SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 25, 1997
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)
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 186,029 shares
(Class) (Outstanding at January 30, 1998)
<PAGE>
THE PANTRY, INC.
Form 10-Q
December 25, 1997
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.......................................2
Consolidated Statements of Operations.............................4
Consolidated Statements of Cash Flows.............................5
Notes to Consolidated Financial Statements........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................18
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds........................24
Item 6. Exhibits and Reports on Form 8-K.................................24
</TABLE>
PART I - FINANCIAL INFORMATION.
ITEM 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 25, December 25,
1997 1997
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,347 $ 31,822
Receivables 2,101 4,959
Inventories 17,161 35,713
Prepaid expenses 1,204 1,992
Property held for sale 3,323 1,298
Deferred income taxes 1,142 1,142
------ -----
Total current assets 28,278 76,926
------- ------
Property and equipment, net 77,986 210,373
------- -------
Other assets:
Goodwill, net 20,318 70,062
Deferred lease cost, net 314 303
Deferred financing cost, net 4,578 14,594
Environmental receivables, net 6,511 6,511
Deferred income taxes 156 -
Escrow for Lil' Champ acquisition 4,049 -
Other noncurrent assets 609 4,780
---- -----
Total other assets 36,535 96,250
------- ------
$ 142,799 $ 383,549
========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
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THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 25, December 25,
1997 1997
(Audited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 33 $ 56
Current maturities of capital lease obligations 285 1,312
Accounts payable:
Trade 16,035 37,634
Money orders 3,022 2,647
Accrued interest 4,592 4,244
Accrued compensation and related taxes 3,323 4,958
Income taxes payable 296 -
Other accrued taxes 2,194 1,155
Accrued insurance 3,887 6,167
Other accrued liabilities 2,856 12,995
------ ------
Total current liabilities 36,523 71,168
------- ------
Long-term debt 100,305 249,301
-------- -------
Other non-current liabilities:
Environmental reserve 7,806 10,983
Deferred income taxes - 7,511
Capital lease obligations 679 12,149
Employment obligations 1,341 1,249
Accrued dividends on preferred stock 7,958 2,388
Other noncurrent liabilities 6,060 16,056
------ ------
Total other non-current liabilities 23,844 50,336
------- ------
Shareholders' equity (deficit):
Preferred stock, $.01 par value, 150,000 shares authorized;
43,499 issued and outstanding at September 25, 1997 and
17,500 issued and outstanding at December 25, 1997 - -
Common stock, $.01 par value, 300,000 shares authorized;
114,029 issued and outstanding at September 25, 1997 and
186,029 issued and outstanding at December 25, 1997 1 2
Additional paid in capital 5,396 43,116
Shareholder loan - (215)
Accumulated deficit (23,270) (30,159)
-------- --------
Total shareholders' equity (deficit) (17,873) 12,744
-------- ------
$ 142,799 $ 383,549
========== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 26, December 25,
1996 1997
(13 weeks) (13 weeks)
Revenues:
Merchandise sales $ 47,384 $ 89,360
Gasoline sales 51,838 103,022
Commissions 1,109 2,789
-------- -------
Total revenues 100,331 195,171
-------- -------
Cost of sales:
Merchandise 31,504 58,897
Gasoline 46,627 90,909
-------- -------
Total cost of sales 78,131 149,806
------- -------
Gross profit 22,200 45,365
------- ------
Operating expenses:
Store expenses 14,508 28,165
General and administrative expenses 4,083 7,172
Depreciation and amortization 2,263 5,151
------- ------
Total operating expenses 20,854 40,488
------- ------
Income from operations 1,346 4,877
------- ------
Other income (expense):
Interest (3,141) (5,817)
Miscellaneous 67 439
------- ------
Total other expense (3,074) (5,378)
------- -------
Loss before income taxes and extraordinary item (1,728) (501)
Income tax benefit 345 412
------- ------
Loss before extraordinary item (1,383) (89)
Extraordinary item, net of taxes - (6,800)
-------- -------
Net loss $ (1,383) $ (6,889)
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 26, December 25,
1996 1997
(13 weeks) (13 weeks)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,383) $ (6,889)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss - 6,800
Depreciation and amortization 2,263 5,151
Change in deferred income taxes - (653)
(Gain) loss on sale of property and equipment 22 (268)
Reserves for environmental issues 15 27
Reserves for closed stores 15 -
Write-off of property held for sale 9 -
Changes in operating assets and liabilities, net:
Receivables (430) (1,227)
Inventories 41 (951)
Prepaid expenses 148 614
Other noncurrent assets 416 3,574
Accounts payable (2,611) (335)
Other current liabilities and accrued expenses (4,818) (2,614)
Employment obligations (193) (92)
Other noncurrent liabilities 1,359 1,927
------ -----
Net cash provided by (used in) operating activities (5,147) 5,064
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale (50) -
Additions to property and equipment (1,193) (5,932)
Proceeds from sale of property held for sale 30 2,025
Proceeds from sale of property and equipment 136 409
Acquisitions of related businesses, net of cash
acquired of $10,487 - (135,605)
------ ---------
Net cash used in investing activities (1,077) (139,103)
------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 26, December 25,
1996 1997
(13 weeks) (13 weeks)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases (76) (246)
Principal repayments of long-term debt (4) (56,996)
Proceeds from issuance of long-term debt - 200,023
Proceeds from line of credit 5,610 -
Net proceeds from equity issue (53) 32,151
Other financing costs (77) (12,418)
------ --------
Net cash provided by financing activities 5,400 162,514
------ --------
NET INCREASE (DECREASE) IN CASH (824) 28,475
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,338 3,347
------ -----
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 4,514 $ 31,822
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND RECENT DEVELOPMENTS:
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of The
Pantry, Inc. and its wholly-owned subsidiaries, Lil' Champ Food Stores, Inc.
("Lil' Champ"), 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. See "Note 7 - Supplemental Guarantor Information."
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim
consolidated financial statements have been prepared from the accounting records
of The Pantry, Inc. and its subsidiaries and all amounts at December 25, 1997
and for the three months ended December 25, 1997 and December 25, 1996 are
unaudited. References herein to the "Company" shall include all subsidiaries
including Lil' Champ, whereas references to the "Pantry" shall not include Lil'
Champ. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The information furnished reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature.
It is suggested that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 25,
1997 (the "Company's 10-K"), the Company's Registration Statement on Form S-4,
as amended, effective January 8, 1998, and the Company's Current Report on Form
8-K dated October 23, 1997.
The results of operations for the three months ended December 25, 1997 and
December 25, 1996 are not necessarily indicative of results to be expected for
the full fiscal year. The convenience store industry in the Company's marketing
areas experiences higher levels of revenues and profit margins during the summer
months than during the winter months. Historically, the Company has achieved
higher revenues and earnings in its third and fourth quarters. On October 23,
1997, the Company acquired all the outstanding shares of Lil' Champ Food Stores,
Inc. (the "Lil' Champ Acquisition") and accounted for the acquisition and
consolidation under the purchase method; therefore, the consolidated financial
statements only include Lil' Champ results of operations since the date of
acquisition.
The Company
The Company is a privately-held company and operates approximately 867
convenience stores under the names "The Pantry" in North Carolina, South
Carolina, Tennessee, Kentucky, and Indiana or "Lil' Champ" in Florida and
Georgia. 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 Florida, Georgia, Kentucky and Indiana stores, the Company
also sells lottery products. In addition, self-service gasoline is sold at 792
locations, 501 of which sells gasoline under brand names including Amoco,
British Petroleum ("BP"), Chevron, Exxon, Fina, Shell, and Texaco. Since fiscal
1994, merchandise sales (including commissions from services) and gasoline sales
have each averaged approximately 50% of the Company's total revenues.
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. On August 19, 1996, the FS Group and
Chase subsequently acquired the remaining 48.1% interest in the Company
(approximately 37.0% and 11.1%, respectively) through the purchase of common and
preferred stock from certain shareholders. On December 30, 1996, the Company
issued and the FS Group purchased additional preferred stock.
7
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Recent Developments
On October 23, 1997, the Company acquired all of the outstanding common stock of
Lil' Champ from Docks U.S.A., Inc. for $135.6 million (net of cash acquired),
plus the repayment of $10.7 million in outstanding indebtedness of Lil'
Champ. Lil' Champ is a leading operator of convenience stores in Florida and the
largest convenience store operator in northern Florida. Lil Champ's 486 stores
are located primarily in northern Florida and Georgia, with 150 stores
concentrated in the Jacksonville, Florida area. The purchase price, the
refinancing of existing Lil' Champ debt, and the fees and expenses of the Lil'
Champ Acquisition were financed with the proceeds from the offering of $200.0
million, 10 1/4% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes"), cash on hand, and the net proceeds from the sale of the Company's
common stock, par value $.01 per share to existing stockholders and management
of the Company (the "Equity Investment").
The Senior Subordinated Notes are unconditionally guaranteed, on an unsecured
senior subordinated basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all current direct and indirect restricted
subsidiaries (Sandhills, Inc. and Lil Champ, wholly-owned subsidiaries of the
Company) and future direct and indirect restricted subsidiaries (the
"Guarantors"). The Senior Subordinated Notes contain covenants that, among other
things, restrict the ability of the Company and any restricted subsidiary to:
(i) incur additional indebtedness; (ii) pay dividends or make distributions;
(iii) issue stock of subsidiaries; (iv) make certain investments; (v) repurchase
stock; (vi) create liens; (vii) enter into transactions with affiliates; (viii)
enter into sale-leaseback transactions; (ix) merge or consolidate the Company or
any of its subsidiaries; and (x) transfer and sell assets.
On October 23, 1997, the Company entered into a new bank credit facility (the
"New Credit Facility") consisting of a $45.0 million revolving credit facility
and a $30.0 million acquisition facility. The New Credit Facility is available
for (i) working capital financing and general corporate purposes of the Company,
(ii) issuing commercial and standby letters of credit and (iii) acquisitions.
The New Credit Facility is secured by substantially all of the assets of the
Company and the Guarantors and is guaranteed by the Guarantors. The New Credit
Facility contains covenants restricting the ability of the Company and any of
its subsidiaries to, among others: (i) incur additional debt; (ii) declare
dividends or redeem or repurchase capital stock; (iii) prepay, redeem or
purchase debt; (iv) incur liens; (v) make loans and investments; (vi) make
capital expenditures; (vii) engage in mergers, acquisitions and asset sales; and
(viii) engage in transactions with affiliates. The Company is also required to
comply with financial covenants with respect to (a) a minimum coverage ratio,
(b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d)
a maximum capital expenditure allowance.
On October 23, 1997, the Company purchased $51.0 million in principal amount of
its outstanding Senior Notes at a purchase price of 110% of the aggregate
principal amount of each tendered Senior Note plus accrued and unpaid interest
up to, but not including, the date of purchase (the "Tender Offer"). The Company
obtained consents (the "Consent Solicitation") from the holders of the Senior
Notes to amendments and waivers to certain of the covenants contained in the
indenture governing the Senior Notes (the "Senior Notes Indenture"). The Senior
Notes Indenture contains covenants including restrictions on the Company's
ability to incur additional indebtedness and make acquisitions. The Company
obtained consents to, among other things, permit the offering of the Senior
Subordinated Notes, the Lil' Champ Acquisition and the New Credit Facility. The
consideration paid in respect of validly delivered consents was 1 3/4% of the
principal amount of the Senior Notes. See "Note 5 - Long -Term Debt."
NOTE 2 - THE LIL' CHAMP ACQUISITION AND PRO FORMA INFORMATION:
The Lil' Champ Acquisition has been accounted for under the purchase method of
accounting. Under the purchase method, the total purchase price including direct
costs will be allocated to the tangible and intangible assets acquired and
liabilities assumed by the Company based on their respective fair values as of
the acquisition date based upon valuations, appraisals, and other studies not
yet complete and available. For purposes of these interim financial statements
and the notes hereto, (i) the excess of the purchase price including direct
costs over the historical net assets of Lil' Champ, $50,135,000, has been
considered to be goodwill and other intangible assets, pending the completion of
appraisals and other purchase price allocation adjustments and (ii) will be
amortized over a weighted-average period of approximately 30 years.
8
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The assets acquired and liabilities assumed related to the Lil' Champ
Acquisition are as follows (in thousands):
Assets Acquired:
Receivables $ 1,846
Inventories 17,601
Prepaid expenses and other current assets 1,402
------------
Total current assets acquired 20,849
Property and equipment 130,949
Other noncurrent assets 3,696
------------
Total assets acquired 155,494
------------
Liabilities Assumed:
Short-term capital lease obligations $ 1,027
Accounts payable and accrued expenses 36,544
------------
Total current liabilities acquired 37,571
Long-term capital lease obligations 11,716
Other noncurrent liabilities 20,737
------------
Total liabilities assumed 70,024
------------
Net tangible assets acquired 85,470
Identifiable and unidentifiable 50,135
------------
intangibles
Total consideration paid including direct costs,
net of cash acquired of $10,487 $ 135,605
============
Pro forma information for the three month periods ended December 26, 1996 and
December 25, 1997, assuming the Lil' Champ Acquisition, the refinancing of
existing Lil' Champ debt, the issuance of the Senior Subordinated Notes, the
Tender Offer and Consent Solicitation, and the Equity Investment occurred at the
beginning of each of the periods presented is as follows (in thousands):
Three Months Ended
December 26, December 25,
1996 1997
---- ----
Revenues $ 229,037 $ 234,890
Loss before extraordinary items (2,684) (619)
Net loss (9,484) (7,419)
9
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NOTE 3 - INVENTORIES:
Inventories are stated at the lower of last-in, first-out (LIFO) cost or market.
Inventories consisted of the following (in thousands):
September 25, December 25,
1997 1997
---- ----
Inventories at FIFO cost:
Merchandise $ 16,877 $ 33,525
Gasoline 4,969 10,540
-------------- ------------
21,846 44,065
Less adjustment to LIFO cost:
Merchandise (4,203) (7,815)
Gasoline (482) (537)
------------- -------------
Inventories at LIFO cost $ 17,161 $ 35,713
============== ============
Inventories at September 25, 1997 do not include the inventories of Lil' Champ.
See "Note 1 - The Company and Recent Developments" and "Note 2 - The Lil' Champ
Acquisition and Pro Forma Information."
NOTE 4 - ENVIRONMENTAL LIABILITIES AND CONTINGENCIES:
Environmental reserves of $7.8 million and $11.0 million as of September 27,
1997 and December 25, 1997 represent estimates for future expenditures for
remediation, tank removal and litigation associated with all known contaminated
sites as a result of releases (e.g., overfills, spills and underground storage
tank releases) and are based on current regulations, historical results and
certain other factors. The Company anticipates that it will be reimbursed for a
portion of these expenditures from state insurance funds and private insurance.
These anticipated reimbursements of $6.5 million are recorded as long-term
environmental receivables.
The State of North Carolina and the State of Tennessee have assessed Sandhills,
Inc., a subsidiary of the Company, with additional taxes plus penalties and
accrued interest totaling approximately $5.0 million, for the periods February
1, 1992 to September 26, 1996, respectively. The Company is contesting these tax
assessments and believes that it has meritorious defenses to the proposed
adjustments. Additionally, the Company believes that, in the event of a mutual
settlement, the assessment amount and related penalties would be substantially
reduced. Based on this, the Company believes the outcome of the audits will not
have a material adverse effect on the Company's financial condition or results
of operations.
NOTE 5 - LONG-TERM DEBT:
At September 25, 1997 and December 25, 1997, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 25, December 25,
1997 1997
---- ----
<S> <C> <C>
Notes payable ("Senior Notes"); due November
15, 2000; interest payable semi-annually at 12 1/2% $ 99,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October
15, 2007; interest payable semi-annually at 10 1/4% - $ 200,000
Other notes and mortgages payable; generally due in monthly
installments of principal plus interest at various rates and terms 343 362
--------------- ---------------
100,338 249,357
Less - current maturities (33) (56)
-------------- ---------------
$ 100,305 $ 249,301
============== ===============
</TABLE>
On October 23, 1997 in connection with the Lil' Champ Acquisition, the Company
completed the offering of the Senior Subordinated Notes and, in a related
transaction, completed the Tender Offer and Consent Solicitation with respect to
the Senior Notes. See "Note 1 - The Company and Recent Developments."
The Senior Notes are unconditionally guaranteed, on an unsecured senior
subordinated basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all Guarantors. The terms of the Senior
Notes contain certain covenants restricting the (i) use of proceeds from the
offering; (ii) liens on properties; (iii) certain "restricted payments" as
defined in the agreement; (iv) the incurrance of additional debt; (v) the sale
of assets; (vi) any merger; (vii) consolidation or change in control; (viii)
lines of business; and (ix) transactions with affiliates.
The Senior Subordinated Notes are unconditionally guaranteed, on an unsecured
senior subordinated basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all Guarantors. The Senior Subordinated
Notes contain covenants that, among other things, restrict the ability of the
Company and any restricted subsidiary to: (i) incur additional indebtedness;
(ii) pay dividends or make distributions; (iii) issue stock of subsidiaries;
(iv) make certain investments; (v) repurchase stock; (vi) create liens; (vii)
enter into transactions with
10
<PAGE>
affiliates; (viii) enter into sale-leaseback transactions; (ix) merge or
consolidate the Company or any of its subsidiaries; and (x) transfer and sell
assets.
NOTE 6 - SHAREHOLDERS' EQUITY:
As described in Note 1 above, on October 23, 1997 in connection with the Lil'
Champ Acquisition and related transactions, the Company issued 72,000 shares of
Common Stock, par value $0.01, to certain existing shareholders and a member of
management for $32.4 million. Prior to the purchase of Common Stock, holders of
the Company's Series A Preferred Stock, par value $0.01 per share, contributed
all outstanding shares of Series A Preferred Stock and related accrued and
unpaid dividends to the capital of the Company. As a result, preferred stock and
accrued dividends were each reduced by $260 and $5,570,000, respectively, and
additional paid in capital was increased by $5,570,260.
On January 1, 1998, the Company adopted an incentive and non-qualified Stock
Option Plan (the "Plan"). Pursuant to the provisions of the Plan, options may
be granted to officers, key employees and consultants of the Company or any of
its subsidiaries and certain members of the Board of Directors ("BOD") to
purchase shares of the Company's common stock. Incentive stock options may only
be granted to employees. The Plan is administered by the BOD, or a committee of
the BOD. Options are granted at prices determined by the BOD and may be
exercisable in one or more installments. Additionally, term and conditions of
stock awards granted under the Plan may differ from one grant to another. As of
December 25, 1997, no grants have been made under the Plan.
NOTE 7 - SUPPLEMENTAL GUARANTOR INFORMATION:
In connection with the Lil' Champ Acquisition, the Guarantors jointly and
severally, unconditionally guaranteed, on an unsecured senior subordinated
basis, the full and prompt performance of the Company's obligations under its
Senior Subordinated Notes and its Senior Notes Indenture.
Management has determined that separate financial statements of the Guarantors
(Lil' Champ and Sandhills, Inc. as of September 25, 1997 and December 25, 1997,
and for each of the three months ended December 26, 1996 and December 25, 1997)
would not be significant to investors and therefore such financial statements
have not been provided. The supplemental schedules shown below include the
consolidated financial statements of the Company's "Unrestricted Subsidiary," PH
and PH's wholly-owned subsidiaries, TC Capital Management, Inc. and Pantry
Properties, Inc. (together, the "Non-Guarantors"). The following supplemental
combining financial statements present information regarding The Pantry, the
Guarantors, the Non-Guarantors, and related consolidating entries.
The Company accounts for its wholly-owned subsidiaries on the equity basis.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The principal
consolidating entries eliminate investments in subsidiaries and intercompany
balances.
11
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THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net......................................... 4,056 4,562 30 (6,547) 2,101
Inventories.............................................. 17,161 -- -- -- 17,161
Prepaid expenses......................................... 1,195 6 3 -- 1,204
Property held for sale................................... 3,323 -- -- -- 3,323
Deferred income taxes.................................... 1,142 -- -- -- 1,142
---------- ---------- ------------- ------------ --------
Total current assets.................................. 29,124 4,847 854 (6,547) 28,278
---------- ---------- ------------- ------------ --------
Investment in subsidiaries................................. 47,225 -- -- (47,225) --
---------- ---------- ------------- ------------ --------
Property & Equipment, net.................................. 77,641 -- 345 -- 77,986
---------- ---------- ------------- ------------ --------
Other assets:
Goodwill, net............................................ 20,318 -- -- -- 20,318
Deferred lease cost, net................................. 314 -- -- -- 314
Deferred financing cost, net............................. 4,578 -- -- -- 4,578
Environmental receivables................................ 6,511 -- -- -- 6,511
Deferred income taxes.................................... 156 -- -- -- 156
Escrow for Lil' Champ acquisition........................ -- -- 4,049 -- 4,049
Intercompany notes receivable............................ -- 39,434 -- (39,434) --
Other.................................................... 534 74 1 -- 609
---------- ---------- ------------- ------------ --------
Total other assets.................................... 32,411 39,508 4,050 (39,434) 36,535
---------- ---------- ------------- ------------ --------
Total assets............................................... $186,401 $ 44,355 $ 5,249 $(93,206) $142,799
========== ========== ============= ============ ========
</TABLE>
12
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THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt..................... $ 17 $ -- $ 16 $ -- $ 33
Current maturities of capital lease obligations.......... 285 -- -- -- 285
Accounts payable:
Trade................................................. 16,032 3 -- -- 16,035
Money orders.......................................... 3,022 -- -- -- 3,022
Accrued interest......................................... 5,564 -- 1 (973) 4,592
Accrued compensation and related taxes................... 3,322 -- 1 -- 3,323
Income taxes payable..................................... 313 1,560 235 (1,812) 296
Other accrued taxes...................................... 2,194 -- -- -- 2,194
Accrued insurance........................................ 3,887 -- -- -- 3,887
Other accrued liabilities................................ 6,382 113 122 (3,761) 2,856
---------- ---------- ------------- ------------ --------
Total current liabilities............................. 41,018 1,676 375 (6,546) 36,523
---------- ---------- ------------- ------------ --------
Long-term debt............................................. 100,168 -- 137 -- 100,305
---------- ---------- ------------- ------------ --------
Other non-current liabilities:
Environmental expenses................................... 7,806 -- -- -- 7,806
Capital lease obligations................................ 679 -- -- -- 679
Employment obligations................................... 1,341 -- -- -- 1,341
Accrued dividends on preferred stock..................... 7,958 -- -- -- 7,958
Intercompany note payable................................ 39,434 -- -- (39,434) --
Other.................................................... 5,870 150 40 -- 6,060
---------- ---------- ------------- ------------ --------
Total other non-current liabilities................... 63,088 150 40 (39,434) 23,844
---------- ---------- ------------- ------------ --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock.......................................... -- -- -- -- --
Common stock............................................. 1 -- -- -- 1
Additional paid-in capital............................... 5,396 25 5,001 (5,026) 5,396
Retained earnings (deficit).............................. (23,270) 42,504 (304) (42,200) (23,270)
---------- ---------- ------------- ------------ --------
Total shareholders' equity (deficit).................. (17,873) 42,529 4,697 (47,226) (17,873)
---------- ---------- ------------- ------------ --------
Total liabilities and shareholders equity (deficit)........ $186,401 $ 44,355 $ 5,249 $(93,206) $142,799
========== ========== ============= ============ ========
</TABLE>
13
<PAGE>
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
DECEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
------------- ------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 21,898 $ 9,062 $ 862 $ -- $ 31,822
Certificates of deposit -- -- -- --
Receivables, net 6,374 11,677 4 (13,096) 4,959
Inventories 17,173 18,540 -- -- 35,713
Prepaid expenses 718 1,273 1 -- 1,992
Property held for sale 1,298 -- -- -- 1,298
Deferred income taxes 1,142 -- -- -- 1,142
------------- ------------ ------------- --------------- ---------------
Total current assets 48,603 40,552 867 (13,096) 76,926
------------- ------------ ------------- --------------- ---------------
Investment in subsidiaries 49,706 -- -- (49,706) --
------------- ------------ ------------- --------------- ---------------
Property & Equipment, net 79,448 130,581 344 -- 210,373
------------- ------------ ------------- --------------- ---------------
Other assets:
Goodwill, net 20,071 49,991 -- -- 70,062
Deferred lease cost, net 303 -- -- -- 303
Deferred financing cost, net 14,594 -- -- -- 14,594
Environmental receivables 6,511 -- -- -- 6,511
Deferred income taxes 1,990 -- 17 (2,007) --
Intercompany notes receivable -- 39,434 4,075 (43,509) --
Other 422 4,357 1 -- 4,780
------------- ------------ ------------- --------------- ---------------
Total other assets 43,891 93,782 4,093 (45,516) 96,250
------------- ------------ ------------- --------------- ---------------
Total Assets $ 221,648 $ 264,915 $ 5,304 $ (108,318) $ 383,549
============= ============ ============= =============== ===============
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt $ 17 $ 21 $ 18 $ -- $ 56
Current maturities of capital lease obligations 285 1,027 -- -- 1,312
Accounts payable:
Trade 15,746 21,888 -- -- 37,634
Money orders 2,366 281 -- -- 2,647
Accrued interest 3,753 2,544 1 (2,054) 4,244
Accrued compensation and related taxes 2,960 1,998 -- -- 4,958
Income taxes payable 29 3,445 314 (3,788) --
Other accrued taxes 1,155 -- -- -- 1,155
Accrued insurance 3,947 2,220 -- -- 6,167
Other accrued liabilities 12,369 7,519 122 (7,015) 12,995
------------- ------------ ------------- --------------- ---------------
Total current liabilities 42,627 40,943 455 (12,857) 71,168
------------- ------------ ------------- --------------- ---------------
Long-term debt 103,431 145,739 131 -- 249,301
------------- ------------ ------------- --------------- ---------------
Other non-current liabilities:
Environmental expenses 7,833 3,150 -- -- 10,983
Capital lease obligations 603 11,546 -- -- 12,149
Employment obligations 1,249 -- -- -- 1,249
Accrued dividends on preferred stock 2,388 -- -- -- 2,388
Deferred income taxes -- 9,518 -- (2,007) 7,511
Intercompany note payable 43,482 266 -- (43,748) --
Other 7,291 8,725 40 -- 16,056
------------- ------------ ------------- --------------- ---------------
Total other non-current liabilities 62,846 33,205 40 (45,755) 50,336
------------- ------------ ------------- --------------- ---------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- -- --
Common stock 2 -- -- -- 2
Additional paid-in capital 43,116 25 5,001 (5,026) 43,116
Shareholder loan (215) -- (215)
Retained earnings (deficit) (30,159) 45,003 (323) (44,680) (30,159)
------------- ------------ ------------- --------------- ---------------
Total shareholders' equity (deficit) 12,744 45,028 4,678 (49,706) 12,744
------------- ------------ ------------- --------------- ---------------
Total liaibilities and shareholders equity (deficit) $ 221,648 $ 264,915 $ 5,304 $ (108,318) $ 383,549
============= ============ ============= =============== ===============
</TABLE>
14
<PAGE>
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------------- ----------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 50,880 $ 38,480 $ -- $ -- $ 89,360
Gasoline sales 56,830 46,192 -- -- 103,022
Commissions 1,432 1,357 -- -- 2,789
-------------- ----------------- --------------- ---------------- --------------
Total revenues 109,142 86,029 -- -- 195,171
-------------- ----------------- --------------- ---------------- --------------
Cost of sales:
Merchandise 33,102 25,795 -- -- 58,897
Gasoline 50,443 40,466 -- -- 90,909
-------------- ----------------- --------------- ---------------- --------------
Total cost of sales 83,545 66,261 -- -- 149,806
-------------- ----------------- --------------- ---------------- --------------
Gross profit 25,597 19,768 -- -- 45,365
-------------- ----------------- --------------- ---------------- --------------
Operating expenses:
Store expenses 19,002 12,489 (60) (3,266) 28,165
General and administrative expenses 4,335 2,832 5 -- 7,172
Depreciation and amortization 2,870 2,279 2 -- 5,151
-------------- ----------------- --------------- ---------------- --------------
Total operating expenses 26,207 17,600 (53) (3,266) 40,488
-------------- ----------------- --------------- ---------------- --------------
Income from operations (610) 2,168 53 3,266 4,877
-------------- ----------------- --------------- ---------------- --------------
Equity in earnings of subsidiaries 3,973 -- -- (3,973) --
-------------- ----------------- --------------- ---------------- --------------
Other income (expense):
Interest expense (4,148) (2,747) (3) 1,081 (5,817)
Miscellaneous 284 4,465 6 (4,316) 439
-------------- ----------------- --------------- ---------------- --------------
Total other expense (3,864) 1,718 3 (3,235) (5,378)
-------------- ----------------- --------------- ---------------- --------------
Loss before income taxes and extraordinary (501) 3,886 56 (3,942) (501)
item
Income tax benefit (expense) 412 (1,387) (75) 1,462 412
-------------- ----------------- --------------- ---------------- --------------
Loss before extraordinary item (89) 2,499 (19) (2,480) (89)
Extraordinary item, net of taxes 6,800 -- -- -- 6,800
-------------- ----------------- --------------- ---------------- --------------
Net income (loss) $ (6,889) $ 2,499 $ (19) $ (2,480) $ (6,889)
============== ================= =============== ================ ==============
</TABLE>
15
<PAGE>
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 26, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
-------------- ----------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 47,384 $ -- $ -- $ -- $ 47,384
Gasoline sales 51,838 -- -- -- 51,838
Commissions 1,109 -- -- -- 1,109
-------------- ----------------- --------------- ----------------- --------------
Total revenues 100,331 -- -- -- 100,331
-------------- ----------------- --------------- ----------------- --------------
Cost of sales:
Merchandise 31,504 -- -- -- 31,504
Gasoline 46,627 -- -- -- 46,627
-------------- ----------------- --------------- ----------------- --------------
Total cost of sales 78,131 -- -- -- 78,131
-------------- ----------------- --------------- ----------------- --------------
Gross profit 22,200 -- -- -- 22,200
-------------- ----------------- --------------- ----------------- --------------
Operating expenses:
Store expenses 17,579 -- (81) (2,990) 14,508
General and administrative expenses 4,060 18 5 -- 4,083
Depreciation and amortization 2,258 3 2 -- 2,263
-------------- ----------------- --------------- ----------------- --------------
Total operating expenses 23,897 21 (74) (2,990) 20,854
-------------- ----------------- --------------- ----------------- --------------
Income from operations (1,697) (21) 74 2,990 1,346
-------------- ----------------- --------------- ----------------- --------------
Equity in earnings of subsidiaries 3,926 -- -- (3,926) --
-------------- ----------------- --------------- ----------------- --------------
Other income (expense):
Interest expense (3,932) -- (4) 795 (3,141)
Miscellaneous (24) 3,831 45 (3,785) 67
-------------- ----------------- --------------- ----------------- --------------
Total other expense (3,956) 3,831 41 (2,990) (3,074)
-------------- ----------------- --------------- ----------------- --------------
Loss before income taxes (1,727) 3,810 115 (3,926) (1,728)
Income tax benefit (expense) 345 (1,295) (35) 1,330 345
-------------- ----------------- --------------- ----------------- --------------
Net loss $ (1,382) $ 2,515 $ 80 $ (2,596) $ (1,383)
============== ================= =============== ================= ==============
</TABLE>
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMETS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (6,889) 2,499 (19) (2,480) (6,889)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss 6,800 -- -- -- 6,800
Depreciation and amortization 2,870 2,280 1 -- 5,151
Provision for deferred income taxes (636) -- (17) -- (653)
(Gain) loss on sale of property and equipment (190) (78) -- -- (268)
Provision for environmental expenses 27 -- -- -- 27
Equity earnings of affiliates (2,480) -- -- 2,480 --
Changes in operating assets and liabilities, net:
Receivables (2,533) (5,269) 26 6,549 (1,227)
Inventories (12) (939) -- -- (951)
Prepaid expenses 477 135 2 -- 614
Other noncurrent assets 140 3,460 (26) -- 3,574
Accounts payable (942) 607 -- -- (335)
Other current liabilities and accrued expenses 2,551 1,068 78 (6,311) (2,614)
Employment obligations (92) -- -- -- (92)
Other noncurrent liabilities 1,392 773 -- (238) 1,927
---------- ---------- ------------ ----------- -----
Net cash provided by operating activities 483 4,536 45 -- 5,064
---------- ---------- ------------ ----------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,110) (1,822) -- -- (5,932)
Proceeds from sale of property held for sale 2,025 -- -- -- 2,025
Proceeds from sale of property and equipment 273 136 -- -- 409
Intercompany notes receivable (payable) 4,048 (4,048) -- -- --
Acquisitions of related businesses -- (135,605) -- -- (135,605)
---------- ---------- ------------ ----------- -----
Net cash used by investing activities 2,236 (141,339) -- -- (139,103)
---------- ---------- ------------ ----------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases (76) (170) -- -- (246)
Principal repayments of long-term debt (56,992) -- (4) -- (56,996)
Proceeds from issuance of long-term debt 54,267 145,756 -- -- 200,023
Net proceeds from equity issue 32,151 -- -- -- 32,151
Other financing costs (12,418) -- -- -- (12,418)
---------- ---------- ------------ ----------- -----
Net cash provided by financing activities 16,932 145,586 (4) -- 162,514
---------- ---------- ------------ ----------- -----
NET INCREASE (DECREASE) IN CASH 19,651 8,783 41 -- 28,475
CASH & CASH EQUIVALENTS, BEG. OF YEAR 2,247 279 821 -- 3,347
---------- ---------- ------------ ----------- -----
CASH & CASH EQUIVALENTS, END OF YEAR 21,898 9,062 862 -- 31,822
========== ========== ============ =========== =====
</TABLE>
16
<PAGE>
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMETS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 26, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ -----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,383) 2,515 81 (2,596) (1,383)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,258 3 2 -- 2,263
(Gain) loss on sale of property and equipment 22 -- -- -- 22
Provision for environmental expenses 15 -- -- -- 15
Provision for closed stores 15 -- -- -- 15
Write-off of property held for sale 9 -- -- -- 9
Equity earnings of affiliates (2,595) -- -- 2,595 --
Changes in operating assets and liabilities, net:
Receivables (420) 113 (9) (114) (430)
Inventories 41 -- -- -- 41
Prepaid expenses 143 3 2 -- 148
Other noncurrent assets 412 3 1 -- 416
Accounts payable (2,611) -- -- -- (2,611)
Other current liabilities and accrued expenses (4,901) (65) 33 115 (4,818)
Employment obligations (193) -- -- -- (193)
Other noncurrent liabilities 1,358 -- 1 -- 1,359
---------- ---------- ------------- ---------- -------
Net cash provided by operating activities (7,830) 2,572 111 -- (5,147)
---------- ---------- ------------- ---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale (15) -- (5) (30) (50)
Additions to property and equipment (1,191) (1) (1) -- (1,193)
Proceeds from sale of property held for sale -- -- -- 30 30
Proceeds from sale of property and equipment 136 -- -- -- 136
Intercompany notes receivable (payable) 2,660 (2,660) -- -- --
---------- ---------- ------------- ---------- -------
Net cash used by investing activities 1,590 (2,661) (6) -- (1,077)
---------- ---------- ------------- ---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases (76) -- -- -- (76)
Proceeds from line of credit, net 5,610 -- -- -- 5,610
Principal repayments of long-term debt -- -- (4) -- (4)
Net proceeds from equity issue (53) -- -- -- (53)
Other financing costs (77) -- -- -- (77)
---------- ---------- ------------- ---------- -------
Net cash provided by financing activities 5,404 -- (4) -- 5,400
---------- ---------- ------------- ---------- -------
NET INCREASE (DECREASE) IN CASH (836) (89) 101 -- (824)
CASH & CASH EQUIVALENTS, BEG. OF YEAR 1,513 135 3,690 -- 5,338
---------- ---------- ------------- ---------- -------
CASH & CASH EQUIVALENTS, END OF YEAR 677 46 3,791 -- 4,514
========== ========== ============= =========== =======
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q 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-4, as amended, effective January 8, 1998 and Form S-1 filed
with the Securities and Exchange Commission on February 11, 1994.
Management's discussion and analysis should be read in conjunction with the
financial statements and notes thereto. Further information is contained in the
Company's 10-K, the Company's Registration Statement on Form S-4, as amended,
effective January 8, 1998, and the Company's Current Report on Form 8-K dated
October 23, 1997.
Recent Developments
On October 23, 1997, the Company acquired all of the outstanding common stock of
Lil' Champ from Docks U.S.A., Inc. for $135.6 million (net of cash acquired),
plus the repayment of $10.7 million in outstanding indebtedness of Lil'
Champ, and consummated certain other related transactions. The acquisition was
funded by a combination of Senior Subordinated Notes, cash on hand, and an
additional equity investment by the FS Group, Chase and a member of management
(see "PART I. Item 1. Financial Statements - Notes to Consolidated Financial
Statements - Note 2 - The Lil' Champ Acquisition and Pro forma Results" and
"PART II. Item 2. Changes in Securities and Use of Proceeds"). Lil' Champ is a
leading operator of convenience stores in Florida and the largest convenience
store operator in northern Florida. Lil' Champ's 486 stores are located
primarily in northern Florida and Georgia, with approximately 150 stores
concentrated in the Jacksonville, Florida area. Like The Pantry, Lil' Champ
stores offer a broad selection of affordable, high quality merchandise and
services. Self-service gasoline is sold at 432 Lil' Champ stores, 200 of which
sell gasoline under brand names including BP, Chevron, Fina, and Texaco. In
addition, Lil' Champ has developed a food service operation which includes 45
in-store quick service restaurants offering national brands such as Taco Bell,
A&W Root Beer, Long John Silver's and Pizza Hut. The combination of The Pantry
and Lil' Champ has created one of the largest independent convenience store
chains in the United States (based on number of stores) with 867 stores located
primarily in the Southeast.
The Lil' Champ Acquisition is consistent with management's strategic goal to
continue to capitalize on and enhance the Company's position as a leading
convenience store retailer in the Southeast. Over the last two years, the
Company's senior management team has increased management depth to facilitate
the Company's Southeastern growth plans.
As early as October 23, 1997, management began to implement positive
improvements in the operations of Lil' Champ. The new management team at Lil'
Champ, led by Peter J. Sodini and other Pantry executives, began implementing
specific strategies intended to (i) facilitate the integration of Lil' Champ
into the Pantry consolidated group, (ii) enhance field operations and reduce
store operating costs, (iii) improve management reporting, (iv) improve
corporate expense and cash controls, (v) enhance in-store merchandising, and
(vi) renegotiate merchandise and gasoline supplier contracts. For example, field
and store operations have been restructured by reducing management and
maintenance positions by a total of 28 while at the same time (i) strengthening
the group and reporting relationships, (ii) introducing improved wage and
incentive plans, (iii) reducing store overtime from 37.4 hours to 27.9 hours per
store per week, and (iv) reducing the reporting time for workers' compensation
claims from 21.1 to 1.1 days.
Despite the attention given to the Lil' Champ Acquisition and the above
activities, both the Pantry and Lil' Champ operations were able to report
material increases in income from operations and EBITDA (as defined herein) for
the quarter and two month period ended December 25, 1997, respectively, when
compared to the same periods in the prior year (see "Results of Operations").
For a more detailed discussion of Lil' Champ's operations and its impact on The
Pantry, refer to the Company's Registration Statement on Form S-4, as amended,
effective January 8, 1998 and the Company's Current Report on Form 8-K dated
October 23, 1997.
18
<PAGE>
Results of Operations
Impact of Lil' Champ Acquisition. The Lil' Champ Acquisition and
related transactions have had a material impact on the Company's financial
condition and results of operations since the date of acquisition. The
Consolidated Statements of Operations for the three month period ended December
25, 1997 discussed herein include Lil' Champ operations for the two months from
October 23, 1997 to December 25, 1997. Due to the method of accounting for the
Lil' Champ Acquisition, the Consolidated Balance Sheets as of September 25, 1997
and the Consolidated Statements of Operations for the three month period ended
December 26, 1996 do not include the assets, liabilities, and results of
operations of Lil' Champ.
For the above reasons and in an effort to provide information, set
forth below are selected unaudited financial and operating data of the Company
(including Lil' Champ 1997 results), the Company excluding Lil' Champ results
(as previously defined, the "Pantry"), and Lil' Champ. This information is
provided on an interim basis for the current fiscal year and is intended to
aid in the discussion of Lil' Champ and Pantry results. Amounts are in millions,
except store operating data and ratios.
<TABLE>
<CAPTION>
Selected Operating Results for the Period Ended December 25, 1997
Consolidated(a) The Pantry(a) Lil' Champ(a)
1996(a) 1997 1996 1997 1996(a) 1997
------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data: (13 weeks) (13 weeks) (13 weeks) (13 weeks) (9 weeks) (9 weeks)
Revenues:
Merchandise Sales $ 47.4 $ 89.4 $ 47.4 $ 50.9 $ 37.7 $ 38.5
Gasoline Sales 51.8 103.0 51.8 56.8 50.2 46.2
Commissions 1.1 2.8 1.1 1.4 1.5 1.4
----- ----- ---- ---- ---- ----
Total Revenues 100.3 195.2 100.3 109.1 89.4 86.1
Cost of Sales:
Merchandise 31.5 58.9 31.5 33.1 24.9 25.8
Gasoline 46.6 90.9 46.6 50.4 46.0 40.5
----- ----- ----- ----- ----- ----
Gross Profit 22.2 45.4 22.2 25.6 18.5 19.8
Income from operations 1.3 4.9 1.3 2.7 1.5 2.2
Interest expense 3.1 5.8
Other Financial Data:
EBITDA (b) $ 3.7 $ 10.5 $ 3.7 $ 5.9 $ 3.5 $ 4.5
EBITDA/interest expense 1.2x 1.8x
Store Operating Data:
Number of stores (end of
period) 374 876 374 381 498 486
Same store sales growth (c):
Merchandise 11.2 % 3.3 % 11.2 % 3.6 % n/a 3.0 %
Gasoline gallons (1.1)% 3.3 % (1.1)% 7.9 % n/a (1.6)%
Merchandise gross margin 33.5 % 34.1 % 33.5 % 35.0 % 34.0 % 33.0 %
Gasoline gallons sold (in
millions) 41.3 87.5 41.3 49.0 39.0 38.5
Average retail gasoline $ 1.25 $ 1.18 $ 1.25 $ 1.16 $ 1.29 $ 1.20
price per gallon
Average gasoline gross
profit per gallon (in cents) 12.59 c 13.83 c 12.59 c 13.06 c 10.77 c 14.81 c
- -------------------------
</TABLE>
(a) The selected operating results in the first two columns include the
consolidated accounts of The Pantry, Inc. and its wholly-owned
subsidiaries, Lil' Champ, Sandhills, Inc., and PH and PH's wholly-owned
subsidiaries, TC Capital Management, Inc. and Pantry Properties, Inc. Due
to the method of accounting for the Lil' Champ Acquisition, the
consolidated operating results for the quarter ended December 26, 1996 do
not include Lil' Champ results and include only nine weeks of Lil' Champ
operating results for the quarter ended December 25, 1997. For purpose of
review and comparison, this table shows consolidated results, Pantry
results, and Lil' Champ results separately and presents Lil' Champ results
for the nine weeks ended December 26, 1996 and December 25, 1997.
(b) "EBITDA" represents income before interest expense, income tax benefit,
depreciation and amortization, and extraordinary loss.
(c) The stores included in calculating "same store sales growth" are Pantry and
Lil' Champ stores that were in operation for both the 1996 and 1997 first
fiscal quarters (both thirteen weeks) and the nine weeks ended December 26,
1996 and December 25, 1997, respectively. For consolidated "same store
sales growth," Lil' Champ "same store sales growth" volume data was added
to Pantry volume data.
19
<PAGE>
Gross Revenues. Total revenues for the three month period ended
December 25, 1997 (the "first fiscal quarter 1998") increased $94.8 million over
the comparable period ended December 26, 1996 (the "first fiscal quarter 1997").
The increase in total revenues is primarily attributable to Lil' Champ revenues
of $86.1 million for the two month period ended December 25, 1997, the revenue
from stores acquired in the second half of fiscal year 1997, and same store
sales growth.
Merchandise Revenue. Total merchandise revenue for the first fiscal
quarter 1998 increased $42.0 million over the first fiscal quarter 1997. The
increase in merchandise revenues is primarily attributable to Lil' Champ
merchandise revenues of $38.5 million for the two month period ended December
25, 1997, the revenue from stores acquired in the second half of fiscal year
1997, and same store sales growth. The Pantry locations and Lil' Champ locations
same store merchandise revenues for the three and two month periods ended
December 25, 1997 increased 3.6% and 3.0% over the comparable periods in 1996,
respectively. Overall same store merchandise sales growth was 3.3% (see footnote
[c] to the table above). Same store sales increases at the Pantry locations are
primarily attributable to more competitive gasoline pricing, enhanced store
appearance and store merchandising, and increased in-store promotional activity.
Same store sales increases at Lil' Champ locations are primarily attributable to
store merchandising, increases in food service sales, and promotional activity.
Gasoline Revenue and Gallons. Total gasoline revenue for the first
fiscal quarter 1998 increased $51.2 million over the first fiscal quarter 1997.
The increase in gasoline revenues is primarily attributable to Lil' Champ
gasoline revenues of $46.2 million for the two month period ended December 25,
1997, the revenue from stores acquired in the second half of fiscal year 1997,
and same store gallon sales growth. Overall gasoline revenue growth was
partially offset by lower average gasoline retail prices in the first fiscal
quarter 1998 versus the first fiscal quarter 1997.
Total gasoline gallons increased 46.2 million gallons over the first
fiscal quarter 1997, 38.5 million of which is attributable to Lil' Champ volume.
Pantry locations and Lil' Champ locations same store gasoline gallon sales for
the three and two month periods ended December 25, 1997 increased 7.9% and
decreased 1.6% over the comparable periods in 1996, respectively. Overall same
store gallon sales growth was 3.3% (see footnote [c] to the table above). Same
store gallon increases at Pantry locations are primarily attributable to more
competitive gasoline pricing, rebranding and promotional activity, and enhanced
store appearance. Same store gallon decreases at Lil' Champ locations are
primarily attributable to general gasoline conditions and relatively inclement
weather in Florida and coastal Georgia during the two month period ended
December 25, 1997.
Commission Revenue. Total commission revenue for the first fiscal
quarter 1998 increased $1.7 million over the first fiscal quarter 1997. The
increase in commission revenues is attributable to Lil' Champ revenues of $1.4
million for the two month period ended December 25, 1997 and the revenue from
stores acquired in the second half of fiscal year 1997. Lil' Champ's commission
revenue is principally lottery revenue in locations throughout Florida and
Georgia.
Total Gross Profit. Total gross profit for the first fiscal quarter
1998 increased $23.2 million over the first fiscal quarter 1997. The increase in
gross profit is primarily attributable to Lil' Champ gross profit of $19.8
million for the two month period ended December 25, 1997 and an increase of $3.4
million in gross profit for Pantry operations. The increase in Pantry location
gross profits is primarily attributable to the gross profit from stores acquired
in the second half of fiscal year 1997, same store volume growth, and higher
merchandise gross margin and gasoline gross profit per gallon.
Merchandise Gross Margin. The merchandise gross margin increase from
33.5% for the first fiscal quarter 1997 to 34.1% for the first fiscal quarter
1998 is attributable to changes in merchandise mix at Pantry locations and the
addition of several higher average margin Pantry locations acquired in the
coastal Carolinas. The margin increase was offset by the lower merchandise gross
margin at Lil' Champ locations.
Gasoline Gross Profit Per Gallon. The gasoline gross profit per gallon
increase from $0.126 for the first fiscal quarter 1997 to $0.138 in the first
fiscal quarter 1998 is the result of general gasoline market conditions
including lower wholesale gasoline costs for the Company.
Store Operating and General and Administrative Expenses. Store
operating expenses for the first fiscal quarter 1998 increased $13.7 million
over the first fiscal quarter 1997. The increase in store expenses is primarily
attributable to Lil' Champ expenses of $12.5 million for the two month period
ended December 25, 1997 and the personnel and lease expenses associated with the
stores acquired in the second half of fiscal year 1997.
General and administrative expenses for the first fiscal quarter 1998
increased $3.1 million over the first fiscal quarter 1997. The increase in
general and administrative expenses is primarily attributable to Lil' Champ
expenses of
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$2.8 million for the two month period ended December 25, 1997. General and
administrative expenses decreased as a percentage of merchandise sales.
Income from Operations. Income from operations for the first fiscal
quarter 1998 increased $3.6 million over the first fiscal quarter 1997. The
increase is primarily attributable to Lil' Champ income from operations of $2.2
million and to an increase of $1.4 million in income from Pantry operations. The
increase in income from Pantry operations is primarily attributable to the
earnings from stores acquired in the second half of fiscal year 1997, same store
volume increases, and increased margins discussed above.
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). EBITDA represents income before interest expense, income tax
benefit, depreciation and amortization, and extraordinary loss. EBITDA for the
first fiscal quarter 1998 increased $6.8 million over the first fiscal quarter
1997. The increase is attributable to Lil' Champ EBITDA of $4.5 million for
the two month period ended December 25, 1997 and an increase of $2.3 million in
EBITDA for Pantry operations. The Pantry increase is attributable to the items
discussed above, as well as gains on the sale of assets and other miscellaneous
income.
EBITDA is not a measure of performance under generally accepted
accounting principles, and should not be a substitute for net income, cash flows
from operating activities and other income or cash flow statement data prepared
in accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity. The Company has included information concerning
EBITDA 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.
Interest Expense (see "Liquidity and Capital Resources; Long-Term
Debt"). Interest expense is primarily interest on the Company's Senior and
Senior Subordinated Notes. Interest expense increased $2.7 million for the first
fiscal quarter 1998 over the first fiscal quarter 1997 and is attributable to
interest on the Senior Subordinated Notes, which was partially offset by the
interest savings related to the repurchase of $51.0 million in principal amount
of the Senior Notes.
Extraordinary Loss. The Company recognized an extraordinary loss, net
of taxes, of approximately $6.8 million in connection with the Tender Offer and
Consent Solicitation. The loss is the sum, net of taxes, of the premium paid for
the early redemption of $51.0 million in principal amount of the Senior Notes,
the respective portion of the consent fees paid, and the write-off of a
respective portion of the deferred financing cost associated with the Senior
Notes.
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. Capital expenditures, acquisitions
and interest expense represent the primary uses of funds. The Company relies
primarily upon cash provided by operating activities, supplemented as necessary
from time to time by borrowings under its New Credit Facility, sale-leaseback
transactions, asset dispositions and equity investments, to finance its
operations, pay interest, and fund capital expenditures and acquisitions. Cash
provided by (used in) operating activities for the first fiscal quarters 1997
and 1998 totaled ($5.1) million and $3.8 million, respectively. The Company also
had $31.8 million of cash and cash equivalents on hand at December 25, 1997.
Line and Letter of Credit Facility. On October 23, 1997, to supplement
cash on hand and cash provided by operating activities, the Company entered into
a new bank credit facility. The New Credit Facility consists of a $45.0 million
revolving credit facility and a $30.0 million acquisition facility (see "PART I.
- - Item 1. Financial Statements - Notes to Consolidated Financial Statements -
Note 1 - The Company and Recent Developments - Recent Developments"). The
revolving credit facility is available to fund working capital and for the
issuance of standby letters of credit. The acquisition facility is available to
fund future acquisitions of related businesses. As of December 25, 1997, there
were no borrowings outstanding under either the working capital line of credit
or the acquisition facility. As of December 25, 1997, approximately $11.8
million of letters of credit were issued under the standby letter of credit
facility.
The Lil' Champ Acquisition. On October 23, 1997, the Company acquired
all of the outstanding common stock of Lil' Champ from Docks U.S.A., Inc. for
$135.6 million (net of cash acquired), plus the repayment of $10.7 million
in outstanding indebtedness of Lil' Champ. The purchase price, the refinancing
of existing Lil' Champ debt, and the fees and expenses of the Lil' Champ
Acquisition were financed with the proceeds from the offering of $200.0 million
Senior Subordinated Notes, cash on hand, and the net proceeds from the sale of
the Company's common stock, par value $.01 per share to existing stockholders
and management of the Company.
On October 23, 1997 and in connection with the Lil' Champ Acquisition,
the Company purchased $51.0 million in principal amount of the Senior Notes at a
purchase price of 110% of the aggregate principal amount of each tendered Senior
Note plus accrued and unpaid interest up to, but not including, the date of
purchase. The Company obtained consents from the holders of the Senior Notes to
amendments and waivers to certain of the covenants contained in Senior Notes
Indenture. The consideration paid in respect of validly delivered consents was
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1 3/4% of the principal amount of the Senior Notes. The Company recognized an
extraordinary loss, net of taxes, of approximately $6.8 million in connection
with the Tender Offer and Consent Solicitation. See "Results of Operations."
Capital Expenditures. Capital expenditures, excluding the Lil' Champ
Acquisition, for the first fiscal quarters 1997 and 1998 were approximately $1.2
million and $5.9 million, respectively. Capital expenditures are primarily
expenditures for existing store improvements, store equipment, new store
development and expenditures to comply with regulatory statutes, including those
related to the environment. The Company finances substantially all capital
expenditures and new store development through cash flow from operations, a
sale-leaseback program or similar lease activity, and asset dispositions. In the
first fiscal quarter 1998, the Company has received approximately $4.1 million
in sale-leaseback and other reimbursements. As a result, net capital
expenditures for the first fiscal quarter 1998 were $1.8 million. It is
anticipated that any future acquisition activity will be financed by a
combination of (i) cash flow from operations, (ii) a sale-leaseback program or
similar lease activity, and (iii) the Company's new acquisition facility.
Long-Term Debt. At December 25, 1997, The Company's long-term debt
consisted primarily of $49 million of the Senior Notes and $200 million of the
Senior Subordinated Notes (together with the Senior Notes; the "Notes"). The
interest payments on the Senior Notes are due May 15 and November 15. The
interest payments on the Senior Subordinated Notes are due October 15 and June
15.
The Notes are unconditionally guaranteed, on an unsecured basis, as to
the payment of principal, premium, if any, and interest, jointly and severally,
by the Guarantors. The Notes contain covenants that, among other things,
restrict the ability of the Company and any restricted subsidiary to: (i) incur
additional indebtedness; (ii) pay dividends or make distributions; (iii) issue
stock of subsidiaries; (iv) make certain investments; (v) repurchase stock; (vi)
create liens; (vii) enter into transaction with affiliates; (viii) enter into
sale-leaseback transactions; (ix) merge or consolidate the Company or any of its
subsidiaries; and (x) transfer and sell assets. See "PART I. - Item 1. Financial
Statements - Notes to Consolidated Financial Statements - Note 1 - The Company
and Recent Developments" and "Note 5 - Long-term Debt."
Cash Flows from Financing Activities. The Lil' Champ Acquisition price,
the refinancing of existing Lil' Champ debt, the Tender Offer, and all related
fees and expenses were financed with the proceeds from the offering of $200.0
million Senior Subordinated Notes, cash on hand, and the net proceeds of
approximately $32.2 million from the sale to existing stockholders and
management of the Company of an additional 72,000 shares of the Company's
common stock, par value $.01 per share. See "PART I. - Item 1. Financial
Statements - Notes to Consolidated Financial Statements - Note 1 - The Company
and Recent Developments" and "PART II. - Item 2. Changes in Securities and Use
of Proceeds."
Shareholders' Equity. As of December 25, 1997, the Company's
shareholders' equity totaled $12.7 million. The increase in shareholders' equity
of $30.6 million is attributed to the proceeds from the sale of additional
common stock and the contribution of all outstanding shares of Series A
Preferred Stock and related accrued dividends (see "PART I. - Item 1. Financial
Statements - Notes to Consolidated Financial Statements - Note 1 - The Company
and Recent Developments" and "Note 6 - Shareholders' Equity"), which was
partially offset by the Company's net loss of $6.9 million for the three months
ended December 25, 1997.
The value of additional paid in capital is impacted by 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. Additionally, the
accumulated deficit includes the cumulative effect of (i) the accrued dividends
on previously outstanding preferred stock of $5.0 million, (ii) the accrued
dividends on current outstanding Series B Preferred Stock of $2.4 million, (iii)
the net cost of equity transactions and (iv) the cumulative results of
operations, which include extraordinary losses and cumulative effect of
accounting changes, 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 Senior Notes.
Environmental Considerations. The Company is subject to various
federal, state and local environmental laws. Federal, state, and local
regulatory agencies have adopted regulations governing underground petroleum
storage tanks ("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
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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.
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.
The Company believes it is in full or substantial compliance with
the leak detection requirements applicable to 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 $5.5
million of capital expenditures for these purposes over the next twelve months.
Additional regulations or amendments to the existing UST regulations could
result in future revisions to the estimated upgrade compliance and remediation
costs outlined above.
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 coverage for taking
corrective action and compensating third parties in the event of a release from
its 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, Florida, Georgia, Tennessee and Kentucky. 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 subject to applicable deductibles.
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 generally 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.
Cash Requirements. The Company believes that cash on hand, together
with cash flow anticipated to be generated from operations, new equity issued
and sold on October 23, 1997 in connection with the Lil' Champ Acquisition and
related transactions, short-term borrowing for seasonal working capital,
permitted borrowings under the Company's acquisition facility 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 1998.
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PART II - Other Information.
Item 2. Changes in Securities and Use of Proceeds.
As previously reported, the Company entered into certain
transactions related to the acquisition of Lil' Champ, part of which
included the sale of securities by the Company which were not
registered under the Securities Act of 1933, as amended (the
"Securities Act"). On October 23, 1997, the Company sold 72,000 shares
of Common Stock to the FS Group, Chase and Peter J. Sodini for an
aggregate purchase price of $32.4 million. No underwriter was engaged
in connection with the foregoing sales of equity securities.
On October 23, 1997, the Company issued and sold the Senior
Subordinated Notes in the aggregate principal amount of $200.0 million
to CIBC Wood Gundy Securities Corp. and First Union Capital Markets
Corp. (the "Initial Purchasers") in a private placement transaction not
registered under the Securities Act. The Initial Purchasers
subsequently resold the Senior Subordinated Notes to (i) "qualified
institutional buyers" (in reliance on Rule 144A under the Securities
Act) and (ii) non-U.S. persons outside the United States (in reliance
on Regulation S under the Securities Act). In connection with the
issuance and sale of the Senior Subordinated Notes, the Company and the
Initial Purchasers entered into the Exchange Offer Registration Rights
Agreement pursuant to which the Company agreed to use its best efforts
to cause a registration statement to become effective within 150 days
of the date of issuance of the Senior Subordinated Notes with respect
to an offer to exchange its 10 1/4% Senior Subordinated Notes due
October 15, 2007 which would be registered under the Securities Act
(the "Exchange Notes"), for the outstanding Senior Subordinated Notes.
The form and terms of the Exchange Notes are the same as the form and
terms of the Senior Subordinated Notes in all material respects. On
January 8, 1998, the Company's registration statement on Form S-4
registering the Exchange Notes under the Securities Act was declared
effective by the Securities and Exchange Commission.
On October 23, 1997, the Company consummated the Tender Offer,
whereby it purchased $51.0 million in principal amount of Senior Notes
at a purchase price of 110% of the aggregate principal amount of each
tendered Senior Note plus accrued and unpaid interest up to, but not
including, the date of purchase. The Company obtained consents from the
holders of the Senior Notes to amendments and waivers to certain of the
covenants contained in the Senior Notes Indenture. The Senior Notes
Indenture contains covenants including the restrictions on the
Company's ability to incur additional indebtedness and make
acquisitions. The Company obtained consents to, among other things,
permit the offering of the Senior Subordinated Notes, the Lil' Champ
Acquisition and the New Credit Facility. The consideration paid in
respect of validly delivered consents was 1 3/4% of the principal
amount of the Senior Notes for which consents have been validly
delivered. The related terms of the consents were outlined and executed
on October 23, 1997 with the execution of a Second and Third
Supplemental Indenture.
Sales of the securities to the above parties were made in
reliance upon Section 4(2) of the Securities Act as transactions not
involving any public offering. Each of 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 The Pantry, Inc. 1998 Stock Option Plan adopted
January 1, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
On December 19, 1997, the Company filed a Current Report on
Form 8-K reporting The Pantry, Inc.'s acquisition of Lil'
Champ Food Stores, Inc., a wholly-owned subsidiary of Dock
U.S.A., Inc., and certain other related transactions on
October 23, 1997.
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SIGNATURE
Pursuant to the requirements 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.
Date: February 9, 1998 By: \s\ William T. Flyg
---------------------
William T. Flyg
Senior Vice President Finance and Secretary
(Authorized Officer and Principal Financial Officer)
25
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EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
10.1 The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998.
27.1 Financial Data Schedule.
THE PANTRY, INC.
1998 Stock Option Plan
Section 1. Description of Plan. This is the 1998 Stock Option Plan,
dated January ___, 1998 (the "Plan"), of The Pantry, Inc., a Delaware
corporation (the "Company"). Under this Plan, officers, key employees and
consultants of the Company or any of its subsidiaries and certain members of the
Board of Directors of the Company, to be selected as set forth below, may be
granted options ("Options") to purchase shares of the common stock, par value
$.01, of the Company ("Common Stock"). For purposes of this Plan, the term
"subsidiary" means any directly or indirectly majority or wholly owned entity of
the Company (individually, a "Subsidiary" and collectively, the "Subsidiaries").
It is intended that the Options under this Plan will either qualify for
treatment as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and be designated "Incentive Stock
Options" or not qualify for such treatment and be designated "Nonqualified Stock
Options." Incentive Stock Options may only be granted to employees.
Section 2. Purpose of Plan. The purpose of the Plan and of granting
Options to specified persons is to further the growth, development and financial
success of the Company and its Subsidiaries by providing additional incentives
to certain officers, key employees, consultants and members of the Board of
Directors (or equivalent bodies) of the Company or its Subsidiaries. By
assisting such persons in acquiring shares of Common Stock, the Company can
ensure that such persons will themselves benefit directly from the Company's and
its Subsidiaries' growth, development and financial success.
Section 3. Eligibility. The persons who shall be eligible to receive
grants of Options under the Plan shall be the directors, officers, key employees
and consultants of the Company and the Subsidiaries; provided that bona fide
services shall be rendered to the Company or its Subsidiaries by such consultant
and such services shall not have been in connection with the offer and sale of
securities in a capital-raising transaction. Consultants and directors who are
not also employees of the Company ("Nonemployee Directors") are not eligible to
receive Incentive Stock Options. A person who holds an Option is herein referred
to as a "Participant," and more than one Option may be granted to any
Participant. For Incentive Stock Options, the aggregate fair market value
(determined as of the time an Option is granted) of the Common Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Participant in any calendar year under this Plan and any other incentive
stock option plans (which qualify under Section 422 of the Code) of the Company
or any Subsidiary shall not exceed $100,000.
Section 4. Administration.
(a) The Plan shall be administered by the Board or, at
the Board's option, a committee of the Board (the "Committee"). Members of the
Committee shall be appointed, both initially and as vacancies occur, by the
Board, to serve at the pleasure of the
<PAGE>
Board. Upon the first registration of an equity security of the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the
extent possible and advisable, the Committee may be constituted so as to permit
this Plan to comply with Rule 16b-3 promulgated under Section 16 of the Exchange
Act and Section 162(m) of the Code. The Committee shall meet at such times and
places as it determines and may meet through a telephone conference call. A
majority of its members shall constitute a quorum, and the decision of a
majority of those present at any meeting at which a quorum is present shall
constitute the decision of the Committee. A memorandum signed by all of its
members shall constitute the decision of the Committee without necessity, in
such event, for holding an actual meeting.
(b) The Committee is authorized and empowered to
administer the Plan and, subject to the Plan, (i) to select the Participants, to
determine the number of shares of Common Stock which may be purchased and in
general to grant Options and to extend the time period during which a
Nonqualified Stock Option may be exercised; (ii) to determine the dates upon
which Options shall be granted and the terms and conditions thereof in a manner
not inconsistent with the Plan, which terms and conditions need not be identical
as to the various Options granted; (iii) to determine which Options are to be
Incentive Stock Options and which Options are to be Nonqualified Stock Options;
(iv) to interpret the Plan; (v) to prescribe, amend and rescind rules relating
to the Plan; (vi) to authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option previously granted
by the Committee; (vii) to determine the rights and obligations of Participants
under the Plan; (viii) to specify the purchase price to be paid by Participants
for shares of Common Stock; (ix) to accelerate the time during which an Option
may be exercised in accordance with the provisions of Section 16 hereof, and to
otherwise accelerate the time during which an Option may be exercised in each
case notwithstanding the provisions in the Option Agreement (as defined in
Section 13) stating the time during which it may be exercised; and (x) to make
all other determinations deemed necessary or advisable for the administration of
the Plan. The good faith interpretation and construction by the Committee of any
provision of the Plan or of any Option granted under it shall be final,
conclusive and binding. No member of the Committee shall be liable for any
action or determination made with respect to the Plan or any Option granted
hereunder.
Section 5. Shares Subject to Plan. The aggregate number of shares of
Common Stock for which Options may be granted pursuant to the Plan shall be
25,000 subject to adjustment as provided in Section 11 hereof. The maximum
number of shares that may be granted to a single Participant is 20,000. The
number of shares of Common Stock which may be purchased by a Participant upon
exercise of each Option shall be determined by the Committee and set forth in
each Option Agreement. Upon the expiration or termination, in whole or in part,
for any reason of an outstanding Option or any portion thereof which shall not
have vested or shall not have been exercised in full or in the event that any
shares of Common Stock acquired pursuant to the Plan are reacquired by the
Company, (a) any shares of Common Stock which have not been purchased or (b) the
shares of Common Stock reacquired, as the case may be, shall again become
available for the granting of additional Options under the Plan. Notwithstanding
2.
<PAGE>
the preceding sentence, shares subject to a terminated option shall continue to
be considered to be outstanding for purposes of determining the maximum number
of shares that may be issued to a single Participant. Similarly, the repricing
of an Option will be considered the grant of a new Option for this purpose.
Section 6. Option Price. Except as provided in Section 11 or Section
12 hereof, the purchase price per share (the "Option Price") of the shares of
Common Stock underlying each Option shall be as determined by the Board in its
sole discretion; provided, that the Option Price of the shares of Common Stock
underlying each Option intended to be treated as an Incentive Stock Option shall
not be less than 100 percent of the fair market value of such shares on the date
of grant of the Option; provided further, that if the Participant is a
10-percent stockholder of the Company (as defined in Section 422(b)(6) of the
Code) at the time such Participant is granted an Incentive Stock Option, the
Option Price shall be not less than 110 percent of said fair market value. If
used, fair market value shall be determined by the Committee (i) if the
Company's securities are traded on a national securities exchange or on the
National Association of Securities Dealers Automated Quotation System (or a
similar successor system), on the basis of the reported closing sales price on
such date or, in the absence of a reported sales price on such date, on the
basis of the average of the reported closing bid and asked price on such date,
or (ii) in the absence of both a reported sales price and a reported bid and
asked price under clause (i), the Committee shall determine such fair market
value on the basis of such evidence as it deems appropriate in its sole
discretion.
Section 7. Restrictions on Grants; Vesting of Options.
Notwithstanding any other provisions set forth herein or in any Option
Agreement, no Options may be granted under the Plan subsequent to 10 years from
the date hereof. The vesting of all Options may be based on the passage of time.
The Committee shall determine the vesting schedule applicable to each Option or
group of Options in a schedule, a copy of which shall be filed with the records
of the Committee and attached to each Option Agreement to which the same
applies; provided, that each Option shall become fully exercisable no later than
five (5) years from the date the Option is granted and the number of shares of
Common Stock subject to each Option shall become exercisable at the rate of at
least 20% per year each year until the Option is fully exercisable. The vesting
schedule need not be identical for all Options granted hereunder. The Committee
may periodically review the vesting criteria applicable to any Option or Options
and, in its sole good faith judgment, may adjust the same to reflect
unanticipated major events, including but not limited to catastrophic
occurrences, mergers and acquisitions.
Section 8. Exercise of Options. No Option granted to a person
subject to Section 16 of the Exchange Act shall be exercisable during the first
six months after the date such Option is granted. Once vested, and prior to its
termination date, an Option may be exercised by the Participant by giving
written notice to the Company specifying the number of shares of Common Stock to
be purchased and accompanied by payment of the full purchase price therefor in
cash, by check or in such other form of lawful consideration as the Committee
may approve from time to time, including without limitation and in the sole
discretion of the
3.
<PAGE>
Committee, the assignment and transfer by the Participant to the Company of
outstanding shares of Common Stock theretofore held by the Participant in a
manner intended to comply with the provisions of Rule l6b-3 under the Exchange
Act, if applicable; provided that the purchase price may not be paid by a
Participant via any type of "cashless exercise" in which the Company directly,
indirectly or effectively purchases shares of Common Stock held by such
Participant (unless such shares have been held by such Participant continuously
for the six months prior to such exercise) without the express written consent
of the Committee, which may be given or withheld in the Committee's sole
discretion after due consideration of the financial accounting implications of
such form of payment. After giving due consideration of the consequences under
Section 16 of the Exchange Act and under the Code, the Committee may also
authorize the exercise of Options by the delivery to the Company or its
designated agent of an irrevocable written notice of exercise form together with
irrevocable instructions to a broker-dealer to sell or margin a sufficient
portion of the shares of Common Stock and to deliver the sale or margin loan
proceeds directly to the Company to pay the exercise price of the Option. Once
vested, and prior to its termination date, an Option may only be exercised by
the Participant or in the event of death of the Participant, by the person or
persons (including the deceased Participant's estate) to whom the deceased
Participant's rights under such Option shall have passed by will or the laws of
descent and distribution. Notwithstanding the immediately preceding sentence, in
the event of disability (within the meaning of Section 22(e)(3) of the Code) of
a Participant, a designee of the Participant (or the legal representative of the
Participant if the Participant has no designee) may exercise the Option on
behalf of such Participant (provided such Option would have been exercisable by
such Participant) until the right to exercise such Option expires, as set forth
in such Participant's particular Option Agreement or this Plan.
Section 9. Issuance of Common Stock. The Company's obligation to
issue its shares of Common Stock upon exercise of an Option is expressly
conditioned upon the compliance by the Company with any registration or other
qualification obligations with respect to such shares of Common Stock under any
state and/or federal law or rulings and regulations of any government regulatory
body and/or the making of such investment representations or other
representations and undertakings by the Participant (or the Participant's
designee, legal representative, heir or legatee, as the case may be) in order to
comply with the requirements of any exemption from any such registration or
other qualification obligations with respect to such shares of Common Stock
which the Company in its sole discretion shall deem necessary or advisable. Such
required representations and undertakings may include representations and
agreements that such Participant (or the Participant's designee, legal
representative, heir or legatee): (a) is purchasing such shares of Common Stock
for investment and not with any present intention of selling or otherwise
disposing of such shares of Common Stock; and (b) agrees to have a legend placed
upon the face and reverse of any certificates evidencing such shares of Common
Stock (or, if applicable, an appropriate data entry made in the ownership
records of the Company) setting forth (i) any representations and undertakings
which such Participant has given to the Company or a reference thereto, and (ii)
that, prior to effecting any sale or other disposition of any such shares of
Common Stock, the Participant must furnish to the Company an opinion of counsel,
satisfactory to the Company and its counsel, to the effect that
4.
<PAGE>
such sale or disposition will not violate the applicable requirements of state
and federal laws and regulatory agencies; provided, however, that any such
legend or data entry shall be removed when no longer applicable. The inability
of the Company to obtain from any regulatory body having jurisdiction authority
reasonably deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares of Common Stock hereunder shall relieve the
Company of any liability in respect of the nonissuance or sale of such shares of
Common Stock as to which such requisite authority shall not have been obtained.
Any shares of Common Stock issued by the Company upon exercise of an Option
granted hereunder may be subject to (w) a right of first refusal of the Company
with respect to all shares of Common Stock proposed to be transferred by
Participant, (x) drag-along rights of the FS Entities (as defined under that
certain Amended and Restated Stockholders' Agreement, dated as of October 23,
1997, as such agreement may be amended from time to time) as described in
Section 13 hereof, (y) a right of repurchase by the Company in the event that
Participant's employment or other relationship with the Company is terminated,
and (z) certain other restrictions set forth in each particular Option
Agreement.
Section 10. Nontransferability. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution. Any permitted transferee shall
be required prior to any transfer of an Option to execute a written undertaking
to be bound by the provisions of the applicable Option Agreement.
Section 11. Recapitalization, Reorganization; Merger or
Consolidation.
(a) Subject to Section 11(b) hereof, if the outstanding
shares of Common Stock of the Company are exchanged for different securities of
the Company through a reorganization, recapitalization or reclassification or if
the number of outstanding shares is changed through a stock split or stock
dividend, an appropriate adjustment shall be made by the Committee (i) in the
number or kind of shares which may be purchased pursuant to the exercise of
Options, as provided in Section 5 hereof, and (ii) in the number, exercise
price, or kind of securities subject to any outstanding Option granted under the
Plan. Any such adjustment in an outstanding Option, however, shall be made
without change in the total price applicable to the unexercised portion of the
Option but with a corresponding adjustment in the price for each share covered
by the Option. In making such adjustments, or in determining that no such
adjustments are necessary, the Committee may rely upon the advice of counsel and
accountants to the Company, and the good faith determination of the Committee
shall be final, conclusive and binding. No fractional shares of stock shall be
issued or issuable under the Plan on account of any such adjustment.
(b) Subject to Section 16 hereof (i) upon the
dissolution, liquidation or sale of all or substantially all of the business,
properties and assets of the Company, (ii) upon any reorganization, merger,
consolidation, sale or exchange of
5.
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securities in which the Company does not survive, (iii) upon any reorganization,
merger, consolidation, sale or exchange of securities in which the Company does
survive and any of the Company's stockholders have the opportunity to receive
cash, securities and/or other property in exchange for their shares of Common
Stock of the Company or (iv) upon any acquisition by any person or group (as
defined in Section 13(d) of the Exchange Act) of beneficial ownership of more
than 50% of the Company's then outstanding shares of Common Stock (each of the
events described in clauses (i), (ii), (iii) or (iv) is referred to herein as an
"Extraordinary Event"), the Plan and each outstanding Option shall terminate. In
such event, each Participant who is not tendered an option by the surviving
entity in accordance with all of the terms of the immediately succeeding
sentence, or who does not accept any such substituted option which is so
tendered, shall have the right until 10 days before the effective date of such
Extraordinary Event to exercise, in whole or in part, any unexpired Option or
Options issued to the Participant, to the extent that said Option is then vested
and exercisable pursuant to the provisions of said Option or Options and of
Section 7 of the Plan.
(c) The grant of an Option under the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications or changes in its capital or business structures or to merge,
consolidate, dissolve, or liquidate or to sell or transfer all or any part of
its business or assets.
Section 12. Substitute Options. If the Company at any time should
succeed to the business of another entity through a merger, consolidation,
corporate reorganization or exchange, or through the acquisition of stock or
assets of such entity or its subsidiaries or otherwise, Options may be granted
under the Plan to option holders of such entity or its subsidiaries, in
substitution for options to purchase interests in such entity held by them at
the time of succession. The Committee, in its sole and absolute discretion,
shall determine the extent to which such substitute Options shall be granted (if
at all), the person or persons to receive such substitute Options (who need not
be all option holders of such entity), the number of Options to be received by
each such person, the Option Price of such Option (which may be determined
without regard to Section 6 hereof) and the terms and conditions of such
substitute Options; provided, however, that the Option Price of each such
substituted Option which is an Incentive Stock Option shall be an amount such
that, in the sole and absolute judgment of the Committee (and in compliance with
Section 424(a) of the Code), the economic benefit provided by such Option is not
greater than the economic benefit represented by the option in the acquired
entity as of the date of the Company's acquisition of such entity.
Section 13. Option Agreement. Each Option granted under the Plan
shall be evidenced by a written option agreement (an "Option Agreement")
executed by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
(b) shall indicate whether such Option is to be an Incentive Stock Option or a
Nonqualified Stock Option, and if an Incentive Stock Option shall contain terms
and conditions permitting such Option to qualify for treatment as an incentive
stock option under Section 422 of the Code; (c) shall contain provisions which
give the Company a right of first refusal to purchase any shares of Common Stock
issued pursuant to the exercise of Options
6.
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granted under the Plan which a Participant proposes to sell; (d) shall contain
"drag-along" rights in favor of the FS Entities or their respective permitted
successors; (e) shall contain a right of repurchase in favor of the Company in
the event Participant's employment or other relationship with the Company and
all of its Subsidiaries terminates; and (f) may contain such other terms and
conditions as the Committee deems desirable and which are not inconsistent with
the Plan.
Section 14. Rights as a Stockholder. No Participant (or any legal
representative, heir or legatee) shall have any rights as a stockholder with
respect to any shares covered by any Option until the date of the issuance of a
stock certificate to such person upon the due exercise of such Option. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 11 hereof.
Section 15. Termination of Options. Each Option granted under the
Plan shall set forth a termination date thereof, in addition to any other
termination events set forth in the Plan and in each particular Option
Agreement, which, with respect to Nonqualified Stock Options, shall be no later
than ten years from the date such Option is granted and with respect to
Incentive Stock Options, if the Participant is a 10-percent stockholder of the
Company (as described in Section 422(b)(6) of the Code) at the time such Option
is granted, the Option shall terminate no later than five years from the date of
the grant thereof. An Incentive Stock Option shall contain any termination
events required by Section 422 of the Code. In any event all Options shall
terminate and expire upon the first to occur of the following events:
(a) the expiration of 90 days from the date of a
Participant's termination of employment or service with the Company and/or its
Subsidiaries (other than by reason of death), except that if a Participant is
then disabled (within the meaning of Section 22(e)(3) of the Code), the
expiration of 180 days from the date of such Participant's termination of
employment or service with the Company and/or its Subsidiaries; or
(b) the expiration of 180 days from the date of the
death of a Participant if his or her death occurs while he or she is, or not
later than 90 days after he or she has ceased to be, employed by or in the
service of the Company or any of its Subsidiaries in a capacity in which he or
she would be eligible to receive grants of Options under the Plan; or
(c) the termination of the Option pursuant to Section
11(b) of the Plan.
The termination of employment or engagement in another relationship
of a Participant (by death or otherwise) shall not accelerate or otherwise
affect the number of shares with respect to which an Option may be exercised,
and the Option may only be exercised with respect to that number of shares which
could have been purchased under the Option had the Option been exercised by the
Participant on the date of such termination.
7.
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Section 16. Acceleration of Options. Notwithstanding the provisions
of Section 7 or Section 15 hereof, or any provision to the contrary contained in
a particular Option Agreement, the Committee, in its sole discretion, at any
time, or from time to time, may elect to accelerate the vesting of all or any
portion of any Option then outstanding. The decision by the Committee to
accelerate an Option or to decline to accelerate an Option shall be final,
conclusive and binding. In the event of the acceleration of the exercisability
of Options as the result of a decision by the Committee pursuant to this Section
16, each outstanding Option so accelerated shall be exercisable for a period of
at least five days from and after the date of such acceleration and upon such
other terms and conditions as the Committee may determine in its sole
discretion; provided that such terms and conditions (other than terms and
conditions relating solely to the acceleration of exercisability and the related
termination of an Option) may not adversely affect the rights of any Participant
without the consent of the Participant so adversely affected. Any outstanding
Option which has not been exercised by the holder at the end of such period
shall terminate automatically and become null and void.
Section 17. Withholding of Taxes. The Company, or a Subsidiary, as
the case may be, may deduct and withhold from the wages, salary, bonus and other
income paid by the Company (or such Subsidiary) to the Participant the requisite
tax upon the amount of taxable income, if any, recognized by the Participant in
connection with the exercise in whole or in part of any Option, or the sale of
shares of Common Stock issued to the Participant upon the exercise of an Option,
as may be required from time to time under any federal or state tax laws and
regulations. This withholding of tax shall be made from the Company's (or such
Subsidiary's) concurrent or next payment of wages, salary, bonus or other income
to the Participant or by payment to the Company (or such Subsidiary) by the
Participant of the required withholding tax, as the Committee may determine;
provided, however, that, in the sole discretion of the Committee, the
Participant may pay such tax by reducing the number of shares of Common Stock
issued upon exercise of an Option (for which purpose such shares of Common Stock
shall be valued at fair market value as determined in good faith by the
Committee, which determination shall be final, conclusive and binding).
Section 18. Effectiveness and Termination of the Plan. The Plan
shall be effective on the date on which it is adopted by the Board; provided
that it is approved by a majority of the Company's stockholders, in accordance
with the provisions of Section 422 of the Code, within 12 months before or after
the date of its adoption by the Board. The Plan shall terminate, in addition to
the other termination events set forth in the Plan, at the earliest of the time
when all shares of Common Stock which may be issued hereunder have been so
issued; provided, however, that the Board may in its sole discretion terminate
the Plan at any other time. Subject to Section 11 hereof, no such termination
shall in any way affect any Option then outstanding.
Section 19. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Committee makes the
determination granting such
8.
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Option. Notice of the determination shall be given to each Participant to whom
an Option is so granted within a reasonable time after the date of such grant.
Section 20. Amendment of Plan. The Committee may make such
amendments to the Plan and, with the consent of each Participant adversely
affected, to the terms and conditions of granted Options, as it shall deem
advisable, including without limitation the acceleration of the time at which an
Option may be exercised. No amendment shall in any way adversely affect any
option then outstanding without the consent of the Participant so adversely
affected.
Section 21. Transfers and Leaves of Absence. For purposes of the
Plan, (a) a transfer of a Participant's employment or consulting relationship,
without an intervening period, between the Company and a Subsidiary (or vice
versa) or between Subsidiaries shall not be deemed a termination of employment
or a termination of a consulting relationship and (b) a Participant who is
granted in writing a leave of absence shall be deemed to have remained in the
employ of, or in a consulting relationship with, the Company (or a Subsidiary,
whichever is applicable) during such leave of absence except that for purposes
of exercising an Incentive Stock Option, the Participant will be considered to
have terminated employment on the 91st day of the leave, unless his or her right
to re-employment is guaranteed by statute or contract.
Section 22. No Obligation to Exercise Option. The granting of an
Option shall impose no obligation on the Participant to exercise such Option.
Section 23. Indemnification. In addition to such other rights of
indemnification as they may have as members of the Board, the members of the
Committee shall be indemnified by the Company to the fullest extent permitted by
law against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in satisfaction of a judgment in any such action, suit or
proceeding except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Committee member is not entitled to
indemnification under applicable law; provided that within 60 days after
institution of any such action, suit or proceeding such Committee member shall
in writing offer the Company the opportunity, at the Company's expense, to
handle and defend the same, and such Committee member shall cooperate with and
assist the Company in the defense of any such action, suit or proceeding. The
Company shall not be obligated to indemnify any Committee member with regard to
any settlement of any action, suit or proceeding of which the Company did not
consent to in writing prior to such settlement.
Section 24. Governing Law. The Plan and any Option granted pursuant
to the Plan shall be construed under and governed by the laws of the State of
Delaware without regard to conflict of law provisions thereof.
9.
<PAGE>
Section 25. Not an Employment or Consulting Agreement. Nothing
contained in the Plan or in any Option Agreement shall confer, intend to confer
or imply any rights of employment or any rights to a consulting relationship or
rights to continued employment by, or rights to a continued consulting
relationship with, the Company or any Subsidiary in favor of any Participant or
limit the ability of the Company or any Subsidiary to terminate, with or without
cause, in its sole and absolute discretion, the employment of, or consulting
relationship with, any Participant, subject to the terms of any written
employment or consulting agreement to which a Participant is a party. In
addition, nothing contained in the Plan or in any Option Agreement shall
preclude any lawful action by the Company or the Board of Directors.
10.
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THE PANTRY, INC.
Incentive Stock Option Agreement
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is entered
into as of ___________, 1998 by and between The Pantry, Inc., a Delaware
corporation (the "Company"), and ______________ ("Optionee") pursuant to The
Pantry, Inc. 1998 Stock Option Plan (the "Plan"). All capitalized terms not
otherwise defined herein shall have the meanings set forth in the Plan.
R E C I T A L S:
A. Optionee is a director, employee or consultant of the Company
and/or of a direct or indirect subsidiary of the Company (individually, a
"Subsidiary" and collectively, the "Subsidiaries") and the Company considers it
desirable to give Optionee an added incentive to advance the Company's and the
Subsidiaries' interests.
B. The Company now desires to grant Optionee the right to purchase
shares of Common Stock of the Company pursuant to the terms and conditions of
this Agreement and the Plan.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the covenants hereinafter set
forth, the parties agree as follows:
1. Option; Number of Shares. The Company hereby grants to Optionee
the right (the "Option") to purchase up to a maximum of _________ shares (the
"Shares") of Common Stock at a price of $_____ per share (the "Option Price") to
be paid in accordance with Section 6 hereof. The Option and the right to
purchase all or any portion of the Shares are subject to the terms and
conditions stated in this Agreement and in the Plan. It is intended that the
Option will qualify for treatment as an incentive stock option under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
2. Vesting. The Option granted hereunder shall vest and become
exercisable in three (3) equal installments of one-third (1/3) of the Shares
covered hereby on each of the first, second and third anniversaries of the
Vesting Commencement Date. The "Vesting
<PAGE>
Commencement Date" shall mean __________________.
3. Term of Agreement. Except for the rights conferred upon the
Company pursuant to Section 7 below, the Option, and Optionee's right to
exercise the Option, shall terminate when the first of the following occurs:
(a) termination pursuant to Section 11, Section 15 or Section 16
of the Plan;
(b) the expiration of ten (10) years from the date hereof; or
(c) 90 days after the date of termination of Optionee's
employment or other relationship with the Company and all of the Subsidiaries,
unless such termination results from Optionee's death or disability (within the
meaning of Section 22(e)(3) of the Code) or Optionee dies within 90 days after
the date of termination of Optionee's employment or other relationship with the
Company and all of the Subsidiaries, in which case this Agreement and the Option
shall terminate 180 days after the date of termination of Optionee's employment
or other relationship with the Company and all of the Subsidiaries.
4. Termination of Employment or Other Relationship. The termination
for any reason of Optionee's employment or other relationship with the Company
and the Subsidiaries shall not accelerate the vesting of the Option or affect
the number of Shares with respect to which the Option may be exercised;
provided, however, that the Option may only be exercised with respect to that
number of Shares which could have been purchased under the Option had the Option
been exercised by Optionee on the date of such termination.
5. Death of Optionee; No Assignment. The rights of Optionee under
this Agreement may not be assigned or transferred except by will, by the laws of
descent or distribution and may be exercised during the lifetime of Optionee
only by such Optionee; provided, however, that in the event of disability
(within the meaning of Section 22(e)(3) of the Code) of Optionee, a designee of
Optionee (or the Optionee's legal representative if Optionee has not designated
anyone) may exercise the Option on behalf of Optionee (provided the Option would
have been exercisable by Optionee) until the right to exercise the Option
expires pursuant to Section 3 hereof. Any attempt to sell, pledge, assign,
hypothecate, transfer or otherwise dispose of the Option in contravention of
this Agreement or the Plan shall be void. If Optionee should die while Optionee
is engaged in an employment or other relationship with the Company and/or any
Subsidiary or within 90 days of the termination of such relationship, and
provided Optionee's rights hereunder shall have vested, in whole or in part,
pursuant to Section 2 hereof, Optionee's designee, legal representative, or
legatee, the successor trustee of Optionee's inter vivos trust or the person who
acquired the right to exercise the Option by reason of the death of Optionee
(individually, a "Successor") shall succeed to Optionee's rights under this
Agreement.
2.
<PAGE>
After the death of Optionee, only a Successor may exercise the Option.
6. Exercise of Option. On or after the vesting of the Option in
accordance with Section 2 hereof and until termination of the Option in
accordance with Section 3 hereof, the Option may be exercised by Optionee (or
such other person specified in Section 5 hereof) to the extent exercisable as
determined under Section 2 hereof, upon delivery of the following to the Company
at its principal executive offices:
(a) a written notice of exercise which identifies this Agreement
and states the number of Shares (which may not be less than 10) or all of the
Shares (if less than 10 Shares then remain covered by the Option) then being
purchased;
(b) a check, cash or any combination thereof in the amount of the
aggregate Option Price (or payment of the aggregate Option Price in such other
form of lawful consideration as the Committee may approve from time to time
under the provisions of Section 8 of the Plan);
(c) a check or cash in the amount reasonably requested by the
Company to satisfy the Company's withholding obligations under federal, state or
other applicable tax laws with respect to the taxable income, if any, recognized
by Optionee in connection with the exercise, in whole or in part, of the Option
(unless the Company and Optionee shall have made other arrangements for
deductions or withholding from Optionee's wages, bonus or other income paid to
Optionee by the Company or any Subsidiary, provided such arrangements satisfy
the requirements of applicable tax laws);
(d) a written representation and undertaking, in such form and
substance as the Company may require, that the Shares underlying the Option are
being acquired by Optionee for Optionee's personal account, for investment
purposes only, and not with a view to the distribution, resale or other
disposition thereof; and
(e) a written representation and undertaking, if requested by the
Company pursuant to Section 8(b) hereof, in such form and substance as the
Company may require, setting forth the investment intent of Optionee, or a
Successor, as the case may be, and such other agreements, representations and
undertakings as described in the Plan.
7. Right of First Refusal; Drag Along Rights; Repurchase Option.
(a) At any time after the Option shall have vested and Optionee
shall have exercised all or any portion of the Option in accordance with its
terms, Optionee may sell for cash (and only for such form of consideration) any
or all of the Shares to any third party subject to the provisions of this
Section 7. Prior to any such intended sale, Optionee shall first
3.
<PAGE>
give at least 30 days' advance written notice (the "Notice") to the Company
specifying (i) Optionee's bona fide intention to sell such Shares; (ii) the
name(s) and address(es) of the proposed purchaser(s); (iii) the number of Shares
Optionee proposes to sell (the "Offered Shares"); (iv) the price for which
Optionee proposes to sell the Offered Shares; and (v) all other material terms
and conditions of the proposed sale.
(b) Within 15 days of receipt of the Notice, the Company or its
nominee(s) or assignee(s) may elect to purchase all of the Offered Shares at the
price and on the terms and conditions set forth in the Notice by delivery of
written notice of such election to Optionee, which notice shall specify in
reasonable detail any proposed payment to any other person of any portion of the
purchase price as specified in the following sentence; provided, however, that
if the Company designates any assignee or nominee as the purchaser of such
Shares, it shall provide Optionee with reasonable assurance that such sale
complies with applicable federal and state securities laws. Within 15 days after
delivery of such notice to Optionee, the Company or its nominee(s) or
assignee(s) shall deliver to Optionee a check, payable to Optionee or to such
person as Optionee shall request, in the amount of the purchase price of the
Offered Shares; provided, however, that in the event that the Shares to be
purchased have been pledged to secure any indebtedness of Optionee to the
Company or its assignee(s), the Company may retain or deliver to its assignee(s)
(as the case may be) any portion of such purchase price, and/or direct its
nominee(s) or assignee(s) to deliver to the Company or its assignee(s), as the
case may be, any portion of such purchase price, necessary to satisfy such
indebtedness. If the Company or its nominee(s) or assignee(s) do not elect to
purchase all of the Offered Shares, Optionee shall be entitled to sell the
Offered Shares to the purchaser(s) named in the Notice at the price specified in
the Notice or at a higher price and on the terms and conditions set forth in the
Notice; provided, however, that such sale must be consummated within 90 days
from the date of the Notice and any proposed sale after such 90-day period may
be made only by again complying with the procedures set forth in this Section 7.
(c) If FS Equity Partners III, L.P., a Delaware limited
partnership, and FS Equity Partners International, L.P., a Delaware limited
partnership (collectively, "FS"), exercises rights under Section 3 of that
certain Amended and Restated Stockholders' Agreement dated as of October 23,
1997 among the Company, FS, Chase Manhattan Capital, L.P., a Delaware limited
partnership, CB Capital Investors, L.P., a Delaware limited partnership,
Baseball Partners, a New York general partnership, and Peter J. Sodini, as such
agreement may be amended from time to time, then at the request of FS, the
Optionee shall sell all of his or her Options and/or Shares on the same terms
and conditions as apply to the sale by FS of its shares of Common Stock.
(d) In the event that Optionee's employment or other relationship
with the Company and all of its Subsidiaries terminates for any reason
(including, without limitation, by reason of Optionee's death, disability,
retirement, voluntary resignation or dismissal by the
4.
<PAGE>
Company or any of its Subsidiaries, with or without cause), the Company shall
have the option (the "Repurchase Option") to purchase from Optionee all or any
portion of the Shares acquired by Optionee pursuant to this Option for a period
of seven (7) months after the effective date of such termination (the effective
date of termination is hereinafter referred to as the "Termination Date");
provided, that in no event shall the Repurchase Option exceed the date set forth
in Section 3(b) above. The purchase price (the "Repurchase Price") for each
Share to be purchased pursuant to the Repurchase Option shall be equal to (i)
the Fair Market Value (as defined below), in the event Optionee's employment or
other relationship with the Company and all of its Subsidiaries terminates by
reason of Optionee's death or disability or is terminated by the Company without
Cause (as defined below) or (ii) the Option Price, in the event such employment
or other relationship terminates for any other reason. As used herein, the "Fair
Market Value" shall be the fair market value of a Share as of the date of
repurchase by the Company, as determined by the Board of Directors of the
Company, acting in good faith, which determination shall be final and binding.
As used herein, "Cause" shall mean (i) Optionee's conviction of, or the entry of
a pleading of guilty or nolo contendre by Optionee to, a felony or a crime
involving moral turpitude, (ii) Optionee's failure to perform his duties
required under his employment or other relationship, failure to comply with the
Company's standard policies and procedures generally applicable to employees, or
failure to comply with any provision of any employment agreement after having
received written notice from the Company identifying such failure and after
having received an opportunity of at least the (10) days in which to cure the
failure so identified by the Company if such failure is susceptible to cure,
(iii) a willful act by Optionee as a result of which he receives an improper
personal benefit at the expense of the Company, (iv) an act of fraud or
dishonesty committed by Optionee against the Company, or (v) any other
misconduct by Optionee that is materially injurious to the business or
reputation of the Company. The Repurchase Price for any Shares to be purchased
pursuant to the Repurchase Option shall be increased or decreased appropriately
to reflect any distribution of stock or other securities of the Company or any
successor or assign of the Company which is made in respect of, in exchange for
or in substitution of the Shares by reason of any split, reverse split,
combination, recapitalization, reclassification, merger, consolidation or
otherwise. The Repurchase Option shall be exercised by the Company by delivery
to Optionee, within the seven-month period specified above, of (a) a written
notice specifying the number of Shares to be purchased and (b) a check in the
amount of the Repurchase Price, calculated as provided in this Section 7(d), for
all Shares to be purchased; provided that in the event that the Repurchase Price
is equal to the Fair Market Value, the Repurchase Option shall not be exercised
by the Company prior to six (6) months after the Termination Date without the
express written consent of the Committee, which may be given or withheld in its
sole discretion after due consideration of the financial accounting implications
of such repurchase.
(e) The rights provided the Company and its nominee(s) and
assignee(s) under Sections 7(a), (b) and (d) hereof shall terminate (i) with
respect to all Shares upon the consummation of the sale of shares of Common
Stock pursuant to an effective
5.
<PAGE>
registration statement of the Company filed by the Company under the Securities
Act of 1933, as amended (the "Act"), in which the gross selling price of the
shares of the Common Stock is at least $10 million (a "Registered Sale"), or
(ii) upon a sale of the Shares pursuant to Sections 7(a) and (b) hereof, with
respect to the Shares sold; provided, however, that the rights provided to the
Company under Sections 7(a), (b) and (d) hereof shall not terminate upon the
consummation of the sale of shares of Common Stock pursuant to an effective
registration statement of the Company filed by the Company under the Act if such
shares of Common Stock were registered in connection with a transaction the
primary purpose of which is the issuance and sale of any debt securities of the
Company or issued in satisfaction of any interest or other obligations pursuant
to the terms of any debt securities of the Company, if such sale is not a
Registered Sale and if such sale does not result in shares of Common Stock being
held by at least 300 holders.
(f) The Optionee agrees to consent to any sale, transfer,
reorganization, exchange, merger, combination or other form of transaction
described in Section 7(c) and to execute such agreements, powers of attorney,
voting proxies or other documents and instruments as may be necessary or
desirable to consummate such sale, transfer, reorganization, exchange, merger,
combination or other form of transaction. The Optionee further agrees to timely
take such other actions as FS may reasonably request in connection with the
approval of the consummation of such sale, transfer, reorganization, exchange,
merger, combination or other form of transaction, including voting as a
stockholder to approve any such sale, transfer, reorganization, exchange,
merger, combination or other form of transaction and waiving any appraisal
rights that Optionee may have in connection therewith.
(g) The obligations of the Optionee pursuant to this Section 7
shall be binding on any transferee of any of the Options or the Shares (except a
transferee of Shares in a Public Market Sale (as defined below)) and any
transfer of any of the Options or Shares shall be void unless a written
commitment to be bound by such provisions from such transferee is delivered to
the Company and FS prior to any transfer. The obligations of the Optionee
pursuant to this Section 7 shall apply to any securities received in
substitution or exchange for the Options or the Shares, including (without
limitation) pursuant to Section 11 or 14(b) of the Plan. A "Public Market Sale"
shall mean any sale of shares of Common Stock into the public market after a
Registered Sale, which is made pursuant to Rule 144 promulgated under the Act or
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission and shall not include a negotiated private
sale transaction or other disposition of shares of Common Stock.
8. Representations and Warranties of Optionee.
(a) Optionee represents and warrants that the Option is being
acquired by Optionee for Optionee's personal account, for investment purposes
only, and not with a view to the distribution, resale or other disposition
thereof.
6.
<PAGE>
(b) Optionee acknowledges that the Company may issue Shares upon
the exercise of the Option without registering such securities under the Act on
the basis of certain exemptions from such registration requirements.
Accordingly, Optionee agrees that Optionee's exercise of the Option may be
expressly conditioned upon Optionee's delivery to the Company of such
representations and undertakings as the Company may reasonably require in order
to secure the availability of such exemptions, including a representation that
Optionee is acquiring the Shares for investment and not with a present intention
of selling or otherwise disposing of such Shares. Optionee acknowledges that,
because Shares received upon exercise of an Option may be unregistered, Optionee
may be required to hold the Shares indefinitely unless they are subsequently
registered for resale under the Act or an exemption from such registration
requirements is available.
(c) Optionee acknowledges receipt of this Agreement granting the
Option, and the Plan, and understands that all rights and liabilities connected
with the Option are set forth herein and in the Plan.
9. No Rights as a Stockholder. Optionee shall have no rights as a
stockholder of any shares of Common Stock covered by the Option until the date
(the "Exercise Date") an entry evidencing such ownership is made in the stock
transfer books of the Company. Except as may be provided under Section 11 of the
Plan, the Company will make no adjustment for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the Exercise Date.
10. Limitation of Company's Liability for Nonissuance. Inability of
the Company to obtain, from any regulatory body having jurisdiction, authority
reasonably deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares of Common Stock hereunder and under the Plan
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
11. This Agreement Subject to Plan. This Agreement is made under the
provisions of the Plan and shall be interpreted in a manner consistent with it.
To the extent that any provision in this Agreement is inconsistent with the
Plan, the provisions of the Plan shall control. A copy of the Plan is available
to Optionee at the Company's principal executive offices upon request and
without charge. The good faith interpretation of the Committee of any provision
of the Plan, the Option or this Agreement, and any determination with respect
thereto or hereto by the Committee, shall be final, conclusive and binding on
all parties.
12. Restrictive Legends. Optionee hereby acknowledges that federal
securities laws and the securities laws of the state in which Optionee resides
or is employed may require the placement of certain restrictive legends upon the
Shares issued upon exercise of the Option,
7.
<PAGE>
and Optionee hereby consents to the placing of any such legends upon
certificates evidencing the Shares as the Company, or its counsel, may
reasonably deem necessary; provided, however, that any such legend or legends
shall be removed when no longer applicable.
13. Notices. All notices, requests and other communications
hereunder shall be in writing and, if given by telegram, telecopy or telex,
shall be deemed to have been validly served, given or delivered when sent, if
given by personal delivery, shall be deemed to have been validly served, given
or delivered upon actual delivery and, if mailed, shall be deemed to have been
validly served, given or delivered three business days after deposit in the
United States mails, as registered or certified mail, with proper postage
prepaid and addressed to the party or parties to be notified, at the following
addresses (or such other address(es) as a party may designate for itself by like
notice):
If to the Company:
The Pantry, Inc.
1801 Douglas Drive
Sanford, North Carolina 27330
Facsimile: (919) 774-3329
Attention: President
If to Optionee:
14. Not an Employment or Other Agreement. Nothing contained in this
Agreement shall confer, intend to confer or imply any rights to an employment or
other relationship or rights to a continued employment or other relationship
with the Company and/or any Subsidiary in favor of Optionee or limit the ability
of the Company and/or any Subsidiary to terminate, with or without cause, in its
sole and absolute discretion, the employment or other relationship with
Optionee, subject to the terms of any written employment or other agreement to
which Optionee is a party.
15. Governing Law. This Agreement shall be construed under and
governed by the laws of the State of Delaware without regard to the conflict of
law provisions thereof.
16. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original and both of which together shall be
deemed one Agreement.
8.
<PAGE>
IN WITNESS WHEREOF, the Company and Optionee have executed this
Agreement as of the date first above written.
THE COMPANY:
THE PANTRY, INC.,
a Delaware corporation
By:
--------------------------------------
Name: Peter J. Sodini
Title: President and Chief Executive
Officer
OPTIONEE:
-----------------------------------------
Name:
9
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