
Ronald P. Spogli 48 Director
Charles P. Rullman 48 Director
Todd W. Halloran 34 Director
Jon D. Ralph 32 Director
Christopher C. Behrens 32 Director
</TABLE>
Peter J. Sodini, President, Chief Executive Officer and Director,
joined The Pantry in February 1996 as Chief Operating Officer and was named
President and Chief Executive Officer in June 1996. Mr. Sodini has served as a
director of the Company since November 1995. Mr. Sodini is a director of Buttrey
Food and Drug Stores Company and Pamida Holding Corporation. From December 1991
to November 1995, Mr. Sodini was Chief Executive Officer and a director of
Purity Supreme, Inc. Prior to 1991, Mr. Sodini held executive positions at
several supermarket chains.
Dennis R. Crook, Senior Vice President, Administration and Petroleum
Marketing, joined The Pantry in March 1996. From December 1987 to November 1995,
Mr. Crook was Senior Vice President, Human Resources and Labor Relations of
Purity Supreme, Inc.
Douglas M. Sweeney, Senior Vice President, Operations, joined The
Pantry in March 1996. From December 1991 to December 1995, Mr. Sweeney was
Senior Vice President, Operations of Purity Supreme, Inc.
38
<PAGE>
Mark C. King, Senior Vice President, Chief Financial Officer and
Secretary, joined The Pantry in 1988 as Director of Internal Audit. In December
1988, Mr. King assumed the position of Controller. He assumed the position of
Secretary in March 1991 and the positions of Vice President and Chief Financial
Officer in August 1991. Mr. King assumed the position of Senior Vice President
in 1993.
Daniel J. McCormack, Vice President, Marketing, joined The Pantry in
March 1996. From 1989 to February 1996, Mr. McCormack was Director of Purchasing
of Purity Supreme, Inc.
John H. Hearne, Vice President, Real Estate, joined the Company in
1984. Prior to joining the Company, Mr. Hearne was employed for 15 years by
Sears, Roebuck, and Company. He has been active in construction since 1965 and
in commercial real estate and property management since 1977. He holds a real
estate broker's license in both North and South Carolina.
Eugene B. Horne, Jr., Vice Chairman of the Board of Directors, joined
The Pantry in 1973, and served as President from 1986 to May 1996. Mr. Horne has
served as a director of the Company since July 1994. He is a director and past
President of the North Carolina and South Carolina Association of Convenience
Stores and a director of the North Carolina Retail Merchants Association. He is
a member of The Business Advisory Council of the East Carolina School of
Business and President and a director of the East Carolina University
Foundation.
Ronald P. Spogli, Director, has been a director of the Company since
November 1995. He is a founding partner of FS&Co. Mr. Spogli is the Chairman of
the Board and a director of EnviroSource, Inc. Mr. Spogli also serves on the
Boards of Directors of Calmar Inc., Mac Frugal's Bargains o Close Outs, Inc.,
Buttrey Food and Drug Stores Company, and AFC Enterprises, Inc. and on the Board
of Representatives of Brylane, L.P.
Charles P. Rullman, Director, has been a director of the Company since
November 1995. Mr. Rullman joined FS&Co. as a General Partner in 1995. From 1992
to 1995, Mr. Rullman was a General Partner of Westar Capital, a private equity
investment firm specializing in middle market transactions. Prior to joining
Westar, Mr. Rullman spent twenty years at Bankers Trust Company and its
affiliate BT Securities Corporation where he was a Managing Director and
Partner. Mr. Rullman is also a director of EnviroSource, Inc.
Todd W. Halloran, Director, has been a director of the Company since
November 1995. Mr. Halloran joined FS&Co. in 1995. Previously, Mr. Halloran was
a Vice President at Goldman, Sachs & Co. where he worked in the Mergers and
Acquisition Department and in the Principal Investment Area. Mr. Halloran is
also a director of AFC Enterprises, Inc.
Jon D. Ralph, Director, has been a director of the Company since
November 1995. Mr. Ralph joined FS&Co. in 1989. Prior to joining FS&Co., Mr.
Ralph spent three years at Morgan Stanley & Co. where he served as an Analyst in
the Investment Banking Division. Mr. Ralph is also a director of EnviroSource,
Inc.
Christopher C. Behrens, Director, has been a director of the Company
since January 1996. He is a principal of Chase Capital Partners, a private
equity investing affiliate of The Chase Manhattan Corporation. Prior to joining
Chase Capital Partners, Mr. Behrens was a principal of Chase Capital and, prior
to that, was a Vice President in Chase's Merchant Banking Group. Mr. Behrens is
a director of Portola Packaging and a number of private companies.
Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders and until their successors are duly elected
and qualified.
39
<PAGE>
Item 11. Executive Compensation
The following table sets forth information with respect to the
fiscal 1994, fiscal 1995 and fiscal 1996 compensation for services in all
capacities of the Company's Chief Executive Officer and four other most highly
compensated executive officers who were serving as executive officers at the end
of the last completed fiscal year and two additional individuals for whom
disclosures would have been provided as an executive officer but for the fact
that the individual was not serving as an executive officer of the Company at
the end of the last completed fiscal year (collectively, the "Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Fiscal Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation (a) Compensation (b)
<S> <C> <C> <C> <C> <C>
Peter J. Sodini 1996 $174,295 $ 0 $ 3,392 $ ----
President and Chief Executive
Officer (c)
W. Clay Hamner (d) 1996 $327,012 $ $60,262 $ 755,962
1995 $331,305 0 $65,990 $ 7,680
1994 $300,000 $ 83,984 $61,195 $ 5,768
$264,485
Eugene B. Horne, Jr. 1996 $182,804 $ 0 $14,464 $ 3,321
Vice Chairman (e) 1995 $198,747 $ 49,413 $17,046 $ 4,620
1994 $169,676 $171,916 $13,709 $ 3,580
Mark C. King 1996 $119,923 $ 0 $11,280 $ 2,885
Senior Vice President, Finance 1995 $100,000 $ 26,607 $10,670 $ 3,723
1994 $100,000 $ 92,662 $10,331 $ 2,589
Dennis R. Crook 1996 $124,324 $ 0 $ 1,334 $ 7,680
Senior Vice President,
Administration and Gasoline
Marketing
Tommie D. Whiting (f) 1996 $164,963 $ 0 $11,835 $ ----
1995 $126,825 $ 33,938 $ 9,479 $ ----
Steven L. Johnson (g) 1996 $129,962 $ 90,000 $13,643 $ ----
1995 $ 79,383 $ 59,093 $ 8,300 $ ----
</TABLE>
(a) Includes (i) medical reimbursements of $5,046 for Mr. Horne in fiscal
1995; (ii) car allowances for Mr. Hamner in the amount of $10,613, $12,000 and
$3,000 in fiscal 1996, 1995 and 1994, respectively; car allowances for Mr. Horne
in the amount of $10,400, $12,000 and $12,000 in fiscal 1996, 1995 and 1994,
respectively; car allowances for Mr. King in the amount of $10,200 in fiscal
1996, 1995 and 1994, and car allowances for Mr. Whiting of $10,200 and $9,350 in
fiscal 1996 and 1995, respectively; and car allowances for Mr. Johnson of
$10,200 and $6,800 in fiscal 1996 and 1995, respectively, (iii) office overhead
expenses for an office maintained at a location other than the Company's
headquarters for Mr. Hamner in the aggregate amount of $47,204 in fiscal 1996,
$51,294 in fiscal 1995 and $20,652 in fiscal 1994; and (iv) annual retainer fees
for serving as directors and fees for attending director meetings for Mr. Hamner
in the aggregate amount of $17,000 in fiscal 1994.
(b) Consists of (i) matching contributions to the Company's 401(k) Savings
Plan; (ii) a $750,000 employment contract buyout paid to Mr. Hamner in fiscal
1996 and (iii) life insurance premiums paid on behalf of Mr. Hamner in the
amount of $2,004 in fiscal 1996 and $3,830 in fiscal 1995. See "Benefit Plan"
and "Executive Employment Contracts" below.
(c) Mr. Sodini was appointed Chief Operating Officer in February, 1996
and appointed President and Chief Executive Officer of the
Company in June 1996 and, accordingly, only fiscal year 1996 information is
provided.
(d) Mr. Hamner served as Chairman and Chief Executive Officer of the Company
from July 11, 1994 until November 30, 1995.
40
<PAGE>
(e) Mr. Horne served as Chief Executive Officer of the Company from December
1, 1995 until April 30, 1996. Mr. Horne continues to serve as Vice Chairman of
the Company. Although Mr. Horne is no longer an officer of the Company, the
Company is continuing to make payments under Mr. Horne's employment agreement
with the Company. See "Executive Employment Contracts" below.
(f) Mr. Whiting served as Executive Vice President, Stores of the Company
from January 1, 1995 until February 13, 1996. Mr. Whiting has an employment
agreement with the Company. See "Executive Employment Contracts" below.
(g) Mr. Johnson served as Senior Vice President, Marketing of the Company
from February 1, 1995 until March 31, 1996. Mr. Johnson has an employment
agreement with the Company. See "Executive Employment Contracts" below.
Non-Compete and Executive Employment Contracts
Certain current and former Executive Officers are parties to
non-compete employment agreements. Mr. King, who is a current Executive Officer,
and Messrs. Horne, Whiting and Johnson, who are former Executive Officers are
each a party to a non-compete employment agreement with the Company, effective
July 1, 1993 or on the date of employment if after July 1, 1993.
The agreements for Messrs. Horne and King extend until June
30, 1997. Mr. Horne's agreement provides for an annual base salary of $160,000
and Mr. King's agreement provides for an annual base salary of $100,000,
subject, in each case, to annual discretionary increases by the Board of
Directors.
Although Mr. Whiting is no longer employed by the Company, the
agreement for Mr. Whiting extends until February 28, 1997. Mr. Whiting's
agreement provides for an annual base salary of $150,000, subject to annual
discretionary increases by the Board of Directors.
Although Mr. Johnson is no longer employed by the Company, the
agreement for Mr. Johnson extends until January 31, 1997. Mr. Johnson's
agreement provides for an annual base salary of $120,000, subject to annual
discretionary increases by the Board of Directors, and a guaranteed bonus equal
to 75% of Mr. Johnson's salary paid in each fiscal year during the contract
period.
Upon the expiration of any of the foregoing employment
agreements, all payments of salary and benefits for the respective current or
former officer will cease. If the employment of any of the Executive Officers is
terminated by the Company for cause or by reason of death or disability, salary
and benefits will continue for such officer until the lesser of six months after
such event or the remaining term of the respective employment agreement.
Each of the agreements provides for certain additional
benefits payable to these current and former Executive Officers. Each of these
current and former Executive Officers is entitled to medical reimbursements up
to specified annual amounts and a monthly car allowance.
Each of the agreements for these current and former Executive
Officers contains certain covenants applicable during the term of the agreement
and the relevant post-employment period described above, including, without
limitation, covenants prohibiting (i) competing in the convenience store
industry, (ii) inducing other Company employees to terminate employment with the
Company, accept employment elsewhere, or engage in a competing convenience store
business or (iii) using or disclosing confidential information or trade secrets
of the Company.
Compensation of Directors
Prior to December 1, 1995, non-employee directors were paid
for meeting attendance. As of December 1, 1995, Directors of the Company receive
no compensation as directors. Directors are reimbursed for their reasonable
expenses in attending meetings.
Benefit Plan
The Company sponsors a 401(k) employee retirement savings plan
with Fidelity Investments for eligible employees. Employees must be at least
nineteen years of age and have one year of service working at least 1,000 hours
to be eligible to participate in the 401(k) plan. Employees may contribute up to
15% of their annual
41
<PAGE>
compensation and contributions are matched by the Company on the basis of 50% of
the first 5% contributed. Matching contribution expense was $196,000, $346,000
and $330,000 for fiscal years 1994, 1995 and 1996, respectively.
Compensation Committee Interlocks and Insider Participation
Prior to December 1, 1995, the Compensation Committee of the
Board of Directors consisted of James Terry Sanford, Jr., Wayne M. Rogers and
David C. Blivin, all of whom were non-employee directors. W. Clay Hamner is a
director and executive officer of Montrose Capital, Hamner & Associates, Inc.,
SEHED Development Corporation, WCH & Associates, Inc., W. Clay Hamner, Inc. and
Property Advisory Services, Inc., each of which has executive officers (W. Clay
Hamner, James Terry Sanford, Jr. and David C. Blivin) who served on the
Company's Board of Directors during fiscal 1996. After December 1995, the
Company disbanded the Compensation Committee and since that time, the Board of
Directors has determined the compensation of executive officers.
During fiscal 1996, Mr. Sodini participated in Board of
Director deliberations regarding the compensation of the Company's Executive
Officers.
Board of Directors Report on Executive Compensation
Background
This report provides information regarding the compensation
and benefits provided to the Company's Chief Executive Officer and executive
officers (including the "named executive officers"). The Company's Board of
Directors does not have a separate compensation committee. The Board of
Directors determines the compensation of the Chief Executive Officer and sets
policies for, reviews and approves the recommendations of management with
respect to the compensation awarded to other corporate officers (including the
other named executive officers), including decisions about base salary and
bonuses.
Corporate Evaluation
In 1996, the Board of Directors reviewed the Company's
executive compensation program and assessed the competitiveness of the Company's
compensation program by comparing it to other convenience store chains and
retailers of a similar business profile. The Board of Directors believes that
these companies represent the Company's most direct competitors for executive
talent.
Compensation Principles
The Board of Directors adopted the following objectives for
the Company's total compensation program: (i) to attract and retain high quality
employees critical to the continuing success of the Company; (ii) to support a
performance-oriented environment that closely aligns compensation with Company
profitability and contribution to business results; (iii) to reinforce a strong
team orientation; (iv) to motivate and reward achievements in meeting critical
short-term goals and longer term business development goals; and (v) to provide
competitive total compensation opportunities in line with the practices of other
leading convenience store companies and retailers.
The Board of Directors has established a philosophy that
compensation of executives should be linked to operating and financial
performance with some consideration to subjective qualitative factors
and goals. To achieve the link to financial performance, executive
officers' salaries are quantitatively based on EBITDA. This
policy was in effect during fiscal 1996 and is to be used in
fiscal 1997. To achieve the link to qualitative factors, the
Board of Directors has loosely defined, subjective goals
and objectives. The Board of Directors believes
that providing incentives to executive officers to meet the
qualitative and quantitative goals and objectives should increase shareholder
value by contributing to consistent and sustained growth.
The key elements of the Company's executive compensation
program consist of base salary and an annual bonus.
Base Salary
42
<PAGE>
Base salaries are determined by evaluating the
responsibilities of the position, the experience of the individual, the salaries
for comparable position in the competitive marketplace and the individual's
contribution to the qualitative goals and objectives. Base salary levels for the
Company's executive officers are generally positioned at competitive levels for
comparable positions with other convenience store chains and other similar
retailers. The Board of Directors annually reviews each executive officer's base
salary for the purposes of assessing whether an adjustment is appropriate, and
it is anticipated that increases in base salaries will be somewhat subject to
increases in EBITDA. The Board of Directors exercises considerable discretion in
setting base salaries within the guidelines discussed above.
Annual Bonus
In fiscal 1996, the Company utilized its historical annual
bonus plan which covers officers and other key executives of the Company. Due to
the Company's fiscal 1996 performance, no executive officers earned a bonus in
fiscal 1996. The bonus plan is based upon achieving a targeted EBITDA with a
sliding scale that allows the officers and other key executives to share in a
greater or less proportion, depending upon the actual results as compared to the
target with certain minimums and maximums.
CEO Compensation
Compensation for Mr. Sodini, the Company's Chief Exective
Officer, was determined by the Board of Directors in accordance with the
previously described policies. Compensation for the Company's previous chief
executive officers during 1996 was provided in accordance with their respective
employment contracts previously negotiated.
Compliance with Internal Revenue Code Section 162(m)
It is anticipated that in 1996, all compensation to the named
executive officers will be fully deductible under Section 162(m) of the Internal
Revenue Code and therefore the Board of Directors determined that a policy with
respect to qualifying compensation paid to executive officers for deductibility
is not necessary.
THE BOARD OF DIRECTORS
Charles P. Rullman
Ronald P. Spogli
Peter J. Sodini
Todd W. Halloran
Jon D. Ralph
Eugene B. Horne, Jr.
Christopher C. Behrens
Certain of the Company's directors and certain of its former
executive officers, and entities in which they have ownership interests or with
which they are affiliated, have engaged in certain transactions with the
Company. See Item 13. "Certain Relationships and Related Transactions."
43
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of
December 1, 1996, with respect to the beneficial ownership of the 114,029 shares
of currently outstanding Common Stock by (i) each person who beneficially owns
more than 5% of such shares, (ii) each of the executive officers named in the
Summary Compensation Table, (iii) each director of the Company and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Amount of and Nature
Name and Address of Beneficial Percentage of
of Beneficial Owner Ownership Class
<S> <C> <C>
Freeman Spogli & Co. Incorporated (1) 87,713 76.9
Ronald P. Spogli (1) ----- -----
Charles P. Rullman (1) ----- -----
Jon D. Ralph (2) ----- -----
Todd W. Halloran (2) ----- -----
Chase Manhattan Capital Corporation (3) 21,053 18.5
Christopher C. Behrens (3) (4)* 5,263 4.6
Peter J. Sodini ----- -----
Eugene B. Horne, Jr. ----- -----
Dennis R. Crook ----- -----
Mark C. King ----- -----
W. Clay Hamner ----- -----
Tommie D. Whiting ----- -----
Steven L. Johnson ----- -----
All directors and executive officers ----- -----
as a group (12 individuals)
</TABLE>
(1) 84,331 shares and 3,382 shares of Common Stock are held of record by
FSEP III and FSEP International, respectively. As general partner of
FS Capital Partners, L.P. ("FS Capital"), which is general partner of
FSEP III, FS Holdings, Inc. ("FSHI") has the sole power to vote and
dispose of the shares owned by FSEP III. As general partner of FS&Co.
International, L.P. ("FS&Co. International"), which is the general
partner of FSEP International, FS International Holdings Limited
("FS International Holdings") has the sole power to vote and
dispose of the shares owned by FSEP International. Messrs. Spogli and
Rullman and Bradford M. Freeman, William M. Wardlaw, J. Frederick
Simmons and John M. Roth are the sole directors, officers and
shareholders of FSHI, FS International Holdings and Freeman Spogli &
Co. Incorporated, and as such may be deemed to be the beneficial
owners of the shares of the Common Stock and rights to acquire the
Common Stock owned by FSEP III and FSEP International. The business
address of Freeman Spogli & Co. Incorporated, FSEP III, FS Capital,
FSHI and its sole directors, officers and shareholders is 11100 Santa
Monica Boulevard, Suite 1900, Los Angeles, California 90025 and the
business address of FSEP International, FS&Co. International and FS
International Holdings is c/o Padget-Brown & Company, Ltd., West Winds
Building, Third Floor, Grand Cayman, Cayman Islands, British West
Indies.
(2) Each of Messrs. Ralph and Halloran is an employee of an affiliate of
Freeman Spogli & Co. Incorporated.
(3) The business address of Chase Manhattan Capital Corporation is 380
Madison Avenue, 12th Floor, New York, New York 10017. Mr. Behrens is a
principal at Chase Capital Partners an affiliate of Chase Manhattan
Capital Corporation.
(4) Mr. Behrens is a general partner of Baseball Partners, a New York
general partnership that is the beneficial owner of 5,263 shares
of Common Stock. Mr. Behrens disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
44
<PAGE>
Item 13. Certain Relationships and Related Transactions
Real Estate Transactions
The Company leases real estate for the operation of five
convenience stores from Lee-Moore Oil Company (which owned 20.0% of the
Company's common stock prior to December 1, 1995), a corporation owned by Truby
G. Proctor, Jr. (who owned 11.4% of the Company's common stock prior to December
1, 1995), Frank E. Proctor (who owned 13.8% of the Company's common stock prior
to December 1, 1995) and Kirk J. Bradley (a former director of the Company). In
addition, the Company leases real estate for the operation of one convenience
store jointly from Lee-Moore and the Employee Stock Ownership Plan of Lee-Moore.
Most of these leases commenced at various times between 1984 and 1988 and
provide for the greater of various base annual rentals or percentage overrides
from 3.5% to 5.0%. Some of the leases grant the Company a right of first refusal
to purchase the properties during the term of the lease. During the 1996 fiscal
year, the Company paid Lee-Moore aggregate rent of approximately $212,000, and
the Company paid the Employee Stock Ownership Plan of Lee-Moore approximately
$8,000.
The Company leases real estate for the operation of two convenience
stores from W. Clay Hamner and Margaret S. Hamner, his wife. These leases
commenced in 1989 and provide for a current annual rental in an amount equal to
$175,000. The rent increases at five year intervals throughout the lease term
(including renewal terms). The leases grant the Company a right of first refusal
to purchase the properties during the term of the lease. During the 1996 fiscal
year, the Company paid Mr. Hamner and his wife aggregate rent of approximately
$183,000.
The Company leases real estate for the operation of ten convenience
stores from GWH and two convenience stores from Tuscarora, each of which is a
general partnership one-third owned by Eugene B. Horne, Jr. The leases commenced
between 1976 and 1984 and provide for the greater of various base annual rentals
or percentage overrides of either 2.5% or 5.0%. The leases grant the Company a
right of first refusal to purchase the properties during the term of the lease.
During the 1996 fiscal year, the Company paid GWH and Tuscarora aggregate rent
of approximately $306,000.
During fiscal 1995, the Company sold the real estate for four
convenience stores to Pioneer Leasing LLC, a partnership which is one-third
owned by Eugene B. Horne, Jr. and one-third owned by Margaret S. Hamner, for
approximately $3.3 million, which approximated the Company's investment in these
properties. The Company now leases this real estate from Pioneer Leasing for the
operation of these four stores under a lease which commenced on July 1, 1995 and
provides for aggregate annual rental of $396,000. During the 1996 fiscal year,
the Company paid Pioneer Leasing aggregate rent of approximately $396,000.
Although the terms of the real estate transactions described above
were not negotiated at arms' length, management believes that the terms of such
transactions were and are no less favorable to the Company than could have been
obtained if such transactions were negotiated at arms' length with unaffiliated
third parties.
Other Transactions
On November 30, 1995 and August 19, 1996, FS&Co. and Chase were
involved in certain equity transactions with former owners of the Company and
the Company itself. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and "Item 12. Security Ownership of Certain Beneficial Owners and Management".
45
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits - The following documents are filed as part of this
Form 10-K.
(1) Consolidated Financial Statements - See index on page
23.
(2) Financial Statement Schedules - See index on page 23.
(3) Exhibit No. Description of Document
12.1 Computation of Ratio of Earnings
to Fixed Charges.
21.1 Subsidiaries of the Company.
27.1 EDGAR Financial Data Schedule
(b) Reports on Form 8-K
On September 4, 1996, the Company filed a Current Report on
Form 8-K, dated August 19, 1996, with respect to the closing
under a certain Settlement Agreement among the Company and
certain other parties, the terms of which were previously
reported. No financial statements were filed with such report.
46
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Document
<S> <C>
3.1 Restated Certificate of Incorporation of The Pantry, Inc. (the "Company").(5)
3.2 By-laws of the Company. (5)
4.1 Indenture, including form of 12% Senior Note due 2000, dated as of November 4, 1993, between
the Company and IBJ Schroder Bank and Trust Company.(1)
4.2 Supplemental Indenture, dated as of December 4, 1995, between the Company and IBJ Schroder Bank
and Trust Company. (5)
10.1 Employment Agreement dated July 1, 1993 between the Company and Truby G. Proctor, Jr.(1)(2)
10.2 Amendment to Truby G. Proctor, Jr. Employment Agreement, dated June 30, 1995. (5)
10.3 Amended and Restated Employment Agreement dated November 30, 1995 between the Company and W.
Clay Hamner. (5)
10.4 Amended and Restated Employment Agreement dated July 11, 1994 between the Company and Eugene B.
Horne, Jr. (5)
10.5 Amended and Restated Employment Agreement dated July 11, 1994 between the Company and Mark C.
King. (5)
10.6 Employment Agreement dated March 1, 1995 between the Company and Tommie D. Whiting. (5)
10.7 Employment Agreement dated January 16, 1995 between the Company and Steven L. Johnson. (5)
10.8 Amended and Restated Loan Agreement dated as of January 31, 1994 between the Company and First
Union National Bank.(3)
10.9 Amendment to Loan Agreement, dated October 21, 1994, between the Company and First Union
National Bank. (5)
10.10 Second Amendment to Loan Agreement, dated October 31, 1995, between the Company and First Union
National Bank. (5)
10.11 Stock Pledge Agreement dated as of January 31, 1994 between the Company and First Union
National Bank.(3)
10.12 Stock Purchase Agreement, dated November 30, 1995, among the Company, FS Equity Partners III,
L.P. ("FSEP III"), FS Equity Partners International, L.P. ("FS International"), Montrose Value
Fund Limited Partnership ("MVP"), Montrose Financial No. 6 Limited Partnership (Pantry)
("MF#6"), W. Clay Hamner and Wayne M. Rogers. (5)
10.13 Stock Purchase Agreement, dated November 30, 1995, among the Company, Chase Manhattan Capital
Corporation ("Chase Capital"), MVP, MF#6, W. Clay Hamner and Wayne M. Rogers. (5)
10.14 Option Agreement, dated November 30, 1995, among the Company, MVP and MF#6. (5)
10.15 Commitment, dated December 1, 1995, by FSEP III, FS International and Chase Capital for the
benefit of MVP and MF#6. (5)
10.16 Agreement to Exercise or Assign Option, dated December 1, 1995, among the Company, FSEP III, FS
Holdings, and Chase Capital. (5)
10.17 Settlement Agreement dated as of July 16, 1996 among the Montrose Group, W. Clay Hamner, Wayne
M. Rogers, the FS Group, Chase Capital and the Company. (6)
12.1 Computation of Ratio of Earnings to Fixed Charges.
16.1 Letter of Change in Certifying Accountant. (4)
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
</TABLE>
47
<PAGE>
(1) Incorporated by reference to the exhibit designated by the
same number in the Company's Registration Statement on Form
S-1 (Registration No. 33-72574).
(2) Represents a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14(c) of Form 10-K.
(3) Incorporated by reference to the exhibit designated by the
same number in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 30, 1993.
(4) Incorporated by reference to the exhibit designated by the
same number in the Company's Current Report on Form 8-K,
dated June 19, 1996.
(5) Incorporated by reference to the exhibit designated by the
same number in the Company's Annual Report on Form 10-K for
the year ended September 28, 1995.
(6) Incorporated by reference to the exhibit designated by
exhibit number 10.1 in the Company's Company's Current Report
on Form 8-K, dated August 30, 1996.
48
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PANTRY, INC.
By:/s/ Peter J. Sodini
Peter J. Sodini
President and Chief Executive Officer
Date: December 20, 1996
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Peter J. Sodini President, Chief Executive Officer and December 20, 1996
Peter J. Sodini Director (Principal Executive Officer)
/s/ Mark C. King Senior Vice President and Chief Financial December 20, 1996
Mark C. King Officer (Principal Financial Officer)
/s/ Joseph J. Duncan Controller (Principal Accounting Officer) December 20, 1996
Joseph J. Duncan
/s/ Eugene B. Horne, Jr. Vice Chairman December 20, 1996
Eugene B. Horne, Jr.
/s/ Ronald P. Spogli Director December 20, 1996
Ronald P. Spogli
/s/ Charles P. Rullman Director December 20, 1996
Charles P. Rullman
/s/ Jon D. Ralph Director December 20, 1996
Jon D. Ralph
/s/ Todd W. Halloran Director December 20, 1996
Todd W. Halloran
/s/ Christopher C. Behrens Director December 20, 1996
Christopher C. Behrens
</TABLE>
49
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PANTRY, INC.
By:
Peter J. Sodini
President and Chief Executive Officer
Date: December 20, 1996
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 dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
President, Chief Executive Officer and December 20, 1996
Peter J. Sodini Director (Principal Executive Officer)
Senior Vice President and Chief Financial December 20, 1996
Mark C. King Officer (Principal Financial Officer)
Controller (Principal Accounting Officer) December 20, 1996
Joseph J. Duncan
Vice Chairman December 20, 1996
Eugene B. Horne, Jr.
Director December 20, 1996
Ronald P. Spogli
Director December 20, 1996
Charles P. Rullman
Director December 20, 1996
Jon D. Ralph
Director December 20, 1996
Todd W. Halloran
Director December 20, 1996
Christopher C. Behrens
</TABLE>
50
<PAGE>
THE PANTRY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions Deductions
Balance at charged to for Balance at
beginning costs and payments or end
of period expenses write-offs of periods
<S> <C> <C> <C> <C>
Year ended September 29, 1994:
Allowance for doubtful
accounts......................... $ 619 $ 105 $ (348) $ 376
Reverse for environmental
issues........................... 1,649 13 (459) 1,203
Reverse for closed stores........ 410 - - 410
Reserve for closed stores........
Deferred tax asset
valuation allowance.............. 119 (57) - 62
$ 2,797 $ 61 $ (807) $ 2,051
Year ended September 29, 1995:
Allowance for doubtful
accounts......................... $ 376 $ (125) $ - $ 251
Reverse for environmental
issues........................... 1,203 4,356 161 5,720
Reverse for closed stores........ 410 365 (312) 463
Deferred tax asset
valuation allowance.............. 62 511 - 573
$ 2,051 $ 5,107 $ (151) $ 7,007
Year ended September 29, 1996:
Allowance for doubtful
accounts......................... $ 251 $ (46) $ (55) $ 150
Reverse for environmental
issues........................... 5,720 617 (105) 6,232
Reverse for closed stores........ 463 707 (210) 960
Deferred tax asset
valuation allowance.............. 573 1,209 - 1,782
$ 7,007 $ 2,487 $ (370) $ 9,124
</TABLE>
<PAGE>
THE PANTRY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
Sep. 24, Sep. 30, Sep. 29, Sep. 28, Sep. 26,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Pretax (loss) income....... $ (1,578) $ 3,326 $ (181) $ (3,639) $(10,778)
Fixed charges:
Interest expense.......... 7,923 7,434 12,047 13,241 11,992
Amortization of deferred
financing costs.......... 193 162 908 1,038 1,359
Preferred stock dividends. 325 331 31 - 2,654
Rental expense (1)........ 2,310 2,334 2,183 2,253 2,709
Total fixed charges........ $10,751 $10,261 $15,169 $16,532 $ 18,714
Earnings................... $ 9,173 $13,587 $14,988 $12,893 $ 7,936
Ratio (shortfall) of
earnings to fixed charges. $(1,578) $ 1.32 $ (181) $(3,639) $(10,778)
</TABLE>
(1) One-third of rental expense related to operating leases representing an
appropriate interest factor.
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21.1 Subsidiaries of the Company
THE PANTRY, INC.
Subsidiaries
Name of Subsidiary State of Incorporation
Sandhills, Inc. Delaware
PH Holding Corporation North Carolina
PH HOLDING CORPORATION
Subsidiaries
Name of Subsidiary State of Incorporation
TC Capital Management, Inc. Delaware
Pantry Properties, Inc. South Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1996
<PERIOD-START> SEP-29-1995
<PERIOD-END> SEP-26-1996
<CASH> 5,338
<SECURITIES> 0
<RECEIVABLES> 2,860
<ALLOWANCES> 0
<INVENTORY> 13,223
<CURRENT-ASSETS> 25,954
<PP&E> 117,173
<DEPRECIATION> (51,718)
<TOTAL-ASSETS> 120,880
<CURRENT-LIABILITIES> 32,467
<BONDS> 100,148
<COMMON> 1
0
0
<OTHER-SE> (27,548)
<TOTAL-LIABILITY-AND-EQUITY> 120,880
<SALES> 384,807
<TOTAL-REVENUES> 384,807
<CGS> 293,589
<TOTAL-COSTS> 89,344
<OTHER-EXPENSES> (660)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,992)
<INCOME-PRETAX> (10,778)
<INCOME-TAX> 2,664
<INCOME-CONTINUING> (8,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,114)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>